The United Kingdom life and annuities market (UK life market) needs to develop a new sourcing mindset.
Outsourcing the management and maintenance of legacy systems has uplifted UK life carriers, freeing insurers from managing both the business processes and associated technology. Engaging providers with experience in traditional outsourcing and innovative digital-first outsourcing can yield substantial cost savings and position carriers to meet changing consumer demands. One major theme in the North American life and annuity market (North American life market) is the dismantling of their legacy operating models in favor of greater risk transfer to specialist insurance service providers.
In this Point of View (POV), we explore service providers’ changing role and look at how one provider, EXL, has shifted its value proposition to North American insurers with the aim of bringing this expertise into the UK life market.
The good news for the UK life market is that this report recommends some step changes that can begin the journey to a digital-first operating model. The bad news is that UK life companies have a long way to go, so it’s time to act!
With relative success, the UK life market continues to address several external challenges that threaten the prominent carriers’ profitability, regulatory compliance, and market positioning. For context, the UK life market has been navigating several external issues:
While these external factors shape the demands on the UK life market, carriers have to extricate themselves from antiquated IT infrastructures and rigid operating procedures that continue to add huge operating expenses and limit their ability to adequately service prospective customer journeys across life, annuity, and pension markets.
In this regard, the UK life market is playing catchup to its North American counterpart. In North America, carriers have been dismantling legacy operating models in partnership with outstanding information technology outsourcing (ITO) and business process outsourcing (BPO) providers, accelerating their ability to respond to consumer demands with more agile products and a push for continuous policyholder engagement.
By no means has the North American life market completed its transformation, but it should be a source of inspiration for how the UK life market can think differently about capturing growth, improving customer experience, and driving to a more variable expense base.
Specifically, the UK life market should examine providers that have been integral to the modernization of the North American life market to see what differentials they may bring, how they can learn from new thinking in deployment techniques, and how knowledge transfer is becoming as important as service delivery in the most successful of sourcing relationships.
One of the most visible changes in the North American market has been insurers’ willingness to transfer operating accountability to service providers. This intentional shift in mentality results from the assessment, often at the board level, of internal functional leaders’ relative roles and abilities to move enterprises forward.
Increasingly, we see a model of “contractual trust” being established between the carrier and the service provider, where the provider will accept greater accountability for outcomes in exchange for a greater scope of services across the entire insurance value chain.
As the demarcation line between activities that should be retained (differentiating activities) and activities that can be performed as a service (non-differentiating activities) continues to edge closer to core underwriting, risk selection, and distribution, we are witnessing the leading service providers, such as EXL, surround themselves with “A team” alliances to create what HFS as termed the “ecosystem model of service provision.”
This shift to alliance-based service delivery frequently improves the probability of successful execution—a trait insurance leaders back wholeheartedly.
One such alliance leader in the North American life market is EXL. One of the oldest insurance BPO firms and EXL’s first customer in 1999 was Conseco, which subsequently acquired EXL before EXL management bought out the company and established an insurance heritage with firms such as Aviva.
Today, insurance business accounts for about a third of EXL’s global revenue of nearly $2 billion. What has been interesting, however, is the evolution of the company’s ability to build data and analytics as core principles and how these services integrate with core operating BPO in the insurance market. Although it operates predominantly in North America, EXL is emerging as a serious provider for the UK life market.
A second major change in the North American life market has been the acceptance that core policy administration systems can be disassembled and rebuilt in a modular fashion rather than replaced in their entirety as a single project. In this market, EXL’s offerings have matured from offering proprietary life platforms such as LifePRO to alliances with platform providers such as Verisk FAST. This alliance approach reflects EXL’s understanding that it is data, not just the application, that is the insurer’s greatest asset.
This philosophical approach is exactly what each UK life insurer needs to consider as it modernizes its data-driven operating model to support agility in product development, intimate customer journeys, and continuous policyholder engagement—all of which contribute to unearthing new value streams for the insurer.
In summary, the North American life market has entrusted more value-add activities to external services providers like EXL. This is driving alliances with providers, including Microsoft Azure, OpenAI, and AWS Bedrock, allowing insurers to participate in a positive innovation cycle. Intriguingly, it is positioning insurers to capture the benefits of the next generation of transformation under generative artificial intelligence (GenAI).
Exciting times are ahead.
Let’s dive into some of the changes in thinking we believe will give the leaders in the UK life market the ability to differentiate themselves from the rest. The recommendations in Exhibit 1 will increase the velocity of well-founded ideas and improve the insurer’s success in implementing digital-first operating changes.
Source: HFS Research, 2024
The prevailing approach to modernizing legacy technology estates in the UK has been one of nervous trepidation. If modernizing a core policy administration platform was not demanding enough, doing this simultaneously as cloud-based operating models permeate the insurance sector has only added more risks to mitigate.
Instead, modernizing incrementally through modular line-of-business platforms can be a more palatable approach to transformation. It offers faster benefit realization times and, critically, opportunities for internal solution leaders to gain hands-on experience deploying digital-first projects across all links in the insurance value chain. This hands-on experience needs to be leveraged repeatedly so that progress across the back, middle, and front offices is coordinated and a full understanding of the customer’s journey is represented.
Just as it has done in the North American market, EXL intentionally challenges its portfolio for the UK life market and is building alliances with low-code policy administration providers such as Fadata and Instanda. The key concept for UK insurers to comprehend is the shift to data as the greatest asset, not the application. Providers like EXL have grasped this and innovated their own solution mindset to be driven by the use and management of data.
HFS recommends insurers partner with providers who continuously innovate and make incremental changes to allow data to flow across all applications. This has shorter benefit realization timeframes and builds greater trust in the associated insurance leaders.
HFS has long pushed for a OneOffice™ mindset, where teams function autonomously across front, middle, and back offices to promote broader processes with real-time data flows supporting rapid decision making. In the North American life market, we see a redesign of the budget allocation model, where traditionally separate budgets for back-office technology operations and front-office customer engagements are being brought together.
The intent is to minimize non-compatible operating expenditures and certain capital expenditures, tasking business-savvy digital leaders, such as chief digital transformation officers, with accountability rights over what had been the responsibility of chief technology officers.
As the saying goes, the board of directors “is looking to go in a new direction.”
This change toward third parties demonstrating a digital-first mindset is opening the door for a new set of providers, resulting in a composition of service providers where start-up providers are gaining as much attention as the largest technology providers. In doing so, carriers seek to mitigate the risk of technology from being a threat (external technology firms moving into insurance) to being a differentiator (controlling technology themselves).
This shift in thinking makes it imperative to build alliances now with providers that can turn these risks (data-driven organizations, unlimited processing capability, infinite analysis, and understanding) into your advantages.
HFS recommends carriers review their key portfolio of providers against current business needs. Consider providers who have served all geographies, as their capabilities have no borders.
Faced with changing demographics, a lessening of reliance on state pensions, and a market that prefers to shop for and buy insurance and investment products digitally, the UK life market needs technology partners with vastly different value propositions than those of the decade pre-COVID.
Traditional ITO providers in the UK life market have had a head start in modernizing technology estates, but the evidence suggests that too many of them have been slow to deliver. A review of ITO contracts often shows a lack of examples of gainsharing provisions—a contract feature intended to support service modernization.
This is giving momentum to carriers looking at alternative providers, and we are seeing UK life insurers using a duopoly model for technology services. ITO firms are focused on simplifying the IT infrastructure, while a cadre of specialist data-driven insuretech firms is engaged in the distribution, product, data management, and risk assessment functions.
The call to action for UK life insurers is to prioritize service providers willing to balance the financials of service management as revenue based or margin based. Services measured in terms of provider margin typically mean lower revenue for the carrier.
A less labor-centered delivery model decreases service fees (provider revenue) but can also allow for greater provider margin, as providers retain a larger portion of an overall lower revenue stream. The drive to automate and successfully deploy the latest technologies allows the insurer and provider to have mutually compatible goals.
An additional approach to changing your ITO provider’s expectations is to use an adviser firm—a re-insurer—to assess the risk of digital transformation. Getting a second opinion on the rate of innovation and probing the use of data and analytics may be the catalysts for your incumbent ITO provider to increase its propensity to bring innovations from all industries and qualify its application against the insurer’s business goals.
HFS recommends that UK insurers look to innovative commercial providers, such as EXL, that will engage in multiple pricing models.
Like all financial services segments, the UK life market has recognized the unmatched importance of data in improving decision making in every facet of business.
Data and metadata are being leveraged exponentially across every facet of the UK life enterprise, from operational insight on potential policyholders’ suitability and product alignment to deepening policyholder engagement and the underwriting of blocks of business.
Across all our 2023 and 2024 conversations, we have seen a commitment to data mastery. Yet, according to HFS’ 2023 research that included more than 200 F&A executives, only 23% of finance leaders believed their organization was strategically leveraging data as an asset in their function.
Those that do leverage data as an asset typically leverage cloud-optimized data platforms with stakeholder-specific applications. UK insurers may wish to look at firms like EXL, whose digital finance suite for the CFO harnesses cloud-based models and, importantly, is prebuilt with insurance-specific applications across the finance and accounting value chain.
These applications are built on the most nuanced understanding of the data needs associated with managing insurance operations over the past 25 years.
While a proven track record is essential in evaluating the service provider market, current attention on GenAI has only a short tail of demonstrated use cases, as listed in Exhibit 2, which HFS identified during its Generative Enterprise™ study.
Source: HFS Research, 2024
While it is recognized that the leading UK insurers are performing due diligence on GenAI, it is worth bearing in mind that GenAI poses possibly the biggest transformation of work across all parts of the insurance value chain.
For this reason, ensuring that insurance leadership is educated on GenAI’s potential and risks is a critical imperative.
HFS recommends prioritizing educating leadership about GenAI as a key step for all insurance enterprises toward becoming digitally literate.
The prevailing approach to outsourcing within the UK life market has been for insurers to consider rules-based, repetitive, and non-differentiating tasks as the basis for in-scope service agreements.
While this approach has matured to include more effective partnering across the multiple links of the value chain and incrementally include task automation, we believe now more than ever that education of insurance leaders in the next wave of GenAI-led opportunities is vital for them to fully comprehend the digital-first opportunity in front of them.
As one of the top UK life companies described, “The failure to understand and react to the impact of new technology could lead to an obsolete business model.”
UK life companies should value those service providers who go beyond leading with a technical offering to those that position offerings with the goal of transferring their knowledge. Knowledge transfers ensure that solutions don’t create workflow “dams” where siloed work processing disrupts end-to-end productivity. EXL’s industry experience shapes its implementation of projects, highlighting and suggesting mitigation strategies so that service recipients realize the full benefit of their solutions.
In short, the best UK life insurers should aim to improve the employee experience (EX) of digital-first sourcing decisions at all levels. Doing so embraces transformation opportunities, enriches work, and creates new sources of value. These outcomes will increase retention rates, especially among Gen X and Millennial employees.
HFS recommends insurers seek partners that understand how their solutions impact employee experience (EX), as this directly drives customer experience (CX) improvement, resulting in improved retained business performance and new business growth.
UK life insurers should evaluate providers on “demonstrated innovation” from all insurance markets and all geographies. In doing so, they create barriers to entry, as prospective and current policyholders will value the engagement models that support their journeys through individual protection and investment needs in the future.
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