Sources of Inspiration

Economic pressures, evolving technology and increasing comfort with partner management are combining to force insurance executives to expand their views of what can be sourced externally.

Many insurance executives may ponder whether a given capability could or should be outsourced. But for Enrico Treglia, SVP and COO of Wilton Re, the question is, How should it be sourced, and what are the options?

Even though the ways insurers can do business have expanded, many executives can't see beyond the way they've always done things, Treglia says. "Because you have a factory in place, the assumption is that you have to use it," he elaborates. "But if you have options in terms of technology, business process, control and cost of ownership, you're now making an informed decision."

"It's about choices," Treglia continues. "You need to offer senior leadership options: Does it make sense to invest in back-office systems internally or externally? Outsourcing doesn't just mean technology or business process - it is a possibility anywhere in the insurance value chain, anything from procurement all the way through administration of policies and the technology that supports them."

Wilton Re (more than $6 billion in assets) has applied this philosophy to taking on existing books of business from direct life insurers since the Wilton, Conn.-based company's founding in 2005. "There's a lot of business out there on old technology, and companies are going to have to do something about that in the coming years," Treglia notes.

In the case of an existing block of business that the carrier wishes to expand, it may make sense to manage the book internally, Treglia relates. But continuing to invest in the management of a closed book is a less-profitable proposition, he argues. Treglia suggests a third option: reinsuring the book. "Not only do you monetize the value in a block of business," he says, "you also take care of issues with old technology and take the expense risk out of outsourcing and put the burden on the reinsurers."

Wilton Re's ability to take on that burden is based on specialized expertise, including the ability to work effectively with external partners, Treglia insists. For example, two internal managers oversee more than 450,000 outsourced policies. The same two people, he notes, also manage a recently launched new-business platform for a simplified issue product that Wilton got up-and-running in three months, in collaboration with its outsourcing partner CSC (Falls Church, Va.).

"We've been able to effect a virtual insurance company from policy issuance to producing financial statements," says Treglia. "CSC mans the new-business call centers and provides the technology platform and in-force issue processing, and provides the financial reporting."

Few insurers have mastered external sourcing to the degree that Wilton Re has, but insurers' ideas of what can and should be outsourced continue to evolve. Carriers have learned from both successful and troubled outsourcing engagements and have refined their partner management skills. Technological improvements have made it easier to integrate with external partners, and the current economic downturn has put added pressure on executives to find lower-cost ways of doing business.

And as their confidence increases, insurance companies are willing to explore new opportunities, says Mike Fitzgerald, a Chicago-based senior analyst with Celent. "Companies that have developed muscle memory around outsourcing are doing more," he reports.

Driven by cost pressures, insurers that are more comfortable with outsourcing are searching for things to outsource that they may have missed before, and they are getting a jump on less-comfortable competitors, according to Fitzgerald. "As these companies look to expand outsourcing capabilities, because of what they've learned, they face less risk," he says. "The outsourcing laggards can't see a clear way to do it, so the gap is increasing."

Forward-looking companies are not merely outsourcing more of the same, they are expanding what they source externally. The question for innovative companies increasingly is not, "What can we safely outsource?" but rather, "What can we afford to keep in-house?" suggests Sanjay Mohan, assistant VP of Infosys' (Bangalore) insurance industry unit. There's only so much that can be gained through internal cost-control efforts, he says, adding, "There's a more fundamental discussion going on now about what is core and non-core to an insurance enterprise."

If, as Thomas Davenport argued in his 2005 essay, "The Coming Commoditization of Process," cost efficiencies come from standardized process, then insurers' strategic investments should go to the core capabilities that distinguish them from their competitors, Mohan asserts. "If a process is commoditized or standardized, why invest in the infrastructure and staff required to support it? That's the key question in the boardroom right now," he says.

Mohan adds that some of Infosys' insurance clients that have been asking what is or is not core have generated plans to reduce assets - including IT assets - by as much as 50 percent. "They're looking at their return on capital and asking whether they can get the same results with fewer owned assets. That's where the sourcing comes in," he explains.

One-Stop Shopping

Insurers that feel less need to harbor capabilities internally often see less point in large numbers of supplier relationships, suggests Michael Scunziano, head of North American sales for Tata Consultancy Services (TCS) in New York. A growing number of carriers see the appeal of consolidating a variety of hardware, middleware, operating software and applications into a simplified platform, he says.

"The cost of managing the inherent complexity of a large vendor base is not worth the additional required investment in ... staff, contract management or competitive bidding process," Scunziano contends. "The magic of maximizing benefit is to find the balance of scale and boutique that matches a carrier's business needs for efficiency and flexibility."

Scunziano cites a relationship TCS has with a major U.S. P&C carrier that declines to be identified. The relationship includes a mixture of IT outsourcing and business process outsourcing (BPO) in support of underwriting, policy administration, claims processing support, and imaging and mailroom services. TCS, he reports, supports business processes for claims, personal lines, underwriting, merit coding, and imaging and indexing services, and is performing IT services for personal lines, commercial lines, claims, open seas, surety, and quote and issue processes.

According to Scunziano, in addition to ensuring the quality of deliverables and services, TCS has focused on value additions and process improvements by documenting the maintenance procedures in wiki pages. The consultant also has helped to identify process automation opportunities. To expedite testing activities, Scunziano says, TCS developed an automated data creation tool and performed functional testing. TCS also implemented process tracking and real-time metrics.

The ongoing engagement, which began in 2005, has resulted in $8 million in full-time-equivalent savings, Scunziano says. Other benefits include reduction in cycle times, reduction of inbound calls by half, a 25 percent increase in claims adjuster and field staff capacity, and a doubling of field reps' productivity. In 2009 alone, Scunziano reports, process improvements resulted in savings of $600,000.

In 2007 TCS began an engagement to deliver a "company-in-a-box" solution for an international insurer launching a start-up operation in India, Scunziano adds. The outsourcer provides end-to-end policy administration on its TCS BaNCS insurance platform, infrastructure services, and application development and maintenance. According to Scunziano, the carrier has enjoyed dramatically improved speed to market and a platform and financial terms that will scale as the greenfield operation grows.

The range of capabilities that insurers are willing to outsource is growing as each acquires an increasingly refined understanding of what makes the company special, Scunziano believes. "I don't think anything is sacred anymore," he says. "Perhaps an insurer has the best product guy in the business so they're not going to outsource what he does. However, they may realize that he doesn't need 50 actuaries sitting around him - he might have a team of actuaries in India."

He might indeed. In a recent blog post, Celent's Fitzgerald reported that this year alone 10,000 individuals in India will take the actuarial exam. Some of those are employees of New York-based EXL, which has extensive operations in India, including an insurance academy where students prepare for the actuarial and CPCU exams, among other credentials, according to Bill Bloom, EVP, global client services, for EXL.

The notion of "outsourcing actuarial" may strike fear into the hearts of insurers. However, the idea of outsourcing some of the data analytics that an actuarial department does - while leaving internal actuaries to continue to do the high-level pricing and reserve modeling - is appealing, Bloom implies.

"Every carrier is trying to figure out how to leverage both internal and externally available data. They realize that there is a limited supply of domestic actuaries that they can hire," he says.

"They have to figure out how to break down the analytical processes and understand, 'What do my people need to do in the analysis of this data, and what can I have other people do?'" continues Bloom, the former CIO of Travelers. "Once you break down that value tree, there are many places in the world where people can do everything from lower-end data pulling to some fairly sophisticated analysis."

In fact, the sudden vogue in data analytics has left many insurers scrambling to find the skills they need wherever they can find them, according to industry insiders. But it would be a stretch to call this outsourcing, since for many carriers this never was a capability they held internally.

Dhiraj Rajaram, founder of analytics service firm Mu Sigma (Chicago and Bangalore), has seen in the past few years a shift in demand from insurers for strategic data analysis rather than projects involving tactical data gathering. "A few years back, our insurance clients were asking us to help them gather data and get it ready for analysis; now they are asking us to perform analysis and help them build predictive models that will help them make better business decisions," he relates. "These firms have invested a lot of money in sophisticated IT systems for collecting data, and they want to do something useful with it and get return on their investment."

Insurer demand for analytic services also has evolved from individual reports and dashboards to enterprise-level, holistic dashboards, Rajaram adds. Within a slightly longer time frame, many carriers have moved to modern claims systems and, as a result, now have large repositories of accessible data that they can analyze to improve claims processes, he explains.

The director of sourcing at a leading U.S. insurer tells Insurance & Technology that the carrier's relationship with Mu Sigma has grown both quantitatively and qualitatively since its beginning in 2005. "We have Mu Sigma perform various types of analytic support, all the way from the simplest data cleansing and formatting all the way to modeling, whether predictive, exploratory analysis or trend analysis," says the director, who requested anonymity. "We recently had them in to do analysis on new product potential."

Staffing has been a factor in the growing relationship, since college grads hired by the insurer took a long time to train and ended up leaving the company before providing a return on what had been invested in them, according to the director. "This is an even greater challenge today than in 2004 when we began building analytics staff," he reports. "Mu Sigma has helped us bridge that gap by establishing a pool of similar analytic capabilities."

Studying Abroad

It's easier to be flexible when a company can only get the resources it needs by sourcing externally, but North American companies also should look to the example set by counterparts abroad, as both inspiration and potential competitors. For example, in the United Kingdom, financial services companies have demonstrated a greater willingness than American companies to let go of processes and take advantage of both offshore and near- or onshore options, according to Sudhakar Ram, chairman of Mumbai-based Mastek.

"While U.S. companies have mainly outsourced the call center parts of their operations, I see the U.K. embracing a more widespread use of outsourcing - complete back-office processing," Ram says. "In the area of life insurance and pensions, the penetration of BPO in the U.K. is more than 25 percent, while in the U.S. it is under 5 percent."

Ram cites regulation as a factor in U.K. companies' motivation to reduce administrative costs, but he says there is a difference in attitude as well. "I have found U.K. executives more willing to let go of control and manage to outcomes, while the U.S. executives feel more comfortable having their operations under their direct control."

Another option for insurers is to combine direct control with offshore or near-shore economies. Two of the biggest U.S. insurers have run significant technology subsidiaries in Ulster for about 10 years. Newark, N.J.-based Prudential's ($637 billion in assets under management) software development and call center subsidiary, Pramerica Systems (formerly Prumerica), based in Letterkenny in the Republic of Ireland, celebrated its tenth anniversary this year. Allstate Northern Ireland (formerly Northbrook Technology), the Northbrook, Ill.-based carrier's software development and BPO solutions provider subsidiary, was established on the U.K. side of the border in Belfast in 1999.

Near-shore, English-speaking locations - such as Ireland, Scotland (see related sidebar, previous page) and Canada's Maritime Provinces - offer the possibility of lower costs for highly educated staff without the need to manage significant cultural differences.

Flagstone Re (underwriting capital of about $1.5 billion) looked to a near-shore location to provide significant capabilities for the very practical reason that the resources it needed were unavailable in Bermuda, where the company is headquartered. "Nova Scotia is two hours away, the people speak the same language, the province has five important colleges and a wealth of very talented people," remarks David Brown, Flagstone's CEO. "It gives us great access to talent, and the prices are reasonable."

Flagstone's in-sourced, Halifax-based capabilities include a large portion of its accounting and financing staff and a large IT center. "Our global IT hardware is in Halifax, as well as a staff of developers who manage our proprietary systems and purchased systems that can be modified," Brown relates. "We also have a high-performance computing center for high-end simulation."

Flagstone doesn't in-source anything that the firm could reasonably buy on the open market, but outsourcing opportunities are sometimes constrained by regulatory or tax implications, according to Brown. "Something might make sense from a resource point of view, but because of complicated regulations, it's not viable," he comments.

Considerations of competitive advantage also condition what Flagstone in-sources. "Development is onerous, but often there isn't an available package and we have to develop something ourselves," he says. "If we have to develop something and it becomes proprietary - if I outsource that development, that IP and its related advantage is with somebody else."

The reinsurer also has opened an in-sourced operation with a staff of about 120 people working in software development, risk modeling and finance in Hyderabad, India, Brown reports. "That's another deep pool of talent," he says.

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See related articles on pages 22, 23, 26, 29 and 30.