Making Sense of Claim Outsourcing Opportunities

By Larry Wood
Senior Consultant

Recently, I participated in a webinar on the merits of business process outsourcing (BPO) for property/casualty claim functions. The other panelists came from a company that had recently outsourced some key functions and a vendor who offers outsourcing services to claims departments. The presentation offered good information regarding the history of BPO, some recent applications of BPO thinking, and future opportunities. What I most enjoyed, though, was the panelists’ teleconference in preparation for the webinar.

During the course of our discussion, we debated whether claim handling is a core competency of P&C insurance companies. Certainly, most companies feel that the claim function is important due to its impact on operating results and customer satisfaction. Effective claim handling is critical to financial success because loss adjustment expense and loss costs often equal 70%–80% of earned premium. And while numerous studies have shown that good claim service does not guarantee high customer satisfaction, poor claim service is a primary reason that customers change insurance companies.

There are functions that lend themselves to outsourcing because of the expertise required or economies of scale, among other reasons. Traditionally, claim outsourcing opportunities focused on transferring functions such as:

Today, new technologies and vendor offerings allow us to unbundle the claim process further and outsource components such as compliance management, program management (such as direct repair programs), customer contact, and payment processing.

As companies consider their claim-handling outsourcing options, they should recognize that they may not be able to do everything well and instead focus on their areas of strength; weaknesses are natural candidates for outsourcing, both in the short and long term. Companies should also take advantage of vendor capabilities and economies of scale. Finally, any company considering outsourcing should know and understand their organization and define a strategy for efficient, effective claim handling.

The strategic objectives of outsourcing must be clear. Once they are, the internal cost of providing the activity should be determined and compared to the cost and benefits of outsourcing that function. If a favorable business case can been made, a Request for Proposal process that includes definition of business and technical requirements will help identify the most appropriate vendors.

Care is required in establishing and maintaining outsourcing relationships. Once a vendor is selected, the contract terms negotiated should include service-level agreements and other key performance guarantees. A transition strategy that includes mechanisms to manage the vendor should also be prepared. Develop an exit strategy in case the vendor relationship sours—this will be more or less important depending on the criticality of the outsourced activities to the overall performance of the claim function.

Because of the direct impact claim handling has on the success of P&C companies, outsourcing can never relieve management of the obligation to monitor the services and results achieved by the vendor, within the context of overall claim performance. Applying the principles discussed above can improve the performance of in-house claims processing.