Outsouring isn't "news" to the insurance industry. Insurers have been using outsourcers for years for IT projects, such as application maintenance or development to help with legacy problems, small-scale business processes (such as using third-party administrators for claims processing or accounting) and out-tasking small parts but not an entire business process.However, the bulk of insurance outsourcing has tended to be within the IT outsourcing domain. Driven by aging legacy systems and limited resources (time, budget and staffing), insurers have turned to external services providers to help with a wide variety of IT initiatives, including infrastructure, networking, and application development and maintenance.

Business process outsouring, by contrast, historically has been limited-due to the continual control that insurers have wanted to maintain over business processes, especially those that are mission-critical or directly related to customer service. Some early deals focused on horizontal areas, such as accounting, payroll or imaging/document management. These areas did not require insurance expertise and therefore were often performed by horizontal services providers.

Changing attitudes

Although this still holds true across the industry as a whole, the nature of outsourcing began to change in 2002, with insurers placing more strategic value on IT projects and examining core processes that could be supported externally.

Gartner research at the end of 2001 found a rising awareness of outsourcing alternatives within the industry, noting a rise in general outsourcing rates. This study, however, noted that most outsourcing projects had limited strategic vision.

In the fourth quarter of last year, Gartner re-examined insurance outsourcing trends by conducting a followup study of 81 U.S.-based insurers with more than $100 million in net annual premiums. This study, which included 42 property/casualty and 39 life/health carriers, assessed rates and attitudes toward IT outsourcing and business process outsourcing.

The study confirmed that insurance outsourcing is not growing as previously anticipated.

Instead, IT outsourcing was reduced for both life/health and property/casualty sectors (see "Statistically Speaking," page 16).

The number of insurers reporting to have engaged in IT outsourcing in 2002 fell most dramatically among L/H carriers.

This is not to say that major IT outsourcing deals were not announced in 2002. During the year, Fireman's Fund announced a nine-year infrastructure services outsourcing deal with CGI in October, and Manulife USA announced an application outsourcing agreement with CSC the same month.

It was more common, however, for insurers to slow down the level of IT outsourcing that they supported, much the result of limited IT budgets and tightening market.

BPO trends

While participation in insurance business process outsourcing (BPO) is relatively high, most of the projects are out-tasking rather than large-scale BPO.

The study also found declines in BPO among L/H insurers, but a rise in BPO among P&C insurers. The P&C industry is more transaction-based and has begun to use outsourcers more often for claims and policy administration functions than their L/H peers.

These processes, which can be done by specialist BPO providers, can be moved outside, enabling an insurer to shift resources to projects that support competitive differentiation.

Last year, call center outsourcing began to gain attention. Conseco was one of the first insurers to support call centers in India. For example, in 1999, Conseco purchased call center provider exlService, but in late 2002 it sold the subsidiary due to financial challenges.

Gartner believes that the hardening economy-coupled with global political threats-have made it difficult for insurers to engage in new initiatives or seek external service options.

While the reverse reasoning is that these conditions should encourage outsourcing (in search of less expensive alternatives), this has not been the case in the insurance industry due to its risk-averse nature and concerns over loss of control.

The social and political culture in the industry and the lack of BPO vendors with insurance experience has further exacerbated the situation, leaving insurers reluctant to seek external sourcing.

Although insurance outsourcing may have faced some setbacks in 2002, insurers should not be discouraged from seeking ITO and BPO to meet future business requirements, especially those wanting to gain competitive differentiation or maximize strategic planning.

Kimberly Harris is a research director at Gartner Inc., Stamford, Conn.

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