Out of sight

If you are an insurance company’s claims director and you’re considering outsourcing your claims handling, you may be having a few sleepless nights as you weigh up the pros and cons of such a move.

On the one hand, outsourcing your claims function can reduce your costs, as you are able to make savings by not having to run call centres and employ staff to work in them. But there are also downsides. Can you be sure that the company you’re outsourcing to is giving your customers the service they expect? And with the FSA seeking to ensure that you are managing your reserves responsibly, can you be certain about the amounts being paid out on claims by the third party you’ve handed responsibility over to?

Despite the potential drawbacks, this is a growing trend. Research carried out by the law firm Pinsent Masons last year found that insurers planned to increase their outsourcing operations. The study showed that one of the reasons insurers were prepared to outsource was that they were confident their outsourcing arrangements were sufficiently robust to satisfy the FSA; 82% of respondents to the survey did not find regulations on outsourcing unduly restrictive.

Advocates of outsourcing were given further grist to their mill when, earlier this year, consultant Accenture said that insurers such as Allianz and AXA needed to cut costs and outsource more in order to boost revenue during the recession.

Outsourcing claims is not a new phenomenon. In 2002, research by Insurance Times and motor specialist Claimsplus showed 30% of insurers and brokers were outsourcing and, of those, 64% were outsourcing claims handling. At the time, AXA, RSA and Willis were cited as being among the pioneers of outsourcing in the insurance sector. It would be wrong, however, to say that outsourcing has enjoyed an inexorable rise since then.

In 2007, research by Compass Consulting found that a poor perception of the customer service provided by offshore call centres meant that insurers were reluctant to outsource customer-facing services.

Some insurance companies will only outsource as a last resort. AXA claims managing director David Williams says: “The starting point is that we ‘in-source’ if we can. The claims experience is the only time you touch the customer, so if you’re keen to develop a positive brand, the more you do yourself, the better.”

He adds that it can be tricky trying to instill your firm’s brand values in the company to which you outsource. “If there is a cultural difference, it’s difficult to embed your brand in a third party.”

Williams argues that companies that choose to outsource their claims functions in order to cut costs are avoiding the issue of how to stop wasting resources within their own organisation. “A lot of outsourcing is about costs. If you are more expensive than the company you outsource to, perhaps you need to look at inefficiencies within your own company,” he says.

Get the specialists in

Though Williams is aware of the potential pitfalls, AXA does outsource some claims. “We outsource 60% of travel claims to AXA Assistance, a separately constituted company,” he says, adding that AXA Assistance is well placed to handle travel claims as it has major operations in Greece and Spain. But why doesn’t AXA outsource all its travel claims? “We handle some travel claims ourselves because how will you understand the claims process if you don’t do any yourself?”

AXA does outsource other types of claims in some circumstances. “We’ll outsource claims when we don’t have the specialist expertise ourselves. This includes pet claims – where you’re dealing with vets, for example – and warranty claims.”

So what are the benefits of outsourcing? “You’re not increasing your fixed costs, as they have to worry about laying off or recruiting staff,” he says. “Outsourcing companies also have specialist expertise.” And the disadvantages? “You lose direct customer contact, the brand values are different and you’re contributing to other people’s profit.”

Williams adds that, despite the drawbacks, outsourcing can fulfill a number of objectives for insurers. “Some companies have big lumbering IT systems and sometimes the companies they’re outsourcing to have better IT systems. Outsourcing can also be a stepping stone to restructuring.”

But does the customer suffer as a result of outsourcing? “They shouldn’t. The claims experience can be improved, but we only outsource if absolutely necessary.”

Keith Aylwin, a consultant at CSC Financial Services, an outsourcing company that counts Zurich and Chubb among its clients, says that outsourcing claims can benefit an insurance company’s customers by reducing the amount they pay in premiums.

“For the consumer, a key benefit of outsourcing is that lower costs lead to lower product prices,” he says. “They also receive service improvements: quality is part of the service-level agreement regime that outsourcers are obliged to work to.”

In addition to the effects of the service-level agreement, outsourcing offers other less tangible benefits to the customer, according to Aylwin. He highlights “longer contact centre opening hours – maybe delivered offshore – or technology, such as online claims tracking”. “Online claims tracking will reduce the volume of incoming calls but this will also lead to the consumer perceiving he or she is getting a better service.”

Aylwin argues that aspects of outsourcing that ostensibly benefit the insurer can also be advantageous for the consumer. “It’s often the case that through the drive to reduce indemnity costs, the outsourcer will manage suppliers more rigorously and, as a result, drive down the duration of activities which, in turn, will reduce labour costs. The benefit to the consumer is that their car or home is repaired quicker.”

But Aylwin acknowledges the downsides to outsourcing claims. “Key issues are loss of control and flexibility; in order to deliver the service, the outsourcers will envelope all services into a contractual agreement,” he says. “While this guarantees what is to be delivered, it also means that a one-size-fits-all model is adopted, making it harder to cater for unique circumstances.”

Aylwin adds that because outsourcing contracts can sometimes last for periods of up to 10 years, there is a danger that an insurer could lose its claims expertise. “Once the claims are outsourced, the skills and knowledge – and very often the staff who do the work – are lost from the insurer’s human asset base, so it can be very difficult to bring the work back to the business if there are any difficulties, or issues with the contract, further down the line.”

XL’s head of international property and casualty claims operations, Graham Lambourne, says his inclination has always been to handle claims in-house. “My feeling is that once a client and a broker have handed over a premium, we should provide that service,” he says.

Keeping a handle on things

Lambourne adds that the need to comply with FSA regulations concerning insurers’ reserves, for example, means that if an insurer does outsource, it must ensure as part of its agreement with the outsourcer that it is able to closely monitor the amount of money being paid out on claims. “You need to have confidence in the reserves and the amounts being paid. You need to have a handle on the day-to-day outgoings.”

XL does outsource some claims “out of necessity”, says Lambourne – low-value, high-volume personal injury claims represent 90% of the claims outsourced by XL – but he says he has “never been a great proponent” of outsourcing to save money. “There needs to be the infrastructure [within the insurance company] to control claims handling by other parties. The potential financial risks aren’t necessarily included in the [projected] savings. We have a specific outsourcing team and I’m very comfortable with reporting arrangements and consistency of data.”

Innovation Group – an outsourcing company that includes RSA among its clients – European chief operating officer Jacques Preyser says the main advantage of outsourcing for insurers is that it enables them to reduce costs. “We are specialists in handling motor claims and property subsidence claims. We have a network of repairers so we can reduce indemnity spend,” he says.

Preyser adds that, in addition to saving insurers from having to “invest in call centres or worry about staff levels”, outsourcing can also improve customer service. “We have a dedicated specialist team of vehicle accident repairers; the customer benefits because they get their claim resolved as quickly as possible.”

Preyser believes it could become increasingly common in future for insurers to outsource almost all their operations. “You could create a virtual insurer in the UK. Obviously, it would have to be licensed, but it could outsource virtually everything. There’s no reason why you can’t outsource all of your claims business. In that scenario, an insurer’s job changes from managing its claims to managing its relationship with the company it outsources to.”

He adds: “One client in Europe outsources 90% of its administration and all of its claims work. I think you will see more start-ups doing this.”

Crawford & Company global markets vice-president Clive Nicholls says the current economic climate has resulted in insurers increasingly considering outsourcing as an option. “In these credit-constrained times, we’re having more discussions in relation to outsourcing, as companies want to change fixed costs to variable costs. It can also reduce indemnity spend,” he says.

“I don’t see signs of outsourcing abating; the UK is deep in debt and the need for austerity is upon us, because you can’t go to the bank and borrow capital anymore.”

Ultimately, Nicholls argues, the customer can benefit from insurers outsourcing their claims. “High-value claims have always been outsourced to loss adjusters. I don’t see outsourcing as a degradation of service; it can result in an improvement in service.” IT