Insurers rushed to outsource claims handling a few years ago, with many looking to save money by using companies in other countries. We report that concerns over quality and hidden costs mean that many are set to take their business back in-house

If there was somebody you really, really wanted to impress, would you leave someone else to handle their phone calls? That’s the question insurers are asking themselves as they contemplate bringing their outsourced claims operations back in-house.

Handing aspects of claims handling over to third parties has been popular over the last few years, whether within the UK or to offshore companies. Now, however, there is evidence of a backlash as insurers take a closer look at the service they’re providing to customers and the true cost of those agreements.

Bringing a claims operation back in-house is not a decision to be taken lightly – and it’s certainly not cheap – but with claims costs rising and regulatory pressures increasing, there is a sense that insurers can no longer afford not to regain control of this crucial part of their business.

Head of general insurance at KPMG, Mark Winlow, suggests that there will always be some demand for outsourcing in claims, most obviously with the use of repairer networks. “If your dog has destroyed your rug, your insurer would never come and repair it themselves; they always outsource that.” The most important part of the process, he suggests, and the one that the most enlightened insurers are now reviewing, is first notification of loss (FNOL). “Some people consider FNOL a simple admin task – taking details, seeing if anyone’s injured. But now others are seeing it as a chance to take control of the claim and influence the cost, certainly of the third-party element.”

Bringing it home

According to a survey of about 750 firms carried out at the end of last year by Ernst & Young for the Chartered Insurance Institute (CII)’s claims faculty, 40% of insurers have some form of outsourcing in place. The picture may change significantly over the next few years. While about 25% felt that outsourcing had been an important initiative for improving claims performance over the last three years, and just under 20% felt it was important now, only 5% felt that this would continue to be the case in future. The balance appears to have shifted in favour of bringing operations back in house: a growing 15% said that in-housing was important now, and a further 10% that it would be in the next three years.

Last month, Chartis (formerly AIG) became the latest insurer to announce a review of its outsourcing arrangements, in this case for property and motor claims. Executive director of regional claims for UK and Ireland, Steve Agutter, says that it will be looking to bring as much as possible back in-house over the next few months. “I felt that we should own the core claims handling and the customer outcomes ourselves,” he explains. “That’s the product the customer’s buying.”

At the moment, the whole process for lower value, lower complexity claims is outsourced from FNOL to settlement. “They’re lower risk in terms of cost and our own reputation, but we probably get more complaints on smaller value claims,” Agutter says. “Big companies have small claims as well. We want to be able to demonstrate that we are handling our smaller claims as well as bigger claims.”

AXA is also reviewing all its outsourcing arrangements, and claims director David Williams says that customer service was a key part of the decision-making process. “We feel that the opportunity to have direct contact with customers is something that you shouldn’t give up. It’s difficult enough to build a relationship with customers in insurance, as you speak to them so infrequently. Claims is a massive opportunity. It can really damage your reputation if it’s done badly, but if you do it well you can get buy-in and tie-in from the customer for years. If you’re using an outsourced provider, they’re never going to be pushing the AXA brand as much as you would yourself.”

Neither do outsourcing agreements always stand up to closer financial scrutiny, once hidden costs are taken into account. “I don’t think when you put the whole equation together it works,” Allianz’s head of claims operations, Graham Hughes, says. The company employs outside loss adjusters and repairs contractors, but manages everything else in-house. “Outsourcing may reduce operating costs, but it doesn’t reduce claims spend or improve customer service or quality.”

Time and money

Fortis, ranked by Datamonitor in 2009 as the most efficient of the largest insurers for processing motor and household claims, manages all aspects of claims itself and has no plans to change that. “We don’t see a reason from either a financial point of view or from the customer’s point of view,” head of operations in household and travel claims Gary Lobb says. “There are hidden costs that you don’t see straightaway. By creating a separation in the process, you have to do a lot of training and embed the same culture. Just creating that handover adds cost. Efficiency is a customer service issue – the more efficient you are, the greater your customer service. If you take out any steps that don’t work for customers, you don’t have to have people to answer the calls when things go wrong.”

Outsourcing contracts are governed by service level agreements (SLAs), but these often lack credibility even among providers. As one claims handling organisation told researchers at the CII: “The big problem with SLAs is that, unless you have someone at the other end committed to change things, they can be just a box-ticking exercise. It is easy to manipulate SLA data.”

At PricewaterhouseCoopers, insurance restructuring partner Peter Greaves advises firms that are looking to outsource or insource their operations, and he is often called in when things have gone wrong. He warns insurers that outsourcing doesn’t actually reduce their management burden or responsibility at all. “It’s still your business, and you’re responsible to the FSA and your policyholders. Outsourcing doesn’t mean you’ve cleansed your soul; there’s still a lot of work to do to run the outsourcer.”

In fact, it could be even more work – a contributing factor in both the reviews at AXA and Chartis. Following up complaints, for example, is a lot harder for Williams when an outsourcing provider is involved. If he receives a complaint about a call that was dealt with in-house, he can dial a few numbers from any phone at AXA and immediately hear exactly what happened. If it’s outsourced, he will have to wait for the provider to burn a CD and post it. “It always seems to be that the claims that go badly wrong are the ones that are outsourced. Whether that’s because they’re just more complicated in the first place and that’s why there’s a lot of other people involved, I don’t know.”

Agutter says the management burden has increased further, with regulatory pressures on insurers. “We’ve found the oversight and management of outsourcing providers can be quite expensive and time intensive. We’re doing a lot more to ensure they are acting appropriately with customers to meet our responsibilities to the FSA and regulatory reforms such as treating customers fairly, and fighting financial crime.”

Total control

An outsourced service does not necessarily mean a less professional or effective one, according to Greaves, but a lot hinges on how it is set up and managed. His advice is to start with a watertight legal agreement, and to factor in exactly what you want at the start. “A lot of insurers have their own legal departments, but this is specialist. I would recommend getting robust legal advice from someone who is used to doing these contracts. The insurer might be thinking they will have access to a call centre facility 24/7 because that’s what they provide at the moment. In most cases, that will be the norm but it could be there’s an additional cost for out-of-hours calls.”

The set-up costs of an outsourcing contract can be £10m plus, and deals usually run for a minimum of three years. Reversing a decision to outsource part of the claims process is no small undertaking. KPMG’s Winlow says that while it may be relatively simple contractually, replicating the service in-house could mean a substantial investment in infrastructure. “Telephony, systems, people, locations. It’s not insurmountable, but it isn’t straightforward. Part of the proposition that outsourcing providers bring is that they can give you only the resource that you need and you only pay the unit costs rather than the fixed costs of the buildings and the infrastructure. Is now the time for an insurer to make that scale of investment?”

At Chartis, Agutter believes it is. “If we feel that we can improve the service and that we have the capability, we will do it. We are looking to invest a lot more in claims technology, so I believe we will have the infrastructure and the technology to handle the majority of claims ourselves.”

In-house ease

Williams was pleasantly surprised to find that AXA’s staff were happy to take on extra shifts between 6pm and 8pm to allow it to greatly reduce the number of out-of-hours calls it diverts to an outsourcing provider. He admits that the recession may have made this an easier sell: “I do think that helped us. Money has been tight for everyone – even if they haven’t lost their jobs, their partners might have done. Three or four years ago, it would have been more difficult.”

There are some parts of the claims process that it will always be more efficient to outsource, though, such as those that require very specialist knowledge or skills. For example, AXA will continue to outsource the entire process of handling its pet insurance claims. “You need to know an awful lot about vets’ bills,” Williams explains. “We did consider employing vets and handling it ourselves, but outsourcing makes better sense financially and from a customer service point of view. It’s much better to be dealing with a slick expert with the appropriate system than for me to get a motor claims handler to dabble.”

Inevitably for smaller insurers, the list of capabilities they can’t supply in-house will be longer and the economies of scale that outsourcing call centres or repairs can bring will be more valuable. But for larger firms, there may be few arguments left to outsource core claims processes. As Williams puts it: “If you’re a big, efficient insurance company, you ought to be able to do things as efficiently as most outsourcing providers.”

It’s a challenge that a growing number of firms seem to be willing to take on.

The secret to successful offshoring

Offshoring is outsourcing’s more exotic cousin, where services are delivered from cheaper foreign locations, either by a third party or an insurer’s own offshore operation. It too has fallen from favour in recent years, largely due to disillusionment on the part of insurers and their customers about the service they receive and the difficulties of managing such a far-flung service.

In fact, despite customers’ negative perceptions about the service provided by offshore call centres, their performance is generally in line with UK operations. KPMG’s head of general insurance, Mark Winlow, ran Zurich’s personal lines business in the UK, and found that one of the best-performing units was in India – as well as one of the worst.

It’s important, he stresses, to manage your operations in the same way, wherever they are. “You need to put in the face time and treat people in Bangalore and Pune in the same way as you’d treat people in Southampton and Cardiff.” This includes being aware of local differences, he adds. Just as a call centre in a university city will attract a difference workforce to one on the outskirts of a provincial town, so the same will apply to different regions in India.

For example, although Allianz does not outsource any of its claims processing, it does use its own offshore operation in Kerala to carry out back-office functions. “We went there rather than Bangalore because we didn’t want to get involved in the competition and high churn rate,” head of claims operations Graham Hughes explains.

What offshore operations do well is efficiency, which is why some – as at Allianz – are used only for processing paperwork such as policy documents, according to PricewaterhouseCoopers insurance restructuring partner Peter Greaves. “Policyholders feel they would rather speak to someone closer who they feel understands them a bit more. A lot of overseas centres do no voicework at all. Offshoring doesn’t always mean a bad service, but thought needs to be given to what parts of the service are suited.” IT