Insurers explore offshoring of services

Study raises issue: How wide a range of services might be offshored?

By Phil Zinkewicz

More property/casualty insurers are likely to explore offshoring some of their processes because of pressures to become more cost-efficient, according to a recent study by Conning Research and Consulting. “Offshoring” is a type of outsourcing where the firms providing the services are based outside the United States. Conning’s study is titled “Expense Management for Property-Casualty Processes: Evaluating the Offshore Bargain.”

For the past two decades, the financial services industry has exported process work to offshore venues as a way of lowering costs. However, the services provided to the insurers have been pretty much in the administrative and technology areas. This Conning report indicates that these offshore service providers are moving into areas such as claims and even underwriting.

“We developed this study to analyze trends in business process offshoring opportunities for P-C insurers,” Clint Harris, vice president, insurance research, told Rough Notes. “Principal research goals were to examine recent and projected offshoring developments and explore the strategic implications for individual P-C insurers and the U.S. insurance industry.

“In order to understand how offshore service providers view U.S. P-C insurers’ needs and how they were developing their solutions to respond to those needs, we surveyed offshore providers that currently offer business process services specifically for property and casualty insurers,” Harris explained. “One of the interesting findings is the expected growth in service offerings among the providers. They have developed a wider breadth of services that expand opportunities to outsource beyond cost savings to meet strategic needs.”

“Offshore providers now offer a full range of property and casualty insurance business processing services from policy management to claims and underwriting services,” said Stephan Christiansen, director of research at Conning. “Current demand for expense savings in the near term may accelerate interest in the cost savings offered with these services. At the same time, our survey suggests that offshore providers will continue to build out their service offerings, toward services that demand increasing levels of intellectual capital.

“However, there are significant risks associated with offshoring, including systemic risks that go well beyond security and quality failure. Performance controls need to measure offshoring processes within the context of the full process supply chain and be sensitive to culture barriers,” Christiansen said.

Some of the other findings of the survey include:

• Service providers expect to increase general insurance services offered at both lower-level and high-level services. Customer relationship analysis, a high-level service, is the most identified area that providers expect to expand—from 59% of providers to 76%.

• 60% of offshore provider respondents provide coverage verification, the most commonly offered claims service; 28% of claims providers offer actuarial services. The largest expected expansions are for “first contact with a claimant,” from 47% to 71% of providers, and for actuarial services growing from 28% to 54%. Actuarial services are among the highest-level insurance services.

• About two-thirds of the provider survey respondents offer underwriting services. Template underwriting is the most common underwriting service, with 58% of total respondents offering this service. Template underwriting is associated with high-volume business. It is a low-level underwriting service. The largest expected growth is for “other than template underwriting” services. Providers’ responses indicate that high-level service is expected to increase from 33% of total providers to 58%. As with actuarial services, this expansion is a serious move up the intellectual ladder.

Rough Notes asked Harris if these new areas of expansion—especially the template underwriting, other than template underwriting, claims and actuarial services—might not present a new competition for managing general agencies (MGAs), who currently provide these same services to insurers.

Harris responded this way: “The short answer is that it is possible someday. It would likely have to be lifted out of a developed program, and it would be associated with significant risks, including inherent risk. Of course, at least one insurer would have to believe that the returns from an ‘offshore MGA’ would be worth the associated risks and also regulatory barriers would have to be nullified.

“The longer answer,” continued Harris, “is that, while offshore service providers in our survey did not identify that they have marketing capabilities to develop programs, most of our respondents confirm that they have or are developing many of the critical components typically provided by MGAs. These offshore available components include policy issuance, billing, premium audits, template and other-than-template underwriting, first notice of claims, and claims triage. One critical question is if offshore providers could acquire/develop/maintain the necessary specialized expertise.

“This would be a difficult task for offshore providers because such expertise is rare,” according to Harris. “Much of the MGA marketplace targets risks that generally are not within the underwriting window of standard market insurers. The initial expertise would have to be exported to the offshore MGA. Assuming that the initial expertise can be developed adequately, another critical question is if risk management costs and residual risk are acceptable. An offshore MGA would be exposed to typical offshoring risks and, in particular, to what we refer to in the study as ‘inherent risk.’

“For offshoring, processes that are isolated from the dynamic organization can freeze both process innovation and individual expertise development at the point they are lifted out. Of course, insurers and offshore providers can manage many of the offshoring risks. For an onshore MGA to compete, it would have to be cost- and quality- effective, despite the additional risk and risk management costs.”

Pat Borowski, senior vice president of the National Association of Professional Insurance Agents, said that insurers who think that establishing an offshore entity will excuse them from U.S. insurance regulation for that entity, are mistaken. “Under insurance common law, you can’t pretend that you are not of one body when it comes to regulation. These entities may be offshore, but they must comply with U.S. law.”

New offshore venues continue to develop and are emerging in Russia, the Dominican Republic, Argentina and South Africa. With wage costs rising in India, this location’s low wage value proposition could be waning, says the study. The survey also points out that this is likely a reason why Indian service providers are attempting to move up the intellectual ladder. However, the expansion of services is an indicator of offshore growth, the study says.