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Trends and Challenges in Outsourcing in the Insurance Industry

16 April 2008

When it comes to outsourcing, insurance is not  like other sectors. It’s a specialised and changing market where deals take longer to sign off even than other areas of financial services. But, as Robert Morgan told delegates at Berwin Leighton Paisner’s breakfast seminar, for the smart players there are major opportunities.

In terms of outsourcing, insurance deals were fundamentally different, Robert Morgan – founder of Morgan Chambers and now of Hamilton Bailey Ltd – told delegates at Berwin Leighton Paisner’s Trends and challenges in outsourcing in the insurance industry seminar. Large-scale deals could take up to 60 per cent longer to sign off than the equivalent banking or retail deals, and there were relatively few service providers with detailed insurance knowledge. The benefit for the winning provider, however, was that the deals usually lasted up to two and a half times longer. ‘Try and work out how this can benefit your business,’ he urged. ‘Use consultants and lawyers to obtain contractual flexibility. You’re in a very privileged position – there’s a whole industry of regulated outsourcers that the general public has never heard of.’

Free consultancy

There was also a wealth of free information to be had from the FSA’s outsourcing guidelines, he advised, which gave UK companies a great advantage. ‘The FSA is effectively a free form of consultancy advice, process and governance. If you’re going to do outsourcing, how does it relate to your business strategy now and in the future? It means lawyers have to write contracts that are flexible, and the FSA has provided you sound practical and implementable advice.’

Due diligence by the client on the service provider was essential, and he stressed the importance of working with and lobbying the regulator in the run up to the regulatory changes of Solvency II, as the client will have to implement change programmes without precise regulation to refer to – as happened with Basel II. Organisations should embrace the current ICA regime ahead of Solvency II, he said. ‘It is going to be very beneficial – it’s nothing to be afraid of.’

Break all the rules

Times were changing and many small, specialised insurance companies in Europe would not survive, he warned. ‘They are either going to be consolidated, or you can get out there and buy them.’ The full exploitation of outsourcing was taken up by only a tiny percentage of the companies that engaged in it, however. ‘Often you get trench warfare between suppliers’ contact points and your contact points – that’s not what outsourcing is about.’ The secret of effective outsourcing was gaining and retaining visible executive sponsorship and, critically, to have continuity in the people who set up and oversee it, as most move on.  ‘You have to retain those people,’ he stressed. ‘Use golden handcuffs – break all the rules. Even if you have to double someone’s salary, the benefits can be phenomenal.’

The key future trends to watch were the ‘greening’ of the sector, the growth in near-shoring, a greater emphasis on security and service provider alliance (deal specific) versus strategic partnering (suppliers strategically and logically paired to deliver their speciality services together), he said. Greening represented a major opportunity, as client companies would be striving to come up with new strategies to prove their green credentials to investors and clients alike. He stressed, that it was crucial that organisations not simply take the green claims of suppliers on trust. ‘This could leave you exposed to new taxation legislation – once, of course the legislation if more finely defined.’ Reputational damage, rather than tax fines, could be huge.

Near-Shore for Value Add services

Near-shoring was set to grow significantly, not least as India now had 7 per cent inflation, has huge wage inflation and now faced potential instability due to staple food prices and shortages. He urged delegates to look to the Baltic states – used by the Scandinavian countries for 35 years – as well as the Iberian Peninsula and even Russia. ‘The major thing that underpins staying on European soil is security, and this is the reason near-shoring will grow,’ he said, with vendors starting to look at security in a different way. ‘The majority of security is done badly - it’s one of the biggest let downs in contracts.’

Consolidation is the future

Consolidation of the market was also going to have a major impact on supplier selection, he said. ‘The credit crunch is with us, and outsourcers don’t have access to endless money.’ Organisations would start to come together, he said, urging delegates to take service integration very seriously as consolidation of the market was the future. ‘It is a young, dynamic market, with new outsourcers being formed all the time,’ he said. ‘The market is growing, and growing markets have to consolidate.’



 



 

 

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Mark Lewis

BLP
Partner, Commercial & Outsourcing

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