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Insurers Expand Views On What Can Be Sourced Externally

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.

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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.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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