Tag Archives: SLA

Innovation: Not Just for the Big Firms

Small- to medium-sized insurers that want to remain relevant should heed the call of innovation.

There has been a lot of press lately about how innovation can help insurers overcome growth obstacles. It’s no secret that the insurtech startups of the world, for which digital innovation is the hallmark, are garnering the attention — and funding — of venture capitalists and larger carriers, but how is that innovation affecting small- to medium-sized (SMB) insurers?

In some ways, SMB insurers are vulnerable to a fate like what is being experienced by department stores such as Kmart and JC Penney or the local bookshop, all of which hang on by a thread as the online and big-box retailers take control of the market.

Market demographics contribute to this pressure, as emerging generations of customers — with demands for anytime, anywhere digital access to policy, claims and account information — put an additional burden on carriers.

It’s no wonder that SMB insurers may feel overwhelmed at the thought of keeping up with the likes of IoT, machine learning, business intelligence or robotic process automation. But many SMB insurers assume (incorrectly) that they don’t have the resources necessary to climb aboard the innovation train.

See also: Top 10 Insurtech Trends for 2017  

Consider the business culture in which SMB insurers (small mutual insurers, commercial workers’ comp carriers, municipal risk pools, captives and self-insured groups) operate. These carriers work within a known and predictable entity where budgets are firm — often the result of a formalized, collective group mandate. Smaller self-insured pools — such as public entities, under the scrutiny of their not-for-profit, state-controlled state insurance departments — are also frequently held to a more stringent set of business performance and accounting standards and metrics.

But, like their larger counterparts across all lines of business, these smaller self-insured pools are expected to be efficient, productive and successful in every aspect of their operations, including core systems (underwriting, billing, claims), financial management and CRM/workflow.

Unique Challenges

Because of the financial and cultural boundaries under which they operate, many of these insurers — as well as many other types of small insurers — still must rely on Microsoft Office products or cobbled-together, aging, home-grown legacy solutions to support day-to-day business functions.

This may mean that a single technology solution provider (or perhaps the insurer’s own, in-house IT staff) is responsible for the health and well-being of the organization’s technology footprint, architecture, back/front office, distribution, networking, communications and security. And, lately, those that rely on outside help for their IT function are faced with confusion and potential service delays as the surge in vendor merger and acquisition results in their trusted partner being gobbled up by a technology behemoth. The service-level agreement (SLA) may remain intact, but the larger vendor will undoubtedly start pressuring the carrier to rethink outdated hardware and software. This pressure, along with the potential drop in personalized service that typically accompanies a large M&A deal, add to the SMB insurers’ challenges to remain competitive.

In addition, the talent pipeline is drying up because of a retiring workforce. To replace these workers, what’s the likelihood that SMB insurers will be able to recruit top technology talent to manage an outdated AS/400 linked to a client/server front end?

If it sounds like I’m insinuating that smaller insurers should assume a victim mentality, that’s not the case. These carriers play a critical role in risk management, so they need to remain relevant.

But these SMB insurers will not be able to overcome innovation-related growth obstacles until they better understand and embrace affordable technology innovation options that will make their jobs a lot easier.

The first step is gaining an understanding of what’s possible — such as an affordable pay-as-you-go, as-needed migration of core systems and data to a software-as-a-service (SaaS) hosted environment, a gradual sunsetting of existing hardware and the gradual move to a digital platform that pulls all necessary functionality together for reliable, secure, front- and back-end operations.

From there, SMB insurers can implement predictive analytics for use in claims, communications and even cross-selling. Even at a small scale, machine learning and artificial intelligence can help these carriers improve their claims function, customer service capabilities and more.

See also: 4 Hot Spots for Innovation in Insurance  

Risk-management changes within our marketplace — such as legislative issues, changing (read: younger) demographics, the advent of the sharing economy and the growing presence of disrupters — will affect all lines of business and all sizes of insurers.

The SMB insurers that will remain relevant will be those that hear the wake-up call and understand the path to innovation, that choose a stepped approach to business and technology relevance and that greet the future with an openness to what’s possible.

BPO for Life & Annuity Market

Life and annuity insurers are focusing on three areas to drive growth: distribution, product and brand. Growth is hard enough in today’s market, but it’s even harder when your back office holds you back, both in terms of fixed costs and limited capabilities. Accordingly, achieving operational efficiency is table stakes for life and annuity insurers competing in an extended soft market.

Fortunately, given recent advances in technology and expansion of provider capabilities, business process outsourcing (BPO) has become a feasible way to reduce costs and increase efficiencies. Based on what we’ve seen in the market, we think BPO providers are ready to move from their traditional role as vendors to true business partners. With scale, advanced technology and money to invest, the best of them offer great opportunity for insurers to significantly lower costs and benefit from complementary services over the long term.

Why BPO and why now?

For years, insurers have tried numerous methods to achieve greater operational efficiency, including process reengineering, Six Sigma, and LEAN. Many companies also have pursued sourcing (primarily in IT) to stem the tide of rising fixed costs. While these initiatives have reduced costs and complexity to a certain extent, they have not lowered costs and operational complexity enough to enable the business to focus first and foremost on growth.

Fortunately, times have changed. Some BPO providers have recently offered savings on a per-policy basis (inclusive of both operational and IT costs) of anywhere from 20% to 40%. (Benefits depend on how much savings a company has already realized and how much additional opportunity for savings remains.)

BPO now offers the potential for greater long-term cost reductions and efficiencies than the methods insurers have used in the past.

In Europe, BPO and ITO (information technology outsourcing) has already played a major role in closed block businesses. Life, annuity and pensions BPO has a global market of more than $2.6 billion, nearly half of it in the U.K. In this case, the main point of BPO has been legacy policy cost reduction, but it also offers carriers an alternative operational platform for achieving faster speed to market for new products and for tapping into advanced customer service capabilities.

Legacy modernization is another important reason for considering BPO. As key staff retire, there is a real threat of knowledge loss, not least because legacy systems are concurrently moving toward the end of their effective working lives. Many BPO providers feature up-to-date and evolving technology platforms that are an attractive alternative to incurring continuing fixed costs in-house.

The key for carriers is to select a BPO provider that will keep its platform current rather than simply provide a “your mess for less” service (i.e., administration of your aging platforms). Without the right scope, BPO can backfire and actually result in a more complex operating model, with resulting stranded costs and a suboptimal customer experience.

What is large-scale BPO?

To understand what BPO entails, it is helpful to compare the different kinds of shared services that are available:

  • Captive shared services are when a carrier creates a wholly owned subsidiary to deliver services at a reduced cost. They can be established domestically, near-shore or off-shore.
  • Out-tasked shared services occur when a carrier hands over administration of its systems to a third party that offers wage arbitrage, but the carrier maintains ownership of the process and underlying systems.
  • In contrast, in a BPO transaction, the insurer hands over administration to a partner, who runs the former’s technology platform. In other words, the partner owns the process. Implementation may occur through a lift and shift approach (i.e., the partner takes over the carrier’s legacy platforms), through conversion (data is converted from the carrier’s legacy to the partner’s modern platform) or through a phased combination of both. To smooth the transition, ameliorate community and reputational concerns and improve change management, there is typically a significant amount of rebadging of employees from the carrier to the BPO partner.

Ideally, after BPO, the insurer is a service level agreement (SLA) manager, and the BPO partner controls the process. (N.B.: Contracts should be in place that stipulate performance requirements.) The insurer’s focus on the sourced business should be on performance and analytics, made possible through regular data feeds from the BPO partner.

  • In brokered BPO, the insurer contracts with a third party that isn’t itself offering BPO services but instead will manage the transition to a BPO provider. Ideally, the third party manager will have successful past experience with the BPO provider and managing the complex details of conversion from legacy platforms to new ones.

BPO is not one-size-fits-all. There are different varieties that insurers can match to their individual goals and circumstances.

Managing retained alongside sourced business

While moving the entirety of operations and IT to a BPO provider may seem appealing, insurers realistically will continue to be involved in many operational and IT activities. They often will retain key components of their operations and IT that they deem to be market differentiators. These most often relate to the customer experience (both with the agent and insured) and include call centers, portals and analytics. To remain effective, the operational platform that support retained components will continue to require maintenance, upgrades and BPO integration. Extensive up-front effort will be necessary to promote seamless integration of retained and outsourced components.

In addition, despite inclusion of a broad scope of operations and IT components, certain operational functions will remain with the insurer, namely HR, legal and compliance. Given significant sourcing, the question is if the insurer’s reliance on these functions will decrease and, if so, how to shrink them without increasing operational risks like:

  • Interruption of customer channels and operations: Businesses have been caught by surprise when service grinds to a halt at a provider.
  • Brand-damaging criticism: Businesses that fail to meet customer expectations – even if the cause is outside their walls – may see an increase in complaints, some going viral on social media.
  • Regulatory violation: A data error or breach at your service provider can put you in violation of regulations and jeopardize your customers’ trust.
  • System vulnerabilities: In a complex infrastructure that has dependencies you don’t even realize, a service interruption might trigger a series of problems that can affect your business.
  • Inaccurate reporting: Service provider processing errors can cause a misstatement of compliance, performance, operational or financial information.
  • Risk management lapse: Not knowing the controls around service contract terms can lead to unreported breakdowns in areas hitherto considered secure.

A good way to reduce the chance of BPO-related risks is to insist on a provider that comports with advanced service organization control (SOC) reporting. SOC 2 provides assurance that the provider has controls around the sourced technology and systems supporting the sourced business processes, but only to a pre-defined audience. SOC 3 provides the same assurance but more broadly to anyone interested in the provider’s control and allows the posting of a public seal on the provider’s website.

Embarking on BPO: An end-to-end approach

Given the significant potential for disruption to distribution partners, policy/annuity holders, employees and the community at large, BPO requires a more iterative approach to execution than many other forms of operating model transformation.

When evaluating BPO partners that best match criteria for in-scope functions and blocks of business, some carriers find that a single BPO partner may not meet all needs. Accordingly, it is imperative to determine the best BPO fit for each block of business.

Implications: Insights from BPO initiatives

  1. Plan big. Scope thoroughly enough to actually simplify management instead of just adding another layer of complexity to what you already have.
  2. Choose a partner, not a vendor. Approach the BPO as a relationship that will grow over time. Vet your prospective partner’s record of investment in other relationships and appropriately provide incentives to each other with thoughtful contracts that promote accountability.
  3. When vetting BPO providers, consider the amount of investment they’ll make to upgrade their platforms over time to continue delivering effective service.
  4. Don’t underestimate the amount of time that staff need to prepare for BPO. Identify all necessary business rules and ensure that key individuals and cryptic systems are aware of and understand them. You do not want any service interruptions.
  5. Map all dependencies on the policy administration platforms you’re seeking to move, inclusive of all ancillary applications.
  6. Realize that each part of the operating model you retain will add another layer of integration complexity to BPO.
  7. The prevalence of shared services and the opacity of many service-based cost-pools mean that many companies struggle to understand their IT spending. Therefore, it is vital to have an agreed-upon allocation method that won’t leave significant stranded IT costs post-BPO.
  8. Considering there will be more lines of accountability for running the business during and after the BPO, unless you use a brokered approach, you’ll have to create or augment an existing service provider management team.
  9. You may need multiple BPO partnerships. For example, the BPO partner that best meets your life book needs may not be the best choice to meet your annuity book needs.
  10. Ensure contracts account for all reasonable contingencies (e.g., growth, M&A, divestitures and spin-offs).