Outsourcing for success: by outsourcing claims, insurers are free to deploy their resources toward developing and sustaining core competencies. (Property/Casualty).

Success in today's insurance market requires a company to stay flexible enough to move quickly into lines of business it thinks will be profitable, and it must be nimble enough to exit quickly from lines that no longer offer reasonable returns.

Given current industry economics and other challenges, a fast-paced entry/exit strategy seems difficult to execute. Fortunately for insurers, a new model--outsourcing--may prove to be the key to success.

The industry hasn't seen profits from underwriting in more than two decades, according to the Insurance Services Office Inc. Instead, insurers have relied on investment income to achieve profitability.

Typically, survival and the need to retain revenues have driven carriers into new lines of business and new territories. In doing so, however, they are hampered by a legacy of their past: the infrastructure they must maintain to service claims for a particular line of business, even if that line is no longer profitable. They also know that in creating the claims infrastructure to service a new line of business they may be creating the same stifling problem when they seek to exit the line in the future.

Without increasing expense loads, carriers are virtually stuck, unable to shift with the ebb and flow of the hard and soft markets. They must maintain the staff, systems and facilities to service claims on existing business for five to 10 years. Managing such an infrastructure also requires companies to allocate valuable management time and resources they otherwise might devote to developing new lines of business or finding new territories that would be more profitable.

Fortunately for carriers, many of the regulatory barriers to entry are falling away. The protection that incumbent companies have long enjoyed is beginning to diminish as states implement reciprocal approvals, making entry into multiple markets simultaneously easier.

In the most recent cycle, carriers adopted a strategy of entering specialty lines of business to increase profits. Newcomers moved into areas such as health care, municipalities, errors and omissions and directors and officers lines. As some carriers exited lines due to adverse events--Hurricane Andrew and the Northridge earthquake, for example--others that had not experienced such catastrophic claims stepped in to fill the void, picking up the book of business left behind and even hiring staff from the exiting companies.

The availability and costs involved in hiring experienced staff and the systems required for managing claims--especially in specialty lines--present more of a challenge for carriers, both administrative and financial.

By outsourcing claims management, a company can eliminate the need to invest in infrastructure, hire claims professionals, put systems into place, acquire line-management expertise and invest in technology. The claims-management company that takes on the function will have all that in place and will be able to handle "runoff" claims as carriers exit lines and markets.

With claims outsourced, insurers are free to deploy their resources toward developing and sustaining core competencies and are free of the administrative and economic burden of supporting this infrastructure.

An insurer that chooses to outsource claims management will need a partner far more sophisticated than the traditional third-party administrator that historically has handled the overflow of claims processing. Some capabilities that a carrier should look for in an outsourcing partner:

* the ability to handle a critical mass of claims that matches the client's needs in multistate operations;

* adherence to best practices for each line of business and specialty;

* regulatory compliance over multiple jurisdictions and multiple lines;

* claims management designed to conserve the client's assets;

* automated processes to reduce costs and increase productivity;

* defined program goals that conserve client assets, such as reduced lost days, increases in modified duty, consistent control of reserves and increases in recoveries; and

* online data analysis for immediate access and interpretation of activity and results.

If survival in the insurance industry means being nimble, choosing the right outsourcing partner can be the difference between mere survival and real success.

John Washburn is managing director of Insurance Outsourcing Division for Cambridge Integrated Services Group Inc., a member of A on Corp. Washburn can be reached at [e-mail].