Part of the reason BPO has seen a slow uptake among traditional insurers is those carriers don't take a strategic view of outsourcing. "Most companies are using BPO for tactical challenges such as overflow support or to perform back-office processes faster and cheaper. It's not being used for competitive differentiation or as an overarching strategy," Harris-Ferrante says.

In addition, outsourcing still is a loaded term, with carriers fearing staff pushback, negative PR, and a belief the majority of their business processes represent unique core competencies that simply can't be handled by a third party.

"The head of claims believes he doesn't enhance his value to the firm by outsourcing all the claims operations," says Craig Weber, senior analyst in Celent's insurance practice. "It's an extraordinarily sensitive topic for agents and customers, so many carriers that do outsource are quiet about it."

To be fair to reluctant carriers, there are valid business risks to BPO. For instance, Weber points to concerns about data security and loss of control over service levels. "Carriers are loath to do anything that might result in their agents or customers having a lower-quality experience," he says.

"There are risks that service delivery won't be there and that there might be changes in ownership, particularly with smaller shops that are more susceptible to being purchased," adds David Smith, senior vice president of operations at Old Mutual Financial Network (OMFN), part of the U.K.-based Old Mutual group and an extensive user of outsourcing services in both business processes and IT.

Also inhibiting the adoption of BPO among traditional carriers is the fear of losing control of a process by being at the mercy of a third party or that, by divulging the details of a differentiating process to an outsourcer, the provider could supply that information to competitors. Additionally, while technology has been an enabler of BPO by improving connectivity, insurers still face technology hurdles to effective outsourcing.

"The biggest [obstacle] is that paper still plays such a major role in many insurance processes, and those paper processes don't travel well to an outsourcer," Weber says. "Other concerns include how to transfer institutional knowledge to an outsourcing partner as well as how tightly integrated an insurer's systems are," which inhibits bringing an outside party into workflows.

One virtual insurer that exemplifies having a strategic view of outsourcing is the Sunshine State Insurance Company, formed in 1997 to assume policies from the Florida Joint Underwriting Association (JUA). In 2004, Sunshine State merged with another insurer in the state, QualSure, and subsequently migrated its book of business from BIPT's TiVA administration system to the CSC POINT IN platform QualSure used. Today, Sunshine State outsources its policy processing to CSC and its claims management business to Insurance Network Services (INS) from the Seibels Bruce Group.

"For all the companies that formed or came into Florida to take policies out of the JUA, there was a need for speed to market. We believed the quickest and surest way to get in the business was to engage an outsourcing partner that could do end-to-end transactions for us, rather than trying to build those capabilities from the ground up," says Jim Brown, Sunshine State's director of legal and governmental affairs.

Today, Sunshine State's in-house staff of fewer than 20 employees sets the underwriting and sales strategy of the company and handles marketing, finance, and accounting operations, leaving all policy and claims administration to INS and CSC.

In a typical end-to-end process, Sunshine State agents use CSC's Web-based Agency Link system, which is hosted at a CSC data center, to quote and bind policies. A CSC call center in Sarasota fields questions from agents regarding policies, with CSC underwriting staff taking responsibility for enforcing underwriting guidelines that Sunshine State promulgates.

The call center also fields first notices of loss, transmitting those notices to INS. "We set the guidelines for claims handling and establish authority, but the ministerial, day-to-day management of claims is handled by INS," Brown says.

Sunshine State's goal of writing business quickly was met by the outsourcing arrangement, which has continued to pay benefits as the company has grown its business both within Florida and South Carolina. "The scalability of operations we are afforded by an outsourcer, without having to add personnel, premises, or computer capacity, is very important. If you're looking at a particular state or line to expand into, knowing you can obtain infrastructure that is integrated with what you already have is a major benefit," Brown explains.

BPO also has provided other strategic benefits to Sunshine State in the volatile Florida homeowners market. "For those of us who have endured the business and regulatory challenges writing homeowners in Florida has presented over the last few years, it's been important we have not been distracted by ministerial tasks," Brown says.

The outsourcing arrangements also have enabled Sunshine State to weather natural disasters. When Florida was hit by four hurricanes in 2004, CSC was able to transfer the call center from Sarasota to South Carolina.

Sunshine State's management is well aware of the concern cited by Celent's Weber about maintaining the quality of agent and customer experience in a BPO relationship. It manages that risk through a producer counsel process.

"We actively audit and monitor what [CSC and INS] are doing and meet with their senior management at least twice a year to communicate business plans we might have so we don't catch them unaware," Brown indicates. "Issues we have had [with CSC and INS] have been minor glitches vs. recurring problems that cause significant dissatisfaction."

Ask most carriers to list processes that define "core competencies," and underwriting usually will make the list. "Underwriting is a control point," Hawkins says.

However, OMFN sees underwriting as an activity where outsourcing can enhance the company's business strategy. "At the underwriting [outsourcing] partners we have chosen, underwriting is their niche. They can secure people on their staff we can't. For instance, one has three previous chief underwriters on its staff. We couldn't get that level of expertise in a home-office environment," says Smith.

Like Sunshine State, OMFN considers itself a virtual insurer, with a management staff of only 11 overseeing the activities of more than 700 outsourcing staff members who process about 350,000 applications and handle 1.5 million calls each year. At one time or another, OMFN has outsourced every core insurance process from new-business underwriting through claims administration, retaining only product development and financial activities.

Ten years ago, when OMFN first went to the fully virtual model, the company contracted with just one provider. Since then, it has shifted to a multisource approach to better manage risk. Currently, three different providers perform underwriting for OMFN: Mid-America Agency Services handles a little more than half of the insurer's business, with Best Innovative Underwriting Services and Case Professional Resources splitting the rest. When a new piece of business comes in, the company's policy administration provider, Perot Systems' Transactions Applications Group (TAG), uses a workflow system TAG developed to assign automatically the application to the appropriate underwriting company.

When OMFN entered a new line of variable annuity business in January 2007, it selected McCamish to take care of policyholder service and call center support in addition to producer contract, licensing, and commissions. HSBC Insurance Solutions handles offshore variable annuity business, and Legacy Marketing Group tackles business written by OMFN's Americom Life and Annuity subsidiary.

OMFN does occasionally bring processes back in-house. For instance, it began handling contestable claim processing in-house three years ago, and a year later it brought incontestable claim processing back in, as well.

"Our model is, 'Be the best, or contract the best,'" Smith says. "We still outsource part of the claim process, including receiving and paying the claim. But the review of the claim is handled by our own claim manager because it's a high-risk area and it needs to be tied closely to our legal staff. I wasn't comfortable with the level of expertise in the provider marketplace."

Smith attests to a budgetary benefit to BPO. "Ninety percent of my costs on a $90 million budget are variable costs" directly correlated to business demand, he says. But more important, outsourcing is an institutionalized process that is fundamental to OMFN's business strategy.

"I couldn't fathom going back to an in-sourcing model because we simply move too quickly," Smith notes. "We're a product development shop–putting out up to 15 new products a year–and our volumes fluctuate, including tripling our volume in some lines in the past few years. I don't think we could have succeeded in handling that growth if we would have had to build the capacity to in-source."

Beyond using a multiprovider strategy, OMFN manages business risks of outsourcing through comprehensive service-level agreements and constant evaluation of and contact with providers. "You can outsource the activity but not the accountability," Smith says. "I live and breathe numbers and monitor my daily and weekly dashboards to make sure providers are adhering to agreements and meeting our and our clients' needs."

The company also has learned from its mistakes. "It is easy to become complacent with an [outsourcing] arrangement and not spend enough face time with partners. We learned it's important to [spend the time] to prevent bad habits from forming before we need to mitigate them," Smith says.

Although M Financial Group is a life insurance producer association, it performs many of the policy administration tasks an insurance carrier would, including program development, new-business processing, call center support, and claims processing. It also must sync M Financial policy information with that of its member producers and partner carriers.

When M Financial introduced its MAGNASTAR product in 2000, it chose to outsource all the administrative tasks to McCamish Systems. "We never wanted to do [the administration] in-house," remarks Jacob Boston, vice president of communications at M Financial Group. "That would have required us to build infrastructure in areas that weren't related to what we do best, which is designing products and marketing them to the needs of high-end buyers."

The core administration system for MAGNASTAR is McCamish's VPAS Life platform, which runs at a McCamish data center. M Financial uses a sales illustration system from SunGard to compile offer data provided by its partner carriers to design a product portfolio. VPAS interfaces with the SunGard system, McCamish issues and administers contracts, and XML data on issued contracts is transmitted back to issuing carriers. M Financial's staff uses a Web-based front end to access the VPAS system.

"[The initial BPO arrangement] was a cost-effective way to get into the business. Without it, we would have needed not just the infrastructure but a redundancy of staff to handle anticipated increases and fluctuations in sales volume," points out Curt Rynties, vice president of information technology at M Financial Group.

Since it first launched the MAGNA-STAR product, M Financial has added similar infrastructure and staff to meet other needs; however, it has maintained the outsourcing relationship with McCamish–recently extending its contract with the provider to 2010–because of the additional benefits BPO provides.

"Outsourcing makes things simpler in many cases, particularly for integration with the carriers because McCamish already had data feeds with those carriers in place," Rynties says. "Also, by using an outsourcer to provide consistent information to multiple business partners, our business is simplified with more consistent processes and system interfaces."

Even the most outsourcing-averse insurer might learn something from one of its virtual counterparts. "The important lesson is to identify what you do well and consider outsourcing things you don't," says Weber.

The easiest processes in which insurers can gain some comfort in outsourcing, according to Weber, are the ones that are not core to the insurance business per se, such as HR, payroll, and benefits.

"We also see administrative services tasks such as print, mail, imaging, and indexing as good back-office candidates for outsourcing–the nuts and bolts of running the business that don't pertain to risk," Weber comments.

Gartner predicts the course of BPO will begin to shift throughout 2007, with adoption of BPO accelerating, albeit still not at a remarkable pace.

"We project there will be more interest in BPO, particularly in tier-one life companies that look to outsource activities such as closed book administration," Harris-Ferrante says. "Both life and P&C will look more at outsourcing for back-office management of producer licensing, appointment, and commission payment."

Although a strategic outlook on BPO is the best practice, most insurers will continue to view outsourcing as a tactical activity. "Today, cost still is the dominant driver. If you can take an existing process and save money by outsourcing, it's compelling," Weber asserts. However, he continues, tactical, cost-focused BPO initiatives can pave the way for more strategic adoption at the same time they help assuage staff concerns about outsourcing.

"People are not as concerned about outsourcing if they don't see jobs leaving the company, and one way to make sure those jobs don't leave is to make sure the business is healthy," Weber concludes. "In other words, it's not so bad to outsource if it improves your bottom line, makes you a better company, and creates new opportunity for staff as a result."