Is bigger really better?

Over the past few years, low profits and tough competition have put pressure on insurers to slash costs and offer exemplary customer service.

As a result, outsourcing has become a growing trend, with insurers recognising the advantages of bringing in outside agencies to deal with a range of services. Solicitors, loss adjusters and legal expenses firms are now cashing in on the trend, with many looking to broaden the range of services they offer.

There are several areas in which insurers look for partnerships - investment management, underwriting, operations, sales and marketing, IT, distribution, and strategy and enterprise management.

Most insurers tend to keep core competencies, such as underwriting, in-house, but according to Datamonitor's last report on outsourcing, other areas are increasingly being outsourced. The reports says activities insurers are most likely to outsource are IT (49%), investment management (45%) and enterprise management (33%). Quite a few were considering outsourcing claims (33%) and policy processing (30%), but only 22% would consider outsourcing underwriting.

According to the report, the main drivers behind these partnerships are the acquisition of expertise, cost-savings, time-efficiency, short-term capacity needs and the desire to focus on core activities.

Establishing partnerships
Insurers are continuing to strike deals with smaller niche players. Allianz Cornhill has just signed a new three-year deal with Claims Start, part of CWA, which will operate a claims call centre on its behalf.

Claims project manager for Allianz Cornhill, Lesley Winrow, says the main thing to look for in a partnership is that it is beneficial for both sides. "There is no point getting into a partnership and cutting your partner firm to the absolute bone," she says. "It needs to be viable for them to provide a service and viable for you to pay the price." She adds that many such deals favour the insurer when it comes to price. "In the loss adjusting market and the vehicle repairer networks, there are some very tight contracts and it can be difficult for the other company to stay afloat."

Of the new deal with Claims Start, she says Allianz is adding to, rather than replacing, what it already has. "We are plugging into their 24-hour front-end telephone skills for dealing with initial support of the claim," she explains. "Claims Start takes the call, but then it links back through technology to our in-house claims system."

Claimtec is another company that provides outsourced claims handling and deals with personal and employers' liability and motor claims for a number of insurers.

Director of claims, Neal Etherington, says one of the advantages for insurers of bringing in an outside claims company is that it allows the company to deal with peaks and troughs without having fluctuations in staff numbers.

"There will always be more claims than the insurer can handle," says Etherington. "We can help to cover for these, such as during the summer holidays, when there are more claims, or if it is a particularly bad winter with lots of road accidents."

Some companies, however, express reservations about outsourcing, fearing loss of control, the danger of a partner's short-termism and higher expenses.

Royal & Sunalliance (R&SA) is one company that prefers to keep most of its services in-house. The company has just bought Independent Insurance's loss adjusting arm, Property & Casualty Services (PCS), and is planning to cut back its own panel of loss adjusters.

R&SA spokesman Mike Wallwork says the company aims to be customer-focused and therefore does not believe in "farming out" business to other customers.

"We sell a service and therefore have to make good that service," he says. "The activity has to be cost-effective, but I would not agree in-house necessarily means dearer."

The bigger the better?
While demand for outsourced services is continuing to grow, the market has mirrored the insurance market in recent years, with a period of rapid consolidation.

The loss adjusting market has seen a number of mergers and takeovers and some players have dropped out altogether. Insurers have been reducing their panels and appear keen to concentrate on key partnerships.

Most recently, outsourcing services provider Miller Fisher saw its share price slide, following rumours it was considering selling all or part of the company. But financial director Richard Horton predicts favourable second-quarter results .

One company that has done well out of this trend for consolidation is the Capita Group, which entered the outsourcing market in March 1999 when it acquired 26% of the Eastgate group. It bought the remaining share in November 2000 and acquired loss adjuster McLarens Toplis earlier this year.

Capita posted record profits for the first half of 2001 after its spending spree, up 62% on 2000 to £31.3m.

Earlier this year, Capita won a contract to administer Abbey National's outsourced general insurance business - a deal worth about £325m over the next ten years.

The company now administers all active policies and associated claims for Abbey National's home, motor, travel and creditor insurance policies, underwritten by Norwich Union.

Capita spokesman Iain Bell says: "Economies of scale are a big issue and we have the size and the track record to attract major insurers. We provide value and can strip cost without impairing quality.

"Abbey National will benefit from this as it is not an insurer, and therefore needs an outsourcer who has expertise it doesn't have. The other main issue is to integrate the insurance service with the other products it offers."

Bell says the demand for outsourcers is growing with the emergence of new players in insurance.

"Distribution methods are changing as customer behaviours change," he says. "We are now being approached by companies that are not insurers, to deal with not only claims but the sales and marketing aspect as well."

He adds that many of the smaller outsourcing companies are falling away as the market becomes more fragmented and the lines between insurers, banks and retailers become blurred.

"As an outsourcer, you need to have the ability to broaden your base to respond to the way in which the market is changing," he says.

Multi-functional outsourcing
Outsourcing companies are increasingly becoming more multi-functional. Take Europ Assistance, which started out in the 1970s as a travel assistance company. Now the company offers a range of customer service facilities for many of the major insurers.

"Our function is to provide firms with services that they would not otherwise be able to develop and build themselves," says Europ Assistance marketing manager, Graham Deacon. "For example, we have our own medical stores and have made investment in equipment, such as incubators for premature babies."

The other divisions of Europ Assistance include handling claims and repairs for domestic buildings, concierge services for high net worth customers, motor breakdown assistance and legal insurance.

Deacon says the company helps to add value to the insurer's product, as any calls which come through are answered in the insurer's name.

So what is the future of outsourcing? Datamonitor predicts a number of changes are happening. The market is more frequently seeing a split in the insurance function, between retailing and underwriting and the development of the virtual insurer who co-ordinates outsourced activities.

It is likely that the outsourcing market will continue to grow and consolidate, as the larger companies attempt to wipe out competition by acquisition.

Technology - in-house or outsourced?
Investment in technology is essential for any forward-looking insurance company, whether it is to improve communication with brokers, provide customers with quotes or manage claims effectively.

To keep up with the pace of technological change, insurers are increasingly looking to external agencies to update existing systems or to take over IT resources entirely.

The consolidation of the industry also means companies face the problems of integrating different IT systems and customer databases.

According to a recent survey by technology outsourcing company CMG Admiral, outsourcing looks to play an increasingly important role in the insurance industry. Up to 40% of those questioned believed that technology now drives their business and another 10% say it soon will. Tellingly, more than half of those surveyed said technology needs were becoming too complicated to be handled by internal departments.

Research from Datamonitor also shows outsourcing of IT is considered to bring considerable cost savings.

Zurich Financial Services is one company that has decided to take advantage of the potential cost savings of outsourcing IT functions. The company has recently signed a deal with technology giant IBM Global Services and hopes to save up to £15m through the new partnership.

Around 800 of Zurich's 1,800 IT employees and contract staff employed in systems development and support capability across Zurich's UK insurance business will transfer to IBM. The partnership will provide a jointly staffed and managed advanced solution centre.

Zurich's media relations manager, Jane Hewin, says: "The deal we are working on is designed to meet a number of objectives.

We want to cut costs, but do not want to abdicate responsibility for our IT facilities."

According to Hewin, the deal has are manifold benefits: "IBM, Zurich and the IT employees will be given the best of both worlds. We will keep a lot of our intellectual property in-house while also safeguarding jobs and benefits."

Ken McCarthy is managing director of CMG Admiral, which was established in 1964 and now employs more than 4,000 people in the UK.

One of CMG Admiral's longest-standing clients is Aon, for which it manages IT systems for personal lines and affinity insurance.

McCarthy says one of the main benefits of outsourcing is that it allows flexibility.

"If a company has its own IT department, it is a fixed cost and assets have to be purchased and will depreciate.

Outsourcing means that this can become a variable cost - the insurer can sell its mainframes and other facilities to the outsourcer and can effectively rent them back over a period of time."

He adds that, while some insurers still think that having their IT in-house gives them a competitive edge, others realise outsourcing can offer more flexibility.