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Application Outsourcing push in the Insurance industry

By - ValueLabs Editorial Team | 8 Jan 2016

T
he insurance industry has been, and continues to be, the largest adopter of IT Application Outsourcing (AO) services. However, industry dynamics have changed significantly over the last couple of years. Insurance buyers are facing increasing pressure to drive topline growth, manage complexities arising out of wide-scale regulatory reforms, and improve profitability by driving greater cost efficiencies. Another aspect of this is the internet having changed the way customers buy insurance and maintain contact with insurance providers. Customers do not rely too much on contact centers anymore. Instead, they prefer the online self-service mode to reach the insurer.

Also, traditionally, insurance companies depended on broker channels and their own direct sales teams to generate sales and cater to after-sales services. So, while insurance companies invested heavily in customer contact centers, they now find that their customers are not using those channels. This situation is more pronounced in volume-based businesses such as auto insurance and / or health insurance.

These companies are now looking at new ways of doing business where they can share the investments as well as the risks with the provider.

These recent trends in the insurance industry have thrown up several challenges around the traditional sales model and also impacted the IT practices and outsourcing decisions of insurance players. In order to achieve requisite growth and meet customer demands, insurers globally are now focusing on optimizing their portfolio of AO service providers. For both the sales and policy administration processes, third party outsourcing partners who offer flexible operating models are gaining prominence in the current environment.

Service providers in the insurance AO space are also ramping up their capabilities, building up scale, and investing in developing and acquiring IP / proprietary solutions. They are forming alliances which allow them to undertake and deliver on large-sized, annuity AO engagements. The competitive intensity in the insurance AO services space is at an all-time high. As a result, it is becoming difficult to differentiate among service providers based purely on delivery capabilities. It is, therefore, critical for insurers to have a comprehensive and fact-based assessment of service providers based on value proposition.

Outsourcing strategies

An outsourcing service provider that makes significant technology investments can effectively interact with the customer and shoulder some of the risks in the customer journey. The outsourcer, in turn, can take over some of the functions in the sales process and policy administration that the insurer has traditionally performed.

1. When an outsourcing company takes over the sales and policy administration roles, the customer remains with the insurer, unlike in the broker channel, where the broker owns the customer.

2. Insurance companies can now offload the technology investment to the outsourcing company. The insurer derives the benefits of the technology that the outsourcing partner has invested in without having to pay to acquire it.

3. Instead of a fixed cost of operating the contact center, the insurance company has a flexible cost structure to choose from. The outsourcing company could get paid per claim, per proposal-to-sale or per proposal administered. It is a commission-based system, as with the broker, but the key difference is that the customer continues to be owned by the insurance company.

4. As the maturity curve and the value proposition from outsourcing strategies, there is an increased flexibility in the way the engagement is structured. There is a move from being a pure service provider – where the outsourcing company gets paid per transaction – to one of a close partnership with the insurance company.

Outsourcing partner to share costs, spread risks

In recent times, there have been some outsourcing contracts spanning over 10 to 15 years. This is a sign of the times when the two parties enter into a partnership where they share the costs as well as the benefits. Through a long-term outsourcing agreement spread across seven to 15 years, insurance companies can take advantage of investment commitments that the outsourcing partner makes. However, if the insurance company is only looking at cost savings in the short term, it cannot expect long-term investment commitments from the outsourcing partner. This arrangement works as much for a small insurance company as for the big players. The costs of setting up a contact center may not add up for a small company with the bulk of its customers going online. The benefits of shared services come into play here. The insurance provider can take advantage of the shared training, location, infrastructure and technology that the outsourcing partner offers.

The other advantage in the shared service center is the ability to downsize or close down. If the insurance company does not see the need to continue with the facility in the future, the third party provider can downsize the operation or shut it down. The service provider could redeploy resources to other locations.

This model also provides insurance companies with the flexibility to spread the offering between an offshore and an onshore facility.

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