Growth Beats Cost-Cutting As Insurance Stares at Disintermediation

Voice of the Customer: Insights from the Insurance As-a-Service Blueprint Research

The insurance industry faced one of its toughest years yet in 2017. On the back of continued regulatory pressure and volatility, insurers experienced the harsh impacts of industry cycles and technology-driven market disruption in property and casualty (P&C), life and annuity (L&A), and reinsurance. As a result, we see most carriers looking for rapid technology modernization and operational transformation to adapt to new industry requirements. Clients have new expectations for the delivery of operations support for core insurance processes. Our new HfS Blueprint: Insurance As-a-Service 2017 provides a detailed analysis on the capabilities and vision of insurance services partners as they adapt to this new reality. In this POV, we outline some of the key trends that emerged from this study around services clients’ needs and challenges and provide recommendations for carriers to get more value out of their service engagements. The primary research includes interviews with 24 insurance operations executives, operations manager level and above, primarily based in North America.

Exhibit 1: Client demographics from the Insurance As-a-Service Blueprint 2017

Carriers Are Raising the Bar, Seeking Top-Line Growth

The business process services industry is increasingly challenged to deliver solutions that impact business outcomes for clients – for insurance processes, the verdict is in. Carriers are decidedly focused on operational strategies that add to top-line growth. Answers to a question asking participants about their current challenges revealed that carriers are highly focused on winning market share and seeking innovations in product, price, and customer experiences (see Exhibit 2). To make it happen, they want greater business agility and technology enablement. While bottom-line growth and cost savings did appear in our list of the top 10 challenges, carriers are more attuned to their need for overall top-line growth in the next few years.

Exhibit 2: Innovation around customers and products tops the list of carrier concerns (greatest concern listed first)

Source: HfS Research 2017, n=24 insurance operations executives

These outcomes can be linked back to the solutions and capabilities a service provider brings to the table for an insurance client. As the president of an L&A carrier expresses in our study, “We need to have continued moderate growth and product innovation, as well as have a keen eye on bottom-line growth and risk mitigation. We might add a new channel or two as we try to grow. Our service provider does play a role in this – they need to improve the quality of service and speed to market and learn to do more with less…How many different projects can we do at the same time and get right?”

The selection criteria for service providers is thus evolving as carriers make these crucial links between their key strategic initiatives and the role of their partners in achieving them. As the VP at one of the largest supplemental insurance carriers recounts, “Our provider won out because they focused on understanding our customers’ business and their pain points. They’re very good about process design and worked more like a partner than even some of our internal areas. Their iterative, collaborative process of ‘Let’s try this; how does that feel?’… that’s rare in our business.”

Dial back to a few years ago: The majority of services clients in our insurance research mentioned selection factors such as scale of operations, financial stability, and years in the industry – these are just table stakes today. Apart from the focus on understanding the client’s business and contributing to customer and product growth, another selection criterion HfS is seeing develop is a service provider’s ability and willingness to assume risk and work with aggressive automation-based process redesign and streamlining. We see multiple clients selecting service providers that can “work with when it comes to headcount rationalization, promise up-front savings for automation throughout the life of the engagement, and sign up to co-invest in automation COEs with the clients.

BPaaS engagements are similarly seeing a revival beyond closed block operations as carriers experiment with direct-to-consumer models on new platforms – again, adding to top-line growth. Clients are selecting providers that can support their growing range of product variants and requirements as risk profiles gain complexity. Clients are especially paying attention to BPaaS providers’ product roadmaps and path to simplified upgrades to avoid being stuck with older platform constraints down the road. This goes back to carriers’ needs for managing regulatory changes and greater business agility as we outlined earlier.

One in Four Clients Is Seeing “Frequent” Innovation – Better Than Before, but Is It Enough?

A critical aspect of our Blueprint research is the level of innovation that service providers impact for client organizations over the life of the engagement. Going beyond day-to-day operations, how is the service provider improving services and moving toward delivering business outcomes? At HfS, we track several areas of innovative work for insurance service providers, such as their vision for intelligent automation within core insurance processes and investments in future talent and technology needs. While several providers demonstrate great vision, all of this must eventually be perceptible and delivered to their carrier clients. The industry’s dialogue around business process services in the last decade has stalled – we are hearing about innovation, but not quite seeing it to believe it.

Our interviews throw some light onto how, at a granular level, the insurance industry is seeing a difference in the innovation capabilities of their service providers. Compare the “book-ends” of Exhibit 3; there is a marked uptick with more clients “frequently” seeing innovation compared to three years ago (25% in 2017 vs. 15% in 2014), and fewer engagements left behind on the innovation curve (8% in 2017 vs. 20% in 2014).

Exhibit 3: Comparing levels of innovation delivered by service providers three years apart

Source: HfS Research 2017, n=24 insurance operations executives

What is noticeably constant in this chart are the two sets of columns in the middle – “meh” – what the Oxford English Dictionary’s recent addition describes as indifference or a lack of enthusiasm. How do engagements find themselves in this “meh” state, where clients see only sporadic or on-demand innovation from their providers? In some cases, the service provider is behind the curve on how quickly they’re willing to adapt to the changing marketplace. The vice president at a P&C carrier experienced this recently, sharing, “Comparing against 2015, our service provider remains cautious, and is certainly not embracing and moving us forward on legacy BPO automation. We’re willing and they’re likely trying to hold onto some revenue streams. There’s much more aggressiveness in the marketplace to rethink revenue models and create new service offerings to capture the market. Our service provider is not quite there yet.”

On the flipside, clients are often constrained by the lack of vision within their organization to collaborate with services partners, with some factions viewing them primarily as tactical execution arms. The Senior Vice President of Strategic Initiatives at a carrier highlighted this aspect, mentioning that she wished that their own IT organization was more open to working with their service provider. “We see so much more opportunity to do things around IT and automation, but it involves partnership with our own organization; we are too conservative.”

We created a summary of common buyer challenges for the industry, presented in Exhibit 4.

Exhibit 4: Several more miles to go in improving service delivery for insurance operations

Source: HfS Research 2017, n=24 insurance operations executives

Recommendations on Navigating the Next Few Years of Industry Disruption

Our recommendations for partnering for Insurance As-a-Service include:

• As-a-Service is becoming a reality – educate stakeholders and investigate: Ask your service provider to look beyond labor arbitrage in their contractual models and come up with more As-a-Service value propositions. At the current pace of technology change, what is standard today will be different tomorrow, so the traditional five-to-eight-year contract will not help you address future needs for a flexible, tech-enabled operating model. Look for providers that are thinking of “connecting the dots” with partnerships and acquisitions focused on As-a-Service.
• Culture will go a long way in creating a lasting partnership – find one that works: Multiple clients pointed to the culture of their service provider organizations as a key driver of their success. In some cases, the converse was also true, where due to the lack of transparency and bad communication styles, service providers were not able to meet client expectations. Look for service providers that are culturally aligned with your values and observe ways in which providers go about changing their internal cultures, going from order-takers to creative thinkers, challengers, and problem solvers.
• Look beyond cost savings when it comes to intelligent automation: Insurance carriers are advancing their investments in RPA, but the overall focus is on operational cost efficiencies. While these short- to medium-term cost savings might be lucrative, HfS recommends that clients take a more holistic view of intelligent automation technologies, focusing on long-term business agility and scalability and quality of operations. Further, business outcomes such as risk excellence and straight-through processing are better business cases in the long run, when they can create competitive advantages that are perceptible to customers and partners.
• Drive governance and coordination in automation initiatives: We see RPA pilots and deployments across the board, with several carriers setting up CoEs, some working with third-party advisors or turning to their service providers, and more still undertaking a combination of these approaches. RPA efforts are fairly disjointed and uncoordinated today. Prioritize on coordination and governance to ensure that you have a sustainable effort to use RPA across the organization. Functions such as internal control groups, risk and compliance, and the chief data officer need to be important stakeholders in planning and executing on automation initiatives.

Bottom Line: If you want help from your service and technology partners on industry disruption, prepare to look inward first and then re-evaluate partners that can match your pace of disintermediation.

Carriers are undergoing significant industry changes as business models become fundamentally disintermediated in insurance. During our research, HfS heard that several carriers are asking themselves, “What business are we truly in?” when setting their operations strategy and transformation agenda. We encourage services clients to ask their providers the same question now as the value proposition of insurance operations changes, slowly but surely. Outsourcing and offshoring for labor arbitrage is but one lever available to undertake operational transformation. Look for service providers that can design solutions around the business outcomes that matter to you and back up their vision with the meaningful and relevant use of data, automation tools, industry platforms and utilities, global delivery networks, and As-a-Service engagement frameworks. We see providers at different stages of executing on these ambitious plans with varying investments, buy-in, and levels of engagement across their client accounts. Partner with the ones that are willing to ask and answer the question with you, on what business you – and as a result, they – are in, as the insurance marketplace continues to face disruption around customer growth.

HfS Premium Subscribers can access the 2017 HfS Blueprint report on Insurance As-a-Service here.