Why should the insurance industry be interested in outsourcing? Because, says William Dye, it can trim costs, increase efficency and improve service

There has never been a greater need for outsourcing in insurance than there is today.

We are all under more and more pressure. With competition from new entrants, growth in the compensation culture, falling interest rates and collapsing share prices, insurers are feeling the financial squeeze. The historical lack of need to focus on the operational side of the business has led to service delivery becoming increasingly inefficient and costly, forcing many providers to take a long, hard look at the way they do business.

This is why many insurers are considering outsourcing as one answer to their financial challenges. But then I would say that, wouldn't I?

So why outsource?

Well, it can reduce a company's operating costs and risks while increasing flexibility. The transfer of operations to an established outsourcer allows insurers to concentrate their efforts on their core business. With the outsourcer looking after tasks like minimising leakage, containing fraud, and providing high levels of customer service, the insurer can focus on building customer loyalty.

Freedom to focus
Some insurance firms regard outsourcing as a liberator: it frees them up to focus on segmenting and managing other areas of business, enhancing their relationship with their customers and with key suppliers. They can focus on their brand; its values; its impact. They can focus on differentiation in this difficult market.

Of course there are financial benefits too. Outsourcing allows insurance providers to transfer fixed costs to variable costs. This is better for the balance sheet. And it suits the vagaries of the market. If you outsource, you reduce your risk during challenging economic conditions, as we have experienced since 11 September, or the upturn we are all looking to in the, hopefully, not too distant future. The flexible resource provided by the outsourcer ensures that increases in the volume of business being written can be accommodated seamlessly, while a downturn does not bring with it the difficult decisions that might be faced if operations were retained in-house.

So what could you outsource?

Operations now being outsourced by insurers and affinities range from key parts of the claims management and policy administration to larger or whole parts of an operation for even further efficiencies in cost. And, as regulatory and compliance pressures on intermediaries grow, we may see a greater interest in outsourcing emerge among brokers and affinities.

The growth in volume process outsourcing has led to the emergence of the 'virtual insurer', where bespoke outsourcing solutions allow the provider to outsource all aspects of the insurance operation but retain the customer relationship. Capita's work with Abbey National's general insurance division is a successful example of this model. The approach allows new entrant, such as foreign insurers entering the UK market, affinity groups, banks and other financial services brands extending a product range, a risk-free entry without significant capital outlay costs. For established companies, bespoke solutions can be a catalyst for change in the way they do business and to unlock greater efficiencies - welcome outcomes in this day and age.

No loss of control
"So what about the risk of losing control?" I hear you ask. Clearly, accountability is a fundamental element of any outsourcing arrangement. A high level of dependence on the part of the insurer demands an equally high level of accountability from the outsourcer. The insurer can determine the service levels it requires in order to reflect its brand values to the consumer and the outsourcer will then deliver them. Increasingly sophisticated service level agreements are central to the success of any outsourcing arrangement. These should include rigorous measurement criteria around timely delivery and service quality.

So this is why outsourcing is an attractive option for the insurance industry. It can undoubtedly trim your costs. It can increase your efficiency and provide the service level you require. It is flexible, scalable, adaptable and, most importantly, entirely accountable to you. The future of the insurance industry lies in controlling costs and creating differentiation.

Outsourcing could play a significant part in insurers' success.

  • William Dye is managing director of Capita Insurance Services
  • Topics