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

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.

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.

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.

Outsourcing in the Insurance Vertical

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 service providers grew, the list of functions that were outsourced grew as well. Some of the recent deals in 2009 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: RSA (formerly Royal & Sun Alliance) extended its customer service and back-office administration deal with Accenture BPO for another two years.
•   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.

Though the recession is impacting the insurance industry, it will be on a relatively smaller scale as compared to the BFS industry. The rising volume of insurance business due to globalization promises greater opportunity for outsourcing vendors. Going forward, we see significant traction from not just Europe, but also other geographies including Asia Pacific, though the latter markets will take some time to develop.