Insurance is one of the oldest, and arguably the most conservative industry globally. The industry also faces some of the most stringent regulatory standards and financial scrutiny. Compliance with these various provisions and consequently risk management is becoming increasingly critical to the industry’s fortunes.

Global Insurance Industry

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 life insurance segment makes up for about 59% of the global market, while the non-life (including healthcare) segment accounts for the remaining 41%.

The US dominates this market, contributing 35% to total industry, while European countries together contribute to another 41% for the year 2007.

Global insurance industry

As evident in the exhibit above, while America and Europe account for a significant share of the world market, emerging and ASEAN markets are growing at a rapid pace. Many of these markets have been opened to multi-national participation in the last decade. Rising populations, increasing income levels, low insurance penetration and rapid integration into the global market have fuelled insurance growth in these countries.
Global insurance carriers range from small and medium enterprises to large multi-nationals. Some of the largest insurance companies around the world are based in the US and Europe.

Challenges …
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.

•   Demographic changes such as ageing, obesity, etc., are necessitating newer, more customized product offerings in the traditional markets, with shrinking time-to-market.
•   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.
  
•   A spate of natural disasters in recent times - hurricanes, earthquakes and floods around the world - have brought on an additional financial burden. Growing worries about global warming and a rise in weather related extremities suggest that insurance companies will have to manage their risks better than ever to stay competitive.
  
•   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.
  

…Lead to Outsourcing and Offshoring

A spate of mergers and takeovers in the insurance industry over the last decade created a large number of diverse service platforms for insurance carriers, requiring a high degree of standardization. Limited resources, both monetary and human resources available to re-align legacy systems of acquired companies with the parent, led to outsourcing of IT functions such as infrastructure, application development, and maintenance.

Initially, insurance companies sub-contracted their support functions such as accounting, payroll and human resource management that were not critical to their core businesses. As their comfort with outsourcing and offshore vendors grew, the list of functions that were outsourced grew as well.

Outsourcing drivers

 Source: ValueNotes’ Report on Insurance Outsourcing

 The drivers of offshoring tend to vary, depending upon the outsourcer’s maturity along the value chain. If the buyer is contemplating outsourcing of non-core support services, the most important driver is cost saving. However, if the buyer is relatively mature, the drivers for further offshoring are likely to be availability of specialized skills, ability to enhance product differentiation, etc. However, cost saving is still a significant driver, if not the only one, in all cases.

Offshoring in the insurance industry was pioneered by companies such as GE and Conseco, which set up large captive centers in India. GE’s captive GECIS (now Genpact), and Conseco’s erstwhile captive EXL Service were amongst the early service providers. Today, these companies are counted amongst the largest third party BPO vendors.

The exhibit below shows processes that have been finding their way offshore.

Commonly offshored processes