Take out: global outsourcing is rising above old objections to gain favor among insurers.

Strategic global outsourcing has arrived. This phenomenon is made possible by the worldwide convergence in technology platforms and advances in communications. As corporations standardize their systems on enterprisewide platforms and tap into the availability of software tools that make it easy to port large amounts of data between dispersed information systems, the flow of information becomes a viable and nearly costless option. Today, not only back-office functions but complex knowledge-based processes can be performed anywhere in the world.

According to The World Is Flat, the best-selling book by New York Times columnist Thomas Friedman, we're living in a flat world: one in which technology and education transcend the traditional division between the "haves" and "have-nots" in developed and Third World countries. Cultures and countries around the world can compete on a level playing field. Business processes can be broken down and distributed to the best resource, regardless of whether that resource is in Boston, Beijing or Bucharest.

And, education has created a large pool of English-speaking, trained professionals, in countries such as India, who can communicate fluently in the international language of commerce.

Insurance executives, like those in all industries, recognize the need to focus on their core competencies to succeed in today's marketplace. Competitive forces and the loss of investment income in recent years have pushed insurers to focus on their operations to become more profitable. Insurers need to drive down costs, be nimble and flexible to enter and exit new lines of insurance as market opportunities open up, and have the resources to develop products quickly.

Global outsourcing offers insurance carriers options that enable them to focus on these priorities. Strategic outsourcing can reduce capital costs, lower labor costs, improve service, and in the case of claims management outsourcing, lower loss costs by closing claims faster and managing them better. However, due to the complexity of insurance transactions, a more sophisticated model is needed to deliver the benefits of global outsourcing to this industry. This new vision has three distinguishing characteristics: a combination of outsourcing and insourcing services, deep domain expertise and a strong client-facing presence in the home country.

Insurance and Outsourcing

The ability to attain higher service levels and reallocate valuable resources to core competencies is spurring the expansion of global outsourcing in insurance. Celent Communications Inc. predicts outsourcing in insurance will grow from $2.5 billion in 2004 to nearly $3 billion in 2006, with third-party administrators accounting for about 60% of that revenue.

Rapid adoption is occurring because global outsourcing can:

1. Leverage costs advantages. The leveraging of geographic differences in expense items (such as wages, telecommunications, infrastructure, real estate and support services) can produce savings on operating costs of more than 30%. The outsourced partner's resources and expertise can prompt adoption of other cost-cutting techniques, or process improvements that an insurers cannot achieve alone.

2. Eliminate recruiting/staffing hassles. Turning over noncore back-office tasks to a specialist in these services stabilizes cost, smooths out cyclical staffing needs and provides access to focused skills and competencies.

3. Keep up with competitive trends. Results from industry leaders have already demonstrated that the cost savings possible from offshoring translate directly to the ability to significantly lower product prices. Companies need to develop their own offshoring programs in order to stay abreast of the "competitive threat." The rapid evolution of technology, along with the increased pressure on in-house IT personnel to keep certifications up to date, makes outsourcing an obvious solution for insurers who want to maintain a competitive advantage.

4. Achieve greater productivity. The most important factor influencing loss costs is how long a claim is open. With an integrated home office/offshoring operation, claims are worked 24/7, resulting in faster service and lower costs. A global outsourcing/offshoring model tan improve service levels by leveraging the competencies of process experts who can re-engineer to enhance work flow, and by introducing globally emulated best practices, leading to further process optimization, accuracy, consistency and speed.

5. Realize greater flexibility. Carriers need to maintain an infrastructure to service claims in a line of insurance for five to 10 years after writing its last policy, requiring them to allocate valuable management time and resources they might devote to developing new lines of business or new territories that would be more profitable. By outsourcing claims management for exited lines, such development tan occur more quickly, eliminate the need to maintain technology systems and overhead for this run-off function, and avoid the need to hire and manage a shrinking pool of claim professionals for a line that produces no revenue.

Already, outsourced claims processing in 2004 totaled approximately $10.6 billion and is growing at 10% per annum, or $1 billion plus each year. Insurance functions that are being outsourced also include:

* New business: application intake, set up and management, underwriting.

* Policy administration: policy coverage change, policy owner services.

* Claims: claims intake and registration, simple claims processing.

* Accounting: premium accounting, claims accounting.

Global Outsourcing: Why Not? Insurance executives may be leery of moving into global outsourcing because of five main reasons:

1. There go the jobs. In the United States, the prospect of losing jobs abroad is a concern of politicians and job holders. However, studies have demonstrated that global outsourcing improves the world economy, and creates new consumers in Third World countries that actually boost the U.S. economy and create jobs here.

U.S. insurers are in a unique situation in that management is struggling with a labor shortage for skilled claims adjusters. The pipeline of new claims professionals is drying up for two reasons: The entire U.S. labor force is growing older and there are not enough younger people to replace them in the job market, and training programs have been eliminated or curtailed as the industry is pressured to improve margins and increase profitability.

In contrast, other countries have an abundant supply of people who are skilled and available at a lower cost. These lower costs enable companies to invest in their training and to bring highly intelligent, well-educated people into the business. Consequently, the insurance industry can find the skilled labor force if needs overseas, and by outsourcing routine back-office functions, U.S. workers can use their specialized skills in the actual management of the claims, improving quality and efficiency and enriching the jobs. The company becomes more competitive and more successful--increasing job security for everyone.

2. We'll lose control. Fear of losing control of key functions is another barrier to outsourcing in insurance. However, insurance companies aren't that confident of their infernal controls. In a 2004 Deloitte survey, 25% of insurers described their claims management process as excellent; fewer than half believe their processes are good. Less than one-quarter said their internal control environment is always reliable.

Two factors are necessary to address these control concerns. The first is the use of best practices in the outsource partner's software systems. When this occurs, consistency and quality are guaranteed at every step of a process. If a step is not performed or is not done correctly, the claim does not proceed until this is corrected. The adjuster is notified immediately to take corrective action.

The second remedy is communication. Software systems give insurers access to their data 24/7 to know the exact status of outsourced projects. A strong "face" at home and seamless integration with offshore operations is mandatory for good communication. Generally, client-facing personnel should be based in the home country. Companies considering global outsourcing should consider the level of integration of the partner's international offices, to promote communication and control of the processes.

3. We can't guarantee quality. Due to the complex nature of insurance and the many regulatory issues, an insurer's outsourcing partner should have deep domain expertise, reducing the risk of poor quality or noncompliance required for insurance outsourcing companies. Insurers also should investigate the ability of the partner's software systems to incorporate consistency in processes that lead to improved quality.

4. It will cost too much. The lack of understanding of internal cost and operational performance leads to the misperception that outsourcing is costly. In order to accurately assess the cost, carriers should invest in benchmarking insurance processes and measuring results and quality. The best outsourcing partners have moved higher up on the value chain, from data transformation through customer interface services (customer-support call centers) to "problem resolution" functions (knowledge process outsourcing), where human discretion plays a dominant role. This includes insurance claims processing.

5. It's midnight--where's my data? Data security issues are a huge issue. Any overseas operations should be "vetted" for systems and employee security and meet U.S. standards.

Yes, the insurance world is getting flat because of an overriding need of insurers to become more competitive and the compulsion to provide more value to the customer than the competition. Those firms who are early adapters and embrace the new world will gain "first mover" advantage in the market that can propel them to market leadership.

Key Points

* The ability to attain higher service levels and reallocate valuable resources to core competencies is spurring the expansion of global outsourcing in insurance.

* Celent Communications Inc. predicts outsourcing in insurance will grow from $2.5 billion in 2004 to nearly $3 billion in 2006.

Contributors: James Robertson is managing director and Geeta Sankappanavar is vice president, Strategic Global Outsourcing, for Cambridge Solutions Ltd.