We recently advised The Exeter Friendly in relation to its outsourcing of claims administration and clinical management services to AXA. This briefing draws out themes seen in that transaction and others on which we have worked, and also comments on wider market developments recently seen in the insurance outsourcing sector.
Whilst insurance providers looking to implement outsourced solutions is nothing new, those organisations which are currently gaining the most from such arrangements are those that are deploying the latest technologies to best service a digital-savvy client base, while necessarily addressing regulatory obligations to minimise operational risk.
Why outsource?
Just by way of reminder, there are a number of well-publicised drivers, some or all of which will lie behind any decision to outsource. It is attractive for all organisations, from global enterprises wishing to consolidate or synchronise to small and medium-sized businesses which can tap into otherwise-inaccessible services and skills.
The principle benefits are:
- lower operational and labour costs (switching from a CapEx to an OpEx model)
- improved levels of service from an expert supplier
- increased operational efficiency
- freeing-up internal resources
- access to product and service innovation and transformational initiatives
- sharing risks with a partner company.
Technological and commercial trends
It is not possible to disregard the attention-grabbing commercial advantages which are usually the first item on any board submission relating to a proposed outsourcing. Large-scale service providers can frequently access more favourable claims supplier rates and leverage wider economies of scale to pass on significant savings to their insurance provider customers. However, there are a number of other factors which are gaining increasing traction and which may soon rival cost reduction as the principle driver behind any outsourcing in the insurance sector.
Business process outsourcing (BPO) is increasingly being used by insurance companies as a tool to respond to changes in regulation and the omnipresent risk of fraud as well as providing a means of serving a larger customer base (and reducing operating cost pressures). The security angle is particularly interesting – common frauds (such as data theft and refund fraud) may occur due to companies' relatively unsophisticated fraud detection technology or inability to allocate resources dedicated to online fraud prevention. The engagement of an expert outsourcer can help to rectify both these deficiencies.
As well as perennial favourites such as claims processing and policy administration services, BPO providers are increasingly offering more sophisticated solutions such as predictive and prescriptive data analytics services to benefit insurance companies. Predictive analytics use a variety of statistical, modelling and data mining techniques to study recent and historical data and make forecasted predictions about future trends (such as in relation to volume or price). Prescriptive analytics uses predictive analytics to help determine the best solution or outcome among various choices given the known parameters.
Analytics are of particular interest to motor insurance providers who are now rolling out telematics solutions in an effort to personalise insurance premiums sold to drivers. Telematics data is information collected about motorists' driving patterns which is recorded in devices installed in vehicles. Analysis of this data allows insurance companies to offer tailored insurance premiums to reflect the individual's driving style.
The rise of the digital consumer is forcing insurers (as well of course players in other industries) to rely more heavily on IT, to ensure that the requirements and priorities of such consumers are met. This is causing significant increases in spending on IT and related services within this sector. To ensure that insurers understand such requirements and priorities they look to BPO service providers and other outsourcers for navigation.
Various studies (e.g. on BPO in the insurance market and healthcare IT outsourcing) have shown that, as an inevitable consequence of this development, the focus on outsourcing in the insurance industry has shifted away from simple cost reduction towards improving company technology through the sophisticated engagements of IT outsourcing and BPO providers. Recent dramatic expansion in the investment seen in “InsurTech" start-ups indicates the seriousness with which this focus is being pursued. Insurers are now seeking strategic partners who can help with developing solutions that will boost efficiency and keep up with new technologies. It is unsurprising that clear-sighted use of cloud technologies is at the forefront of such arrangements – as Aviva's director of global IT operations recently discussed with an audience at the Amazon Web Services Enterprise Summit in London.
"SMAC" (i.e. use of social media, mobility, analytics and cloud computing technologies) enhances the customer experience, better manages risk and generates efficiencies to boost productivity. Insurers require platform-based solutions and new technologies that improve customer experience and which can perform complex work such as big data analytics and actuarial analysis. The consumerisation of IT has created a requirement to which insurance providers must recognise and respond: meeting digital savvy customers' specific needs by offering customised products while preparing for new advancements in the changing technology market. Inflexible IT systems and out-dated use of data cannot support the market demand for an increasing number and variety of innovative products.
According to ISG, the average duration of an outsourcing contract continues to shorten. This reflects a growing tendency amongst enterprise customers to prioritise flexibility in a business world where advances in technology are coming thick and fast.
Regulatory backdrop
The inescapable counterpoint to the considerations set out so far is the volume of regulation targeted to ensure insurance providers retain adequate systems, protection and control, notwithstanding any outsourcing.
The regulations attach considerable importance to the maintenance of adequate systems and controls. Specific considerations apply when outsourcing involves critical or important functions, the non-fulfillment of which could materially impair the firm’s financial performance, its ability to comply with its authorisation / regulatory obligations or the continuity of its services and activities. Even when outsourcing functions that are not critical or important, the rules should still be taken into account in a manner proportionate to the nature, scale and complexity of the outsourcing, with appropriate due diligence of the proposal being conducted at the outset.
The Systems and Control (SYSC) chapter in the FCA handbook requires that an insurance provider has internal controls in place in relation to an outsourcing, to:
- safeguard both the assets of the firm and its customers, as well as identifying and managing liabilities
- maintain the efficiency and effectiveness of its operations
- ensure the reliability and completeness of all accounting, financial and management information
- ensure compliance with its internal policies and procedures, as all applicable laws and regulations.
These regulatory obligations cannot be contracted out of and firms that outsource any function remain, in addition, fully responsible for adhering to all legal and regulatory obligations in accordance with Solvency II.
Successful outsourcings
We have listed below a number of the high-profile outsourcings seen in the market in recent years which help to illustrate the trends commented on above. These provide an insight into the way in which players in the insurance sector have engaged outsourcers to realise a broad spectrum of benefits:
RSA Insurance Group plc, the British multinational general insurance company, extended its BPO agreement with Accenture in February 2016 in a six-year deal. Accenture will provide IT-enabled services in the back office, for customer services, claims processing, policy management and services that support those intermediaries who assist with sales, service, claims and finance operations. RSA said that it has experienced "significant cost reductions and enhanced operations" as it aspires to achieve "best-in-class performance". This deal was announced a week after RSA outsourced its UK IT infrastructure to Indian IT supplier Wipro.
Zurich Insurance Group, the global insurer, signed a five-year multimillion dollar extension in 2014 to its master service agreement with CSC to provide electronic workplace desktop services to Zurich’s businesses in Canada, Germany, Italy, Spain, Switzerland, the United Kingdom and the United States. The scope includes a global service desk, local on-site support and software packaging and distribution to more than 50,000 users. This service provides Zurich with the cost and performance benefits of a globally standardised desktop service environment while allowing divisions within Zurich to tailor services specifically to their business needs and locations.
Allianz Global Assistance UK, a leader in travel insurance and assistance services, awarded Banner Managed Communication (BMC) a five-year multi-service outsourcing deal, in 2014, for high quality print and fulfilment services which aren't achievable from smaller in-house facilities. BMC's managing director commented that "businesses are under constant pressure to control both fixed and variable costs without compromising on quality, brand integrity or customer service and BMC’s proposition is ideally suited to this environment. We’ll be delivering this service from a secure, large-scale, multichannel site, which is currently benefiting from sustained investment in the very latest technology."
Direct Line Group, the insurance company which separated from the Royal Bank of Scotland in 2012, awarded Capgemini a five-year deal in 2013 to build and manage its new IT infrastructure. It has been reported that this contract is worth hundreds of millions of pounds.
Navigating the waters
It is clear that insurance providers will have to be increasingly alive to the opportunities offered by the technological and operational capabilities of the outsourcing providers who service this sector. Taking full advantage of these opportunities will be critical to remaining competitive and succeeding in an increasingly digital marketplace. That said, the transformational possibilities and customer benefits being marketed cannot detract from the regulatory obligations which must be satisfied. It is important that best practice procurement, due diligence, governance and contractual processes are adopted from the outset of any engagement with a supplier to ensure that the insurance firm appropriately balances all commercial drivers and operational and regulatory risks.
This article was written by outsourcing team associate Marcus Clayden.