COM K. Harris

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Derrick Lucas
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1 K. Harris Research Note 10 March 2003 Commentary Insurers Shift Focus and Approach to Outsourcing Insurers are evaluating IT outsourcing and business process outsourcing as viable options to support legacy systems, develop new applications and support business requirements. Global delivery options should be evaluated. Outsourcing isn't new to the insurance industry. For years, insurers have been using outsourcers for: IT projects, such as application maintenance or development to help with problems resulting from aging "legacy" systems Small-scale business process outsourcing (BPO) such as using third-party administrators (TPAs) for claims processing or accounting They have been out-tasking small parts, but not the entire business process. However, the bulk of insurance outsourcing has tended to be within the IT outsourcing (ITO) domain. Driven by aging legacy systems and limited resources (in terms of time, budget and staffing), insurers have turned to external service providers (ESPs) to help with a wide variety of IT initiatives, including infrastructure, networking, and application development and maintenance. BPO, in contrast, has historically been limited because of the continual control that insurers have wanted to maintain over business process, especially those that are mission-critical or directly related to customer service. Some early BPO deals focused on "horizontal" areas, such as accounting, payroll or imaging/document management areas that did not require insurance expertise and therefore were often performed by service providers that focused on those areas. Although this still holds true across the industry as a whole, the nature of outsourcing began to change in 2002, with insurers placing more strategic value on IT projects while examining core processes that could be supported externally. Gartner research at YE01 found a rising awareness of outsourcing alternatives within the industry, and noted a rise in general outsourcing rates (see "Insurance Outsourcing: Tactical Response, Not Strategic"). This study, however, noted that most outsourcing projects had limited strategic vision. In 4Q02, Gartner re-examined insurance outsourcing trends by conducting a follow-up study of 81 U.S.- based insurers with greater than $100 million in net annual premiums. This study, which included 42 Gartner 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 property and casualty (P&C) and 39 life/health (L/H) carriers, assessed rates and attitudes toward ITO and BPO. The study confirmed that insurance outsourcing is not growing as previously anticipated. Instead, levels of ITO were reduced in the L/H and P&C sectors (see Figure 1). The number of insurers reporting to have engaged in ITO in 2002 fell more dramatically in L/H. This is not to say that major ITO deals were not announced in In October, Fireman's Fund Interstate Insurance Group announced a nine-year infrastructure services outsourcing deal with CGI, and Manulife USA announced an application outsourcing agreement with Computer Sciences Corp (CSC). The CSC deal included the Vantage-One enterprise life insurance and annuity administration engine and the Performance Plus distribution management system for wealth management and compensation. It was more common, however, for insurers to slow down the level of ITO that they supported, mostly as a result of limited IT budgets and a tightening market. 55% 38% 62% Figure 1 Shifts in Outsourcing Adoption in Insurance YE01 vs. YE02 62% 48% 55% 44% 51% L/H YE01 L/H YE02 P&C YE01 P&C YE02 16% 10% 12% 7% 6% 3% 9% 2% Using ITO Planning to use ITO Using BPO Planning to use BPO Although participation in insurance BPO is relatively high, most of the projects are out-tasking rather than large-scale BPO. The study also found declines in BPO among L/H insurers, but a rise in BPO among P&C insurers. The P&C industry is more transaction-based and has begun to use outsourcers more often for claims and policy administration functions than their L/H peers. These processes, which can be performed by specialist BPO providers, can be moved external for economies of scale, thus providing the insurer with resources to shift to projects to support competitive differentiation. Gartner also noted an increase in call center outsourcing interest during this period. For example, Conseco was one of the first insurers to publicly announce call center support based in India. To support this, Conseco purchased call center provider Exlservice, but sold the company in late 2002 because of corporate financial challenges. 10 March

3 Gartner believes that the hardening economy, coupled with global political threats, have made it difficult for insurers to engage in new initiatives or seek external service options. Although the reverse reasoning would say that these conditions should encourage options such as outsourcing (especially in search of less-expensive alternatives), this has not been the case within the insurance industry because of the riskadverse nature of the industry and concerns over loss of control. The social and political culture within the industry, and the lack of BPO vendors with insurance BPO experience, has further exasperated the situation, leaving insurers reluctant to seek external sourcing options. The Global Delivery Model The Growing Awareness of Offshore Outsourcing in Insurance Insurance outsourcing projects have traditionally been driven by tactical reasons, such as limited resources. During the past few years, the traditional notions that outsourcing was an inexpensive alternative have been discarded, and the goals of using ESPs for assistance in IT and business processes have shifted to helping achieve staffing re-focus to more-strategic projects. This philosophy is further changing, however, as insurers realize the benefits, including 24-hour project staffing and reduced cost of labor, of a global delivery model that includes the use of offshore outsourcing (see "Going Offshore to Globally Source IT Services," and "Buyers Beware: Indian IT Service Providers Foray Into BPO"). Insurers, hoping to move processes/projects to ESPs and finding lower-cost alternatives, have increasingly engaged with offshore outsourcers. For years, large, Type A (technology-aggressive) insurers have used offshore ITO for infrastructure, application development and maintenance projects. Enterprises such as Metlife, Farmers Insurance, Royal & SunAlliance Insurance and Prudential Financial have used offshore firms to assist with a wide range of IT projects. For ITO, Gartner's research has found that approximately 22 percent of insurers have projects that are offshore, and an additional 18 percent employ a combination of onshore/offshore delivery models (see Figure 2). Insurers, such as Farmers Insurance, continued with offshore ITO in 2002, announcing a new agreement with Cognizant for ITO services. To mitigate offshore risks, a blending of onshore and offshore outsourcing may be preferred. In the study, the majority (58 percent) of insurers maintain all ITO projects onshore; complete reliance on onshore ITO is dramatically more common than other sourcing alternatives. 10 March

4 Figure 2 Percentage of Insurers by Delivery Model for ITO Combined for L/H and P&C Insurance 2% 18% 22% 58% Onshore Offshore Onshore and Offshore Don't Know Gartner expects that offshore options will continue to be popular within the insurance industry. Research shows that insurers have mixed attitudes about offshore options (see Figure 3). Approximately 33 percent of the surveyed insurers stated that they would use an offshore IT provider in future projects, compared to 37 percent that said they would not use an offshore provider for ITO. Twenty-five percent of the insurance sample responded with "maybe," showing interest but indecision about future ITO plans. From the countries examined, India on average is viewed as being the most suited to support insurance ITO requirements. 5% Figure 3 Use of Offshore Outsourcer for ITO and Country of Preference Mexico % 33% China % Yes No Maybe Don't Know India 3.98 The rate of offshore acceptance will grow as awareness of offshore benefits becomes apparent and if the political/economic situation calms. Insurers must consider, however, the risks associated with offshore outsourcing and develop risk-mitigation plans. Through 2005, most offshore outsourcing engagements 10 March

5 will be for IT services, not BPO (0.8 probability). Insurers will take a cautious approach to BPO, especially with offshore providers because of geographic requirements and lack of BPO expertise. During this time, offshore ITO providers will continue to build their BPO capabilities in preparation for growing market acceptance. Bottom Line: Although insurance outsourcing may have faced some set backs in 2002, insurers should not be discouraged from seeking IT outsourcing (ITO) and business process outsourcing (BPO) to meet future business requirements, especially those wanting to gain competitive differentiation or maximize strategic planning objectives. Global delivery options, including offshore outsourcing, should be evaluated, based on risk tolerance, project requirements and desired return on investment (ROI). 10 March

SunGard Will Build Insurance Portfolio Through Acquisition

Events, K. Harris Research Note 11 September 2003 SunGard Will Build Insurance Portfolio Through Acquisition The proposed acquisition of Sherwood International by SunGard is a "win-win" opportunity for