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Ovum : growing importance of BPO in European life insurance

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Business process outsourcing (BPO) is now considered a strategic option by the boards of European insurers, according to Ovum. With the fragile economic state of their core markets and an increasingly unstable Eurozone, European life insurers are faced with the urgent need to reduce operational costs and conserve capital.

A new report from the global analysts highlights the factors impacting the life insurance sector. These go beyond a mere temporary market slowdown that is resolvable with short-term cost cutting. Instead, they will drive significant strategic change for some insurers and a wider general restructuring of the European life industry within the next 36 months.

Life insurers implement BPO for a range of functions, from discrete low-complexity back office processes such as premium billing, address changes, data entry and indexing, to the comprehensive outsourcing of most processes encompassed in the life insurance activity chain. These include specialist, judgment-based activities such as contested surrender claims. Typical reductions in service delivery costs achieved through BPO agreements in the UK vary from 15 per cent to 35 per cent.

As the urgency to reduce costs increases, the inhibitors to BPO adoption that are present in a number of continental European countries will be overcome. “While not applicable in every case, the significant role that BPO can have in reducing costs and driving service-level improvement means it should be seriously considered as part of the strategy development process of all European life insurers,” says Charles Juniper, senior insurance analyst, Ovum. “The situation prevailing in each European region will define the characteristics and urgency with which life insurers will adopt BPO.”

The UK will remain the largest life insurance BPO market globally; however, with closed book administration there will be few new market entrants to challenge the dominant BPO market leaders. On the other hand, uplift in adoption of BPO within open book administration is likely, but these opportunities will be small both in scope and contract size. Nonetheless, BPO in support of open book processing does offer potential opportunities to smaller providers.

Conversely, mainland Europe faces a decidedly mixed outlook. The Dutch life insurance industry is facing an immediate crisis, with BPO contracts likely to be awarded within the next 12 months. However, both France and Germany have BPO opportunities developing at a much slower rate. This is primarily due to cultural reluctance, political sensitivity and regulatory complexity of these markets.

“BPO is an increasingly viable strategic option as life insurers look to cut costs in support of core administrative processes – particularly for closed life books,” says Juniper. “Life insurers can assess the potential role of BPO within their organisation by mapping their requirements against key strategic ‘levers.’ These include ‘scope of activity, ‘IT transformation,’ ‘operational transformation’ and ‘multi-shore service delivery.’ This allows a life insurer to understand the focus of benefits, the likely timescale for these benefits to be realised, the level of investment needed and the potential risks.”

Ovum expects to see strategic levers increasingly used by insurers to identify and prioritise key capabilities required of potential BPO vendors in the execution of a particular strategy. This is both in terms of the immediate and longer-term objectives.