Breaking apart the monolith: Outsourcing should be considered for parts of insurers' core business. (Property/Casualty).

It may be time for senior executives to reconsider the rationale for maintaining the full range of functions and services that characterize most major insurance companies.

New technologies make it easier to identify processes and activities that either deliver or offer potential for a competitive edge, as well as to reassign to vendors capabilities that lag in best practices, quality and low-cost performance. Outsourcing should be considered even for parts of the insurers' core business, such as claims settlement or distribution, when better options exist outside the organization.

The breaking apart, or disaggregation, of the insurance value chain will become an important force for reinventing industry-leading organizations. By handing over capital-intensive processes to external vendors, large insurers can free up capital for investments that create or improve distinctive features in products and services.

Until recently, proprietary standards among multiple industry players generated a technological Tower of Babel. Rivalries, confusion and inefficiencies contributed to high transaction costs, slow data transmission, arcane procedures and limited communications capabilities.

These serious shortcomings discouraged cross-enterprise collaboration. This explains why executives with enough scale in their businesses were most comfortable with an integrated business model. It was just more practical to do it all, or most of it, inside the organization they controlled. Embedded costs may have been high in terms of diminished productivity, but the concept of assigning distinct parts of the value chain to the most effective provider--whether inside or outside the organization--was dismissed generally as too complex, too risky or too academic.

Now, however, advancing technologies in electronic communications are overcoming the challenges of coordination and quality control. The Internet provides a common platform for open clam exchange that is accessible by everyone. Advancements in artificial intelligence, data mining, segmentation, pricing and customer relationship management also are making an impact. The results are lower transaction and interaction costs, greater prospects for rising productivity and processes that are more transparent--easier to monitor and analyze for successes, failures and improvements.

Our studies indicate that smaller companies can find strategic opportunities against larger rivals through disaggregation. When they combine significant investments in technology with skills, value proposition and detailed understanding of customers, small companies can raise internal economies of scale in a targeted part of the value chain and reduce transaction costs to match bigger competitors.

This approach applies to large players, as well. Given the larger scale, they can develop a strategy for each section of the value chain and exploit the three elements of technology-enabled redesign. As described by Olav Noack ("Working Behind the Sceness," Best's Review, December 2001), the redesign process encompasses an open Web-based platform, streamlined processes and expanded use of middleware interfaces.

Companies that investigate and pursue disaggregation opportunities are likely to reduce their expense ratio and eventually attract customers from less efficient competitors.

Some movement already is evident in Europe. Skandia and Providentia have decided to wholesale their insurance products, rather than distribute them themselves. And suppliers, such as ARAG and Glass' Information Services, are providing legal and insurance information services, respectively.

German auto insurer HUK-Coburg is using a combination of disaggregation strategies. It has outsourced all of its loss-adjustment processes, primarily to Germany-based Dekra. Dekra's Internet platform allows a large insurer to transmit data, transfer funds and monitor claims that have been assigned to an external supplier.

HUK-Coburg was one of the first users of the German Insurance Association's claims network, a Web-based application that allows insurers to access multiple claims-servicing and information networks through a single portal. Also, HUK-Coburg has introduced a new service that retrieves a damaged vehicle from a claimant, provides a rental car and returns the repaired vehicle tuned-up and cleaned.

These innovations exemplify how insurers are examining new technologies for ways that could eventually deliver revenue growth to equal the level of cost reductions. Many companies in other financial industries--banking and brokerages, certainly--rely on new technologies to help sustain leading positions in their key markets. They have seen that the use of technology, along with business process redesign, allows their chief executive officers to set new aspirations that were unthinkable just a few years ago.

Kevin Relihan is a consultant in Zurich, Switzerland, with McKinsey & Co., a global management consulting firm. He can be reached at [e-mail].