January 22, 2014

A recent study from Novarica revealed that while insurers who currently engage in a moderate level of IT outsourcing plan to increase their efforts this year, the biggest users plan to scale back.

The company polled 95 CIOs who belong to its Novarica Insurance Technology Research Council and work in P&C or life insurance. The study measured current and predicted outsourcing rates along with customer satisfaction levels in outsourcing for application development and maintenance (ADM), specialized skills and infrastructure.

Results indicate that outsourcing typically consumes 16% to 24% of insurers’ IT budgets. Eighty-five of respondents report IT outsourcing in one or more areas, but most are trying to determine a measure of outsourcing that works best for them.

[More on outsourcing: Outsourcing Does More For Insurers Than Lower Costs, Everest Group Says.]

“There’s an optimal level for outsourcing for insurers,” said Matt Josefowicz, managing director at Novarica. “Some insurers who have overdone it and pushed too much out to the outsourcers are bringing some services back in-house.” For example, 38% of light users plan to outsource more in ADM; while 42% of heavy users intend to scale back.

Josefowicz explains that changes in outsourcing plans are primarily driven by company needs, not cost. Rather than consulting their IT budgets to determine outsourcing plans, insurers are evaluating their business capabilities and bringing in partners with skills that are not present on the internal IT team. By outsourcing certain responsibilities, insurers free up internal resources for development. But overall, insurers that do not already outsource are not likely to start.

Though 30% of insurers supplement their internal staff, many struggle to find external employees. “There’s increased competition for technology talent across the economy,” Josefowicz says. Companies in all industries are seeking individuals in specialized areas like mobile and analytics. It’s tough for insurers to compete.

Offshore providers may be an answer for some, but survey results indicate these may lead to lower levels of customer satisfaction. One-quarter of respondents that used offshore providers for ADM and specialized skills ranked their experience as “Poor” or “Very Poor.”

As companies develop their experience, Josefowicz explains, they can tweak their provider relationships to boost customer satisfaction levels. Many insurers jump into outsourcing because they need to address a business capability or reduce costs, he says, and they do it in a non-strategic manner. This often leads to an initially poor experience, he says, which can improve with time.

A positive example can be seen in large P&C insurers, which tended to have higher levels of outsourcing and overall customer satisfaction. “We conjecture that it’s due to their longer history of using these types of services,” he says. Given time, other insurers can follow a similar pattern.

Survey results also indicate that insurers who do not outsource are unlikely to start this year, as the early adopter curve has long passed. “These folks are resistant to it for one reason or another,” says Josefowicz. Whether cultural reasons or informed decisions are behind their choice, he highly doubts that these insurers will ever start to outsource.

ABOUT THE AUTHOR
Kelly is an associate editor for Insurance & Technology. Prior to joining InformationWeek Financial Services, she was a staff writer for InformationWeek and InformationWeek Education. Kelly has also written for trade ...