The multi-process Procurement Outsourcing (PO) market will grow 15-20 percent and reach $1.5 billion in annual contract value (ACV) in 2011, representing managed spend of about $190 billion, according to the Procurement Outsourcing Annual Report 2011 published by Everest Group, a global consulting and research firm.

In 2010, PO adoption was driven by organic and inorganic growth as the market experienced a record year for new contract signings and extensions, according to Everest.

Last year saw ACV grow 13 percent to reach $1.3 billion (cumulative).

While insurance is one of the oldest and most conservative industries globally, the industry is facing some of the most stringent regulatory standards and financial scrutiny and thus is increasingly looking for cost savings through outsourcing.

What's At Stake

The total insurance industry premiums, including life and non-life in 2007 were close to $4.06 trillion, according to Swiss Re and Economic Research & Consulting. The US dominates this market, contributing 35% to total industry, while European countries together contribute to another 41% for the year 2007.

Particularly in 2011, but also in the past few years, the insurance industry has witnessed a series of natural disasters, coupled with new regulations and associated compliance costs. Moreover, an increase in the intensity of competition has added to the pressure on bottom lines.

While the Gramm-Leach-Bliley Act, 1999 opened up significant cross-selling opportunities and increased M&A activity, it also threw up challenges of integrating legacy systems of converged companies.

In addition to this, stringent requirements like HIPAA, new tax compliance directives, payment regulations, etc created additional costs of compliance.

India, China, the Middle East, and other Asian countries have opened their highly under-penetrated markets providing new avenues for growth as well and this is also changing the dynamics into a more global insurance marketplace.

Changing Marketplace

The entry of other financial entities into insurance and the resulting consolidation has intensified competition in developed markets. In the emerging markets, large investments in infrastructure and distribution are required till a critical mass of policies sold can be built.

Outsourcing is particularly efficient in the in IT functions such as infrastructure, application development, and maintenance. Before true outsourcing offshore, insurance companies sub-contracted their support functions such as accounting, payroll and human resource management that were not critical to their core businesses. Then as their comfort with outsourcing and offshore service providers grew, the list of functions that were outsourced began to swell.

According to Everest some of the industry's transactions are indicative of this trend:

• Jan 2009: Capita won a GBP 500 m, 15 year contract from AXA Sun Life. As per the contract, Capita will provide customer servicing, policy administration, claims activity and IT support to AXA Sun Life.
• Feb 2009: RESPONSE bagged a five-year BPO contract with Hiscox, the international insurance specialist. The BPO will provide a variety of sales and customer services.
• March 2009: Perot Systems received a 10-year contract extension from Swiss Re. As per the agreement, Perot Systems will offer administrative and business process services.

Outsourcing's Future

Several regulatory and market changes may lead to increased pressure to outsource and create greater insurer cost savings, in particular the medical loss ratio requirements enacted as part of the PPACA.

First, US healthcare reform will bring in over 30 million new insured over the course of the next four years, introducing complete new segments for US insurers to service. While this is a great opportunity for insurers, they will need strong risk and price remodelling to aid their product development.

According to Gartner Consulting health care vendors, in addition to insurers may need to look at targeted "pure cost-takeout business process outsourcing offerings for niche processes to healthcare insurers".

Its highly possible that while the PPACA has been touted by the Obama administrator as a job creator and savior, it may actually lead to greater job loss through outsourcing. Definitely an unintended and potentially harmful result not forseen by the advocates of the PPACA.

But the Medical Loss Ratio Rules demand greater efficiency as beginning in January 2011, large-group health plans must spend at least 85% of premiums on medical services and quality improvement. Individual and small-group health plans must spend 80% of premiums on such services. The act will require noncompliant health insurers to pay rebates to members and employer groups.

And as those competitive pressures increase core process outsourcing may be considered as insurers face a market with falling premiums and profitability, compared to the pre-recession years. There is severe competition, coupled with newer customer and distribution channel dynamics. To be able to compete, insurers must achieve the highest degree of efficiency and leanness possible. Once ‘unoutsourceable’ core processes are no longer viewed as such, Everest argues. Risk modelling, actuarial services and new product development were traditionally the most core insurance activities, directly linked with company performance and competitive differentiation.

Conclusion

Unintended consequences of the worst kind in this economy, i.e. more jobs lost, appear to be inevitable.