What insurance outsourcing trends to watch for

Editor’s note: For part five of this series, click here.

The function and structure of outsourcing is changing in the insurance industry, as global outsourcing continues on a meteoric growth trajectory. One estimate holds a nearly tenfold rise in insurance outsourcing in a three-year period, from $24.6 billion in 2017 to a projected $220 billion by the end of 2020. 

As it’s well documented that leading firms are focused on building their core strengths and differentiated capabilities, how must organizational structures shift to accommodate outsourced functions and knowledge sourcing? What has changed and how must the industry change with it? 

Here are some of the trends we’re seeing in insurance outsourcing, and why we believe this is happening. We’ll also lay out some best practices for insurance companies looking to form external partnerships for non-core and support functions.

Outsourcing is not new
Why are companies outsourcing today? The simple answer: there’s a massive shortage of talent. What started as a way to drive efficiencies by lowering costs and overhead has morphed into a much more serious problem of simply not having enough people to recruit into working at insurance companies, particularly in the middle and back-office functions. We’ve heard that a quarter of insurance executives are slated to retire in the next 10 years; meanwhile, too few new graduates are thinking that insurance is a viable career for them.

Amidst this talent shortage, it is not surprising that some firms are using different partner networks to access talent, at times even at a similar cost structure to in-house resources. Firms are finding people in several different ways: some are outsourcing certain functions, while others are beginning to use emerging “star platforms” as a way of accessing talent—something we’ll see increasingly in the future. There are also third-party talent platforms, pointing to the continuing evolution of accessing core talent.

Which skills and capabilities should be outsourced?
Broadly speaking, firms should rarely outsource roles or core capabilities that lead to a career path within the company. In insurance, this means anything leading to, and stemming from, the underwriter position, or more generally any position that has core responsibilities in managing market relationships and evaluating risks. In contrast, some insurance firms may want to grow their reputation for good service through “white glove” claims servicing, which is not their core function. The business of insurance is not to provide service, it’s to mitigate risk. So, underwriting as a capability—as the core industry function—is how insurance companies truly make money, it’s the driver of a successful firm. Underwriting is thus the pinnacle of what companies should strive to keep as an in-house capability.

For example, hiring underwriters in several geographies is very hard. As a result, insurers are strategically choosing to keep some underwriter support roles in-house as they represent a potential career path. The entry path to being an underwriter might begin as an entry-level operations policy administration role. That graduates to an underwriting technician or associate, roles that typically handle the less complex risks, or prep risks for evaluation by an underwriter. Then that grows into the underwriter role and from there, underwriters are often funneled into the leadership of the firm, moving into portfolio management and roles that demand a much broader perspective. 

Successful firms should then focus on expanding and improving on core capabilities while looking to external partners for non-core and supporting functions. As we see it, there are three viable paths to outsourcing non-core capabilities: as an efficiency play; casting a wider net for capabilities not performed in-house, such as tax reporting, or a skill set that can’t be built inside, such as analytics; and leveraging third-party partner data.

We see a trend of knowledge and analytics-as-a-service increasing and operating models shifting to allow for partner and alliance delivery. Contracting with outside vendors to deliver software as a service capabilities requires a depth of talent in scoping, contracting, negotiations, program management, and relationship management. Skills gaps exacerbated by the flight of talent in the industry can be addressed through partner delivery models, both in core functions and in technology and knowledge. 

Outsourcing for efficiency and cost is still massively important because making a fixed cost into a variable cost creates more agility. Additionally, we’re increasingly seeing the movement of labor from corporates to freelance. In 2017, the World Economic Forum estimated that 50% of the U.S. will be gig workers by 2027. This not only means occasional; it also includes highly skilled workers, and the curve on freelancers has sharpened considerably with the pandemic. Increasingly, all industries are going to have to focus on accessing talent in different ways.  Bringing in freelance talent—a form of broader partner network—is one clear way for a company to extend its knowledge sourcing. 

Creating networks
We believe insurance companies should begin by acknowledging the talent shortage, requiring different partner networks to access talent. Second, they should think about talent development and leverage outsourcing to create paths, because they might outsource a function that generates potential talent in other areas than real core competencies. 

For example, third-party underwriting and claims processing solutions are expected to increase substantially in the coming years. Outsourcing analysis can eliminate delays in policy issuance, resolve complaints, and lead to higher customer satisfaction. In this model, vendor software provides data-driven market insights and predictive and prescriptive analytics reduces the risk of bad policies and increases potential profit margins. Robotic process automation, delivered through the SaaS model, can be delivered without extensive changes to existing IT infrastructure by automating less critical workflow processes and integrating RPAs with other processes at deeper levels. As a result, customer experience will improve through intuitive interface, self-service, and customer activities. 

This shift to a model that embraces more partnerships and outsourcing of skills has several implications for insurance firms. Organization design and deployment of resources will have to shift significantly to include management of outsourced personnel and functions, and service level agreement contracting and management skills will be required. Back office roles will need to change to accommodate more management and team leadership skills. Significant role and skill changes will require the retraining and redeployment of team members, as partner models allow for freeing up capacity and increasing efficiency.

Organizations shouldn’t underestimate the value of bringing in freelancers. Instead of taking competencies—even non-core ones—out of the enterprise, consider bringing in the capability, albeit in a more flexible and temporary way. With the accelerated growth of the gig economy, there may be an opportunity to leverage experienced and skilled workers across the insurance industry in new ways.