The insurance industry is facing myriad challenges arising from intense competition, rising regulatory compliance and growing payouts due to fraud and natural disasters. It's expected that competitive pressures will make offshoring of information technology (IT) and business processes a growing imperative in the insurance industry.
Compared to mainstream banking and financial services, where the early adoption of automation and IT helped facilitate outsourcing, first in IT services and later in BPO, the insurance industry has lagged behind. This is one reason why insurance companies have been more conservative in their attitude to “business process outsourcing”, and especially to offshoring.
With expected cost savings of 30% to 40%, and other advantages such as focusing on core competencies and access to skilled labor, we believe that the insurance offshoring industry is poised for significant growth in the next three to four years.
The Opportunity For India
Indian revenues from offshore insurance BPO services are slated to rise from $690 million in 2006 to about $2 billion by 2010. During the period, employment in Indian insurance offshoring is likely to increase from 41,600 in 2006 to 100,500 by 2010.
Insurance Offshoring: The Growth Opportunity
- Insurance carriers currently dominate the buyer landscape. However, in the future, we may also see offshoring from intermediaries and re-insurance companies.
- Buyers in the UK and Europe will increase their share in the insurance offshoring market, while the share of business from US buyers is expected to fall by 2010.
- As the industry achieves greater offshoring maturity, the share of higher value services such as underwriting support and analytics will increase. Because billing rates are higher in these "knowledge"-based services compared to traditionally offshored tasks, the rise in employment in the industry will be lower than revenue growth.
Outsource-Ability And Offshorability
Support functions such as accounting and human resource were among the first processes offshored by insurance carriers. Vendors typically require less insurance domain expertise for these functions than for some of the other transaction processing functions. The table below shows processes that have been finding their way offshore.
Table 1: Typically offshored processes.
New business acquisition
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|Source: ValueNotes Research|
In the last two to three years, a large number of activities in claims processing functions have found their way offshore. Relatively, processes in underwriting, adjudication, fund management and actuarial processes are not yet being offshored in significant volumes, though this is likely to change.
The Indian Service Provider Landscape
Historically, the industry owes its roots to the captives of large companies such as GE and Conseco, which first set up offshore centers in India to provide insurance processes. Subsequently, the captives of these companies became third party players — Genpact and EXL Service. Today they dominate the insurance service provider landscape by virtue of their size, domain expertise and offshoring capabilities.
The insurance BPO provider landscape comprises large, mid-size and small service providers. The larger BPO companies are diversified across many verticals; but as a result of their size, they have acquired deep domain expertise in multiple verticals, including insurance. They have significant global reach, with marketing and delivery centers spread across the world. We expect this group to continue to dominate the insurance provider landscape in the next two to three years.
Many of the mid-size players have grown considerably in the last two years. They have diversified into additional insurance segments (life, healthcare and property and casualty) and broadened their service offerings. Some of these players, especially the BPO offshoots of IT companies, have good potential to grow both in size, and specialization in the next two to three years.
Table 2: Expected winners among third-party offshore vendors.
|Large Players||Rationale for high growth prediction|
|Genpact||The largest BPO in terms of revenues. Is aggressively bidding for insurance contracts after attaining third-party status. Scale, BPO knowledge and process maturity make Genpact a formidable competitor.|
|EXL Service||Player with a strong banking, financial services and insurance focus (BFSI); has been scaling up in research and analytics. Has recently bought Inductis. NASDAQ listing in 2006 expected to provide funds for growth.|
|Cambridge||Large presence outside India; is trying to build up India presence. Not limited in terms of funds. We expect this company to increase competitiveness aggressively by building its India presence.|
|TCS BPO||Backing of the largest Indian IT company and large business house. Is acquiring companies focused in BFSI and leveraging its capabilities such as offshoring knowledge and process maturity very aggressively.|
|Wipro BPO||Has been scaling up its insurance practice. Diversifying into non-voice business, and insurance transaction processing will be an area of focus. Scale and outsourcing knowledge will give it an edge.|
|WNS Global Services||One of the largest Indian insurance BPO players. Has very strong insurance focus. We expect WNS to continue to scale up aggressively in the insurance vertical, backed up the recent cash through the NYSE listing.|
|Mid-size players||Rationale for high growth prediction|
|Infosys BPO (formerly Progeon)||Strong margins have been its forte. It will look to scale up rapidly and build capabilities in insurance, especially analytics and research. The Infosys parentage implies strong financial backing and offshoring know-how.|
|TransWorks||Has recently acquired Minacs, one of the largest call centers in Canada; has focused plans for BFSI capability building. Backing from the industrial house Birla means that funds won't be a constraint.|
|Xansa||Strong presence and client base in the European market where growth is expected, especially among UK-based insurance companies. Will ramp up in the insurance vertical in the next few years.|
|IBM Daksh||Not very focused on insurance as yet, but scaling up rapidly. Has the backing of global IT giant IBM in terms of funding and client base. Daksh is likely to build up strong insurance capabilities in the near future.|
|Source: ValueNotes Research|
Apart from the large, differentiated players, there are a number of tier 2 and 3 vendors of smaller sizes and capabilities. Some of these small BPO vendors — those that have been able to differentiate their offerings — are growing rapidly, at rates much higher than the industry average. However, this is on a typically tiny base, and their ability to manage scale isn't yet evident.
Key Trends in the Insurance BPO Industry
The insurance offshoring industry is definitely poised for higher growth than it has witnessed so far. According to ValueNotes' estimates, the industry will grow at a CAGR of 30% a year up to 2010, compared to a CAGR of 23% in the last two years, driven by the need to reduce costs, differentiate products in an increasingly competitive environment and ensure regulatory compliance.
Buyer Market to Shift Towards UK and Europe
As per our estimates, about 64% of the current offshore business is generated from insurance carriers based in the United States. Of the remainder, 28% of the business comes from the UK and Europe. We expect that by 2010, the US share will shrink to 54%, while that of the UK and Europe will increase to 36%.
Innovative Operating Models to Lead the Way in Contracts
We expect the number of contracts with "hybrid operating models" to show a large increase in the future. This will come at the expense of straightforward captive and third-party contracts from insurance companies. Hybrid models will also have a large share of the additional employment generated in the insurance BPO industry in India. Among these, innovative arrangements such as the buy-out of the UK-based Pearl Group's insurance processing division by TCS will become more common.
Growth in Emerging Markets to Translate into More Business
The rising volume of insurance business due to globalization, in turn, promises greater opportunity for outsourcing vendors. In India itself, domestic insurance companies that have sprung up in the last decade have already begun to outsource. This trend is expected to accelerate with an increase in business volumes and intensifying competition.
Favorable Eco-system to Support Talent and Skill Availability in India
Following the privatization of the insurance sector in 2000, there's also evidence of greater skill development in insurance in India. This is likely to create a sustainable eco-system, which will provide the necessary talent and experience to fuel further growth in insurance BPO in India.
Research and Analytics Services to Provide Value Growth to BPOs
So far, knowledge services, especially the core insurance services, such as underwriting and actuarial support is restricted to the captives of large insurance carriers. But now, high-end knowledge based services such as analytics, data mining and research have also started to get offshored to third-party vendors in India.
While, services such as claims processing, policy management, etc. will continue to provide volume growth to offshore BPO services providers, services such as analytics and decision support will be the higher-end, higher billing rate-based services that will drive value growth for the BPO organizations.
Non-Voice Transaction Based Processes To Go Up Significantly
So far, knowledge services and the core insurance services such as analytics and decision support have been retained in-house or restricted to captives. However, this work is starting to get offshored to the larger Indian BPO vendors or niche service providers, which are rapidly acquiring capabilities in these areas.
While services such as claims processing, policy administration, etc. will continue to provide volume growth to offshore BPO services providers, it will be the higher-end, higher billing rate-based services that will drive value growth for BPO organizations in future. Pressure on billing rates coupled with the need to offer broadbase service offerings is expected to drive most Indian BPOs down this route in the future.
Convergence in vendor landscape expected
Mergers and acquisitions have become integral to growth strategies of insurance BPOs. Acquiring domain expertise, inheriting trained and skilled manpower and accessing newer markets and clients are the drivers for acquisitions. The broader trend, however, is towards acquiring expertise in banking, financial services and insurance as an integrated offering.
Third-party administrator — BPO service provider convergence?
Industry dynamics are pointing to the possibility of a "third-party administrator-BPO service provider" convergence. This convergence can be in either direction. TPAs, threatened by competitive pressures, may acquire offshore vendors to build a low-cost base in countries like India. On the other hand, some of the large third-party service providers may buy out TPAs, both for more business and to gain onshore presence and domain knowledge.
In the future, you can expect to see a rising trend towards outsourcing of higher-end processes such as underwriting, actuaries and analytics to the larger third-party BPO vendors, which are fast gaining capabilities in these areas. ValueNotes forsees greater offshoring of high-end, higher-value services like analytics, actuaries and underwriting to push industry average billing rates upwards by more than 25% in the next two to three years. Finally, by 2010 a large number of Indian vendors will have evolved into mature, end-to-end service providers, competing with multinational outsourcing companies. Players such as Genpact, WNS and EXL Services, as well as BPO offshoots of IT companies such as IBM, TCS, Infosys (Progeon) and Wipro will emerge as formidable global players.
For detailed vendor analysis and company profiles, purchase the full report, “Insurance Outsourcing: India Gains Momentum As Offshoring Intensifies”:
WNS Global Services