A primary challenge for the leaders of any evolving business is how to best allocate limited resources to achieve desired business objectives. This is particularly true with insurance agencies, where the vast majority of firms are small- to medium-sized businesses.
These firms (and, particularly, startups) must decide whether to handle core functions such as payroll or human resources internally or to outsource such functions to a specialized provider.
Outsourcing can be an effective tool for maximizing resources — but only when certain criteria are met. Some functions are outsourced by default; IT services are a typical example. Most agencies lack the expertise or critical mass to take on this function internally, so they contract with external experts to handle their computers, networking and other information infrastructure. Several other business functions could potentially benefit from outsourcing, but the case is not always so clear.
The agency principal should consider three important questions when evaluating outsourcing opportunities:
1. Is the function critical to your business operation, but not a core part of your strategy?
If a function is not critical to the business, it should almost certainly be outsourced (if it cannot be eliminated). For tasks critical to a business, the manager should consider if the task is a central element of the business strategy. Critical tasks that are not core to the business strategy are prime candidates for outsourcing
2. Is the function shareable?
When a business identifies a function that may be outsourced because it requires special expertise and investment, “shareability” is another consideration. Outsourcing works best when the provider of the outsourced service can leverage its investment in intellectual capital and infrastructure across a pool of similar clients. A robust solution that might be unaffordable for a single firm may become practical and cost-effective when shared as a “multi-tenant” solution (e.g., payroll and HR).
See also: A Revolution in Risk Management
3. Does the function require significant management oversight?
While it is important that the outsourced service provider give the management team visibility into the function performed, outsourcing efforts often fail if the management team is still required to spend significant, valuable time directing or overseeing the work of the service provider.
The Case for Outsourcing License Management and Compliance Services
The management of insurance licenses and credentials as well as other compliance services is an outsourcing opportunity that all well-run agencies, brokerages and third-party administrators (TPAs) should consider. Let’s look at how license and compliance management aligns with the questions posed above.
Is the function critical to your business operation but not a core part of your strategy?
Insurance licenses must be carefully maintained. Over the last several years, state regulators have become more aggressive in sanctioning agents and carriers for non-compliance. As a result, carriers are less tolerant of violations by their agents and are more selective in the agents, brokers and TPAs with whom they will contract. But accurate and timely maintenance of licenses and other compliance functions is not a central driver of the business strategy. In fact, most agency principals consider license maintenance as a “necessary evil.”
Is the function shareable?
A recently released report by the Professional Insurance Marketing Association states:
“The proliferation of laws and regulations have made it more difficult for carriers, agents, brokers and third-party administrators to satisfy their (compliance) obligations. As a result, regulated entities will likely need to dedicate additional resources to compliance, including personnel and systems….”Companies can obviously make investments in infrastructure and training of compliance personnel, but the costs can be prohibitive for small- to medium-sized firms, and the results are less than certain. Compliance managers with significant experience are in high demand and, in certain parts of the country, command salaries in the low six figures. When companies decide to invest in training an employee in this area, they run the risk of losing the employee to a competitor once she has obtained the relevant expertise. For most small- to medium-sized insurance agencies, the individual responsible for licensing and compliance also bears other responsibilities and lacks deep compliance expertise because he (1) spends much of his time on non-licensing activities and (2) does not receive adequate education and training. License requirements vary by state, but they apply uniformly to all agency entities. This means that a shared resource (the outsourced license management partner) can assemble a best-in-class service that can be delivered to multiple agency clients on a more cost-effective basis than if the agency built the function internally. With critical mass and an exclusive focus on the licensing/compliance space, an outsourced partner can also stay current on developments across all jurisdictions while maintaining relationships with state insurance regulators to assist clients in avoiding regulatory issues and providing informed remedies when issues do arise. By assembling an experienced team of professionals, the outsourced license management partner can also marshal investments in systems and infrastructure to make license management more efficient and reliable. Today, most agencies track their licenses on a spreadsheet, which can result in errors, missed deadlines and other issues. A related issue faced by agencies is continuity of the licensing function. In-house compliance personnel have historically managed licensing and renewals on an ad hoc basis using Excel spreadsheets or conventional paper filing systems. These approaches may work on a very small scale, but they offer very little in the way of checks and balances because institutional knowledge is not easily translated within the organization and is often lost when the person assigned to manage compliance leaves. Because these firms typically lack robust systems and procedures, the compliance function is difficult to transfer to the new compliance manager. Does the function require significant management oversight? Agency managers should not need to concern themselves with day-to-day maintenance, while still having ready access to the status of their compliance programs so they can take advantage of business opportunities. See also: Insurance Coverage Porn Here are three case studies of how outsourcing has worked when put in practice by ACCEL Compliance, which specializes in providing outsourced service options for license management and compliance functions for insurance agencies, brokerages and TPAs. ACCEL's experience illustrates how these functions meet the key strategic criteria for outsourcing. CASE 1: Nationally Licensed P&C Brokerage A nationally licensed property and casualty broker specializing in large complex commercial and municipal construction projects lost its in-house compliance manager and needed to fill the role rapidly. The firm engaged ACCEL to take over the compliance function, saving the firm the time, expense and risk of recruiting a new hire. The firm’s president said it saved money and got increased visibility into its compliance function, while ACCEL seamlessly picked up its renewals. CASE 2: Nationally Licensed TPA A nationally licensed third party administrator of life, health and employee benefits for a number of the largest U.S. insurance companies and affinity programs also recognized benefits in outsourcing its license compliance function. The internal compliance manager said, “While we understand that licensing is necessary to our continued operations, it does not drive our business strategy. Worrying about lapses in licensing was an unnecessary distraction for myself and our executive management team." CASE 3: Small, Independent P&C and Surplus Lines Agency A small but growing independent property-casualty and surplus lines insurance agency based in the Southeast faced a rapidly expanding licensing footprint. As with many independent agencies, its founder and CEO had grown the business without adding significant administrative staff and the related expense. He recognized the opportunity to outsource his compliance and license management function and engaged ACCEL, which he said "frees me up to manage the growth of the business and drive revenue."
