How far should outsourcing go?

Every insurer knows that well handled claims help to win more business, generate more capital and reduce expenditure. While badly handled claims lead to deeply unhappy customers.

That is because good claims management is not just a question of accurate accounting. When a customer makes a claim the insurers entire reputation rests on the efficiency of this department.

Poor claims service can leave the customer feeling cheated and the insurer’s brand tarnished.

The idea of outsourcing the claims function to a third party is controversial. Some companies see it as a way to free up resources to concentrate on core activities, such as underwriting and broking. Others, however, see claims as a core part of the business and refuse to give a third party responsiblity for delivering in this area.

Lost reputations

“Reputations can be lost very quickly if the claims department isn’t up to scratch,” says Steve Bartlett, a director with Heath Lambert Insurance Services.

“That’s why, if you are outsourcing, it’s important to sign a strict service level agreement with built-in financial penalties should the levels of service not live up to expectations,”‘ ‘explains Richard Holland, managing director of Capita Insurance Services.

Despite these misgivings, third party providers would argue that they can deliver increased performance cheaper. But changing the way a company does something is decidedly difficult.

Take the Kinnect debacle, the much heralded attempt to convert Lloyd’s brokers and underwriters to an electronic platform, which it pulled after widespread reluctance to adopt the system.

David Mead, chief operating officer at Aon UK, which outsourced its entire back office client operations division in September 2006, says: “While not a disadvantage, the transition does require significant effort to ensure success. And developing new skills in managing business partners is essential.”

“Those companies that go into outsourcing with cost as the prime driver will be disappointed,” he adds.

“Outsourcing should get you to a point rather than just shave a few pounds off operational costs,” comments Roger Townsend, executive director of Xchanging.

“If you are outsourcing, it’s important to sign a strict service level agreement with built-in financial penalties

Richard Holland, Capita

While risk carriers tend to be wary of outsourcing, some in the industry point to a cultural shift away from one company providing every service.

Those companies with the capacity and skills to manage claims may choose to retain the process in-house.

However, a limited availability of claims talent internally can place a high priority on focusing the most appropriate methods to get the job done.

“By outsourcing to a specialist, smaller companies can bring in professionalism in handling claims and tap into a broad range of expertise,” says Capita’s Holland.

But Aon’s Mead says: “Firms have to be realistic about what they can excel at, and choose which activities they are going to retain in-house and which are best placed with a business partner for whom those activities are core.”

Bartlett says market forces drive outsourcers to market efficiencies.

“Those people that in-source for reasons of customer servicing can learn a lot from the outsourcers who have to compete for business with other third party providers,” he says.

Whether a firm treats a particular function as core or not will affect its decision to outsource. Most general insurers tend to consider claims a core competency and therefore keep it in-house.

Lloyd’s syndicates, on the other hand, have traditionally focused on underwriting and left claims to someone else. That’s one reason why the Lloyd’s market is desperate to encourage syndicates to adopt electronic processing.

As most syndicates outsource their claims the market is looking for an ‘ efficient way of dealing with its third party providers.

The electronic claims file (ECF) initiative is designed to make processing claims faster by removing the inefficiencies associated with paper transactions. Lloyd’s insurers and brokers have until the end of the year to start transacting all claims through ECFs.

Outsourcing, traditionally one of the main solutions for run-off claims, is also a way of delivering competitive advantage within live claims by focusing resources on core competencies.

“To be a successful broker we must deliver what the client wants, and we can’t deliver this effectively unless we own and control the processing function

Joe Plumeri, Willis

Some look for a complete claims service outsourcing operation while others opt for pulling out particular lines of business.

Professional Risk Insurance (PRI) chose to concentrate on underwriting expertise and outsourcing the majority of its back office functions to well known service providers. Xchanging handled its claims processing. The company was swallowed up by Brit in 2003.

For Aon, outsourcing claims processing is a way of freeing up technical and senior management resources to deal with clients. “By retaining those activities that are core to the client proposition in house and placing the high volume processing requirements with an outsourced business partner enables us to concentrate on delivering claims advocacy,” says Mead.

In contrast, Willis has said it will definitely not be outsourcing its claims administration. Joe Plumeri, Willis chairman and chief executive, comments: “To be a successful broker we must deliver what the client wants, and we can’t deliver this effectively unless we own and control the processing function.”

Royal & SunAlliance (R&SA) shares a similar view. “We regard claims management as a core competency and a critical part of our offering to our customers.

“Where clear and material benefits are identified and these benefits cannot be easily replicated internally, then we would consider working with strategic partners,” says R&SA technical claims director Steve Maddock.

Parcelling out

While outsourcing is certainly no panacea, in theory parcelling out activities that a company isn’t best equipped to undertake seems to make sense.

When faced with a decision to outsource any insurer will need to accurately assess whether customer service and costs will be materially improved.

But simply using outsourcing as a basis to lob a problem over the wall for someone else to deal with isn’t the right solution.

It should be more considered and all factors taken into account: such as the potential cost savings, business efficiency and the impact on customer service, all contributing to the final decision.