“Many insurance companies that I talk to say, 'We have taken as much cost away from the company as we can, and outsourcing is the next thing on the list,'” said Keith Johnson, a partner at Hamilton, Bermuda-based Accenture, who leads the firm's North American insurance business process outsourcing practice.

John Albanese, vice president of CSC Financial Services Group in El Segundo, Calif., noted that in addition to cost reductions, outsourcing firms also offer scale and allow insurers to focus on their core strengths.

“Many insurers use outsourcing to really narrow their focus,” said Mr. Albanese, who handles outsourcing operations within CSC's financial services group. “Insurers can focus on things that are more important, such as management of distribution channels, focusing on agents.”

Outsourcing can also help insurers avoid capital-intensive investments, since outsourcing vendors provide infrastructure and intellectual property, keeping systems and software up-to-date, the speakers noted.

At a glance, these experts observed, the insurance industry and outsourcing seem to go perfectly together with no downside. On the one hand, insurers are looking to cut costs and focus on core strengths in a competitive environment, while outsourcing firms offer scalability and technological expertise.

However, there are other factors–often unique to the insurance business–that present challenges, the speakers warned.

When it comes to business-process outsourcing, outside firms might fail to understand the complexity of insurance transactions, the speakers noted.

One example is the agency bill in the property-casualty sector, according to Mr. Johnson. “It's easy for a provider to say, 'We can do it,' but unless you have actually done it, it's hard to understand the true complexity of negotiation and working with underwriters and agents, and all the different parties that get involved,” he said.

Another potential hurdle when outsourcing insurance business processes is the long-term nature of many policies, added Mr. Albanese. “Insurance products often have a shelf life of more than 20 or 30 years, and you have to capture all that history associated with that product. That all builds up and that's an aspect that's particularly challenging,” he said.

Carriers–especially those that are laser-focused on distribution–also fret about the kind of signal outsourcing might send to their distributors if carriers farm out main functions such as customer service call centers and claims administration, according to Mr. Albanese.

The industry's independent distribution system also plays a role, Mr. Albanese added. Since many insurer distributors often sell for the carrier's competitors as well, “you don't want to alienate agents in any shape or form,” he said.

“Outsourcing can provide a carrier's field force with better services than they have been providing themselves, but at first it's a tough sell–a tough mental hurdle to get over,” he added.

Panelists advised insurers looking to outsource business processes to find vendors whose culture is compatible with their own.

“Cultural fit is one of the most important things,” Mr. Albanese said. “These deals are typically 10 years in duration. So whoever you make the commitment with, you want to make sure that your company's culture and the way it interacts would be compatible with the potential outsource firms for the long haul.”

Walt Wojcik, a consultant for Infosys Technologies, Ltd. in Fremont, Calif., and the former chief information officer of Northwestern Mutual, added that the U.S. economy is entering a brave new world, moving from a “command-and-control” environment to a “connect-and-collaborate” structure with global outsourcing.

“You just have to be open to the fact that this is now a new way of getting things done,” Mr. Wojcik said.

Flag: Decisive Factors

Should You Outsource?

While many believe outsourcing is a perfect fit for insurer needs, there are potential downsides to consider, experts warn.

Plusses:

o Cost-cutting.

o Allows carriers to focus on core strengths, such as product development and marketing.

o Helps carriers avoid having to make capital-intensive investments in non-core and non-revenue producing functions.

o Takes advantage of economies of scale at outsourcing vendors.

Minuses:

o Outsourcing firms may tarnish a carrier's reputation and brand image if service is poor, especially if customer service is farmed out.

o Short-term outsourcing arrangements might conflict with the long-term nature of many policies.

o Agents might get the wrong impression if key customer service functions are outsourced to generic firms, prompting them to move business to competing carriers.

o A carrier's culture might clash with that of the outsourcing firms, creating tension and undermining the deal's effectiveness.

“Outsourcing can provide a carrier's field force with better services than they have been providing themselves, but at first it's a tough sell–a tough mental hurdle to get over.”

John Albanese, V.P.

CSC Financial Services Group