New York — The insurance industry, which has lagged behind others in outsourcing business and technology processes abroad, is now the fastest growing offshore service sector with a CAGR of 33%, according to “The Black Book of Outsourcing,” from Clearwater, Fla.-based Brown-Wilson Group.

Overall, Brown-Wilson reports, global insurance outsourcing is growing at a CAGR of 8%, and is expected to become a $24 billion industry next year. Onshore sourcing relationships are the favored destination of 91% of insurance firms, while 9% elect to have suppliers from abroad. However, that mix is shifting offshore at a breaking pace.

Research from London-based independent market analyst Datamonitor echoes the increase in outsourcing. Insurers in Europe and the United States are increasingly considering policy administration business process outsourcing (BPO), says the report, "Trends and Strategies in Policy Administration BPO.”

Facing challenging market conditions, both life and non-life insurers are seeking to reduce costs and gain flexibility. Often times, however, these goals are stymied by rigid policy administration platforms, which are frequently built in-house, Datamonitor’s report states.

Brown-Wilson Group’s Black Book findings for the insurance industry include:

•    Nearly three-quarters of global insurers currently use at least one IT outsourcer and one business process outsourcer.
•    U.S. outsourcing vendors are preferred by nine of 10 U.S. insurance users/clients. Offshore data security, the complexities of managing risks, cultural barriers, compliance requirements and reliability are still viewed as offshoring drawbacks by 95% of insurance users. 96.6% of onshore clients state they would consider offshore vendors if these issues manifested improvements.
•    System modernization, process transformation and innovation dominate sourcing agendas as the key drivers for vendor selections—more than the cost based benefits of recent years, as risks from service interruption, customer data, information security and privacy exposures far outweigh any benefits from cost reduction to insurers.

Datamonitor’s report notes that both large and small insurers will adopt BPO. Currently insurers with fewer than 5,000 employees have the lowest policy administration BPO adoption rate, however, this is likely to change. According to a Datamonitor survey of 200 global insurers conducted in the first quarter of 2008, small insurers are heavily weighing a BPO strategy, which is evidence of the need to lower costs and concentrate limited resources on value-add functions in today’s competitive marketplace.

The survey also found that large insurers (those with more than 20,000 employees) are increasingly likely to outsource policy administration. Typically, these players engaged in off shoring via captives, or company-owned facilities. The captive route has not been as fruitful as expected, elevating their interest in outsourcing to a third-party.

Sources: Brown-Wilson Group and Datamonitor

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