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Insurance BPO Market Survey
WI L L T HE WA T C H E D P O T E V E R B O I L ?

www.celent.com

AUGUST 2004

Craig Weber cweber@celent.com

TABLE OF CONTENTS

EXECUTIVE SUMMARY ................................. 3
KEY FINDINGS .............................................. 3

INTRODUCTION .......................................... 5
GOALS SCOPE ......................................................... 5 ......................................................... 5 .................................................. 6 ............................................. 7

PROVIDERS

METHODOLOGY LIMITATIONS Celent Communications 745 Boylston Street, Suite 502 Boston, Massachusetts 02116 USA Tel.: Fax: Email: +1.617.262.3120 +1.617.262.3121 info@celent.com

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BPO OVERVIEW

......................................... 9

THE MARKET ................................................. 9 MARKET SIZE ............................................ PROVIDERS 10

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D E T A I L E D A N A L Y S I S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
D E A L S B Y C L I E N T L O C A T I O N . . . . . . . . . . . . . . . . . . . . . . . . . 14

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DEALS BY BUSINESS META-PROCESS

. . . . . . . . . . . . . 14 . . . . . . . 18

DEALS BY DETAILED BUSINESS PROCESS DEALS BY LONGEVITY

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D E A L S B Y C L I E N T T Y P E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 DEALS BY CLIENT SIZE DEAL SIZE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

CATEGORY LEADERS

CONCLUSIONS

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KEY FINDINGS

OBJECTIVITY & METHODOLOGY

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A B O U T C E L E N T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

© 2004, Celent Communications. Any reproduction of this report by any means is strictly prohibited.

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EXECUTIVE SUMMARY

Few recent business trends have generated more interest among insurance carriers than business process outsourcing. The combination of unrelenting pressure on expenses, vast improvements in networking and communication technology, and an increased appreciation of highly flexible business models has caused virtually all insurance carriers to explore nontraditional options for running their businesses. But adoption of BPO for core insurance services is progressing more slowly than most predicted. Despite widespread successful use of related approaches, such as ITO and BPO for non-core services like human resources and benefits administration, carriers are wary of expanding their efforts. Will the proverbial watched pot ever boil? To answer this question, Celent invited about 30 BPO providers to participate in a survey detailing their existing BPO deals. Fourteen of those firms accepted and provided data about 286 BPO deals, including 194 deals based in North America. Follow-up interviews with both providers and users of BPO services provided additional insight.

K E Y

F I N D I N G S

Celent’s interviews with BPO providers and insurance executives revealed several key findings regarding insurance BPO: • • There is significant BPO activity for core insurance services. Celent estimates that total core insurance BPO (excluding non-core BPO services such as HR, benefits, and payroll) will total more than US$2.5 billion in 2004. Further, we expect the market to grow to almost US$3 billion by 2006. There are two basic groups of external providers of BPO for core insurance services: third-party administrators (TPAs) and a growing assortment of consultants, IT developers and integrators, and BPO specialists. The two key insurance BPO markets are closed books of business and discrete business processes.

© 2004 Celent Communications. Reproduction prohibited.

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An analysis of survey data further defines key aspects of the current insurance BPO market in North America: • Systems-related activities (e.g., hosting of policy administration systems, complete management of a carrier’s IT) are common types of services provided as part of BPO deals. Most insurance BPO deals are currently limited in scope. Forty-three percent of all deals reported were for less than US$1 million in annual revenue. Newer BPO providers are not displacing TPAs, particularly in their traditional areas of strength—such as claims management and adjudication for health insurance and property/casualty insurance. Celent believes that most carriers with BPO in place today are considering ways to expand those efforts. Computer Sciences Corporation (CSC) is a clear leader in terms of providing BPO to North American carriers. It is among the top providers in terms of estimated BPO full-time equivalents (FTEs), and also in terms of estimated BPO revenue. Other prominent players in North American insurance include EDS, ACS, IBM, and First Notice.

© 2004 Celent Communications. Reproduction prohibited.

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INTRODUCTION

Few recent business trends have generated more interest among insurance carriers than business process outsourcing (BPO). The combination of unrelenting pressure on expenses, vast improvements in networking and communication technology, and an increased appreciation for highly flexible business models has caused virtually all insurance carriers to explore non-traditional options for running their businesses. Farming out core business processes to third parties—which was once unthinkable—is now on the table for many carriers. But adoption of BPO by insurers for core insurance services is progressing more slowly than most predicted. Despite widespread successful use of related approaches, such as information technology outsourcing (ITO) and BPO for non-core services like HR and benefits administration, carriers are wary of expanding their efforts. Delegating core insurance functions to outside parties is perceived as a risky move in an industry keenly aware of risk. There also is pressure from a skeptical public for carriers to keep things as they are, largely to protect local jobs. Will the proverbial watched pot of insurance BPO ever boil? Celent believes that it will. The public debate about BPO for core insurance services will continue, and carriers will continue their experimentation for the foreseeable future. This report is designed to provide context for discussion by describing the current uses of BPO for core insurance services, based on input from the companies that provide BPO services to carriers and on interviews with carriers themselves.

G O A L S

Celent conducted this study of the insurance BPO market to address two major goals. First, we wanted to determine the current level of BPO use by North American insurers. We also aimed to determine which core insurance processes are currently being outsourced.

S C O P E

Insurance BPO can be broken down into non-core services and core insurance services. Non-core services include areas such as HR and benefits administration, as well as enterprise services like property management and purchasing. Core insurance services are industryspecific operational areas such as underwriting, policyholder and agent services, and claims.

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Although there has been significant BPO activity in non-core services, this report focuses on BPO for core insurance services. Some of the BPO providers who participated in the Celent survey provide non-core BPO, but their focus is on core insurance services. There is little debate over the efficacy of BPO for non-core services, while BPO for core services is a highly charged issue for several reasons.

P R O V I D E R S

There are two basic groups of external BPO providers for core insurance services. (A handful of carriers have created their own, captive BPO centers in an attempt to reap the benefits of BPO without taking on the risks of involving third parties. These companies may be the topic of a future Celent report.) The first is third party-administrators (TPAs), of which there are hundreds in North America. They are “stealth” BPO providers: They have quietly been providing a range of services around claims, billing, and auditing for a number of years, mostly for property/ casualty and health carriers. The second group is comprised of consultants, IT developers and integrators, and BPO specialists. This eclectic assortment of providers is growing rapidly, as many firms are seeking ways to expand beyond their traditional areas of focus. These companies typically provide BPO services related to software that they own or have developed (e.g., a policy administration or claims system), or are focused on a particular business function (e.g., call centers or imaging). This report is focused on providers in the second group. Table 1 lists the providers who participated in Celent’s survey.
Table 1: Participating North American Insurance BPO Providers
Company IBM EDS Xerox Computer Sciences Corporation (CSC) Accenture Unisys ACS Headquarters Armonk, NY Plano, TX Stamford, CT El Segundo, CA Total Revenue $92,800,000 $21,800,000 $15,700,000 $15,000,000 Employees 319,000 132,000 61,000 90,000

Hamilton, Bermuda Blue Bell, PA Dallas, TX

$11,800,000 $5,900,000 $4,100,000

95,000 37,300 40,000

Source: Celent analysis of publicly available information. Revenue = trailing 12-month, in US$ thousands.

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Table 1: Participating North American Insurance BPO Providers
Company CGI Wipro Keane HCL Technologies WNS Connextions First Notice Systems Headquarters Montreal, Canada Bangalore, India Boston, MA New Dehli, India Mumbai, India Orlando, FL Boston, MA Total Revenue $2,350,000 $1,400,000 $844,000 $583,000 $97,000 n/a n/a Employees 14,600 32,000 7,400 n/a 3,000 n/a n/a

Source: Celent analysis of publicly available information. Revenue = trailing 12-month, in US$ thousands.

M E T H O D O L O G Y

To gauge the current impact of insurance BPO deals on the industry, Celent invited approximately 30 firms— all of which offer BPO and other services to insurance carriers—to participate in a survey. Among the firms that accepted were major systems integrators, software manufacturers, and consultancies with a significant presence in North America. Providers that were invited but did not participate are Hewlett Packard, Infosys, Polaris, Syntel, TCS, Mphasis, ICICI Infotech, Patni, Hitachi, ADP, Convergys Corp., Insurity, Kanbay, Sapiens, Towers Perrin, and Satyam. Firms were asked to provide client-level details about current BPO deals, including lines of business covered, annual value of the deals, number of full-time equivalents (FTEs) represented, and specific business processes performed by the vendor on each client’s behalf. Fourteen firms completed the survey, including almost all the companies that Celent believes constitute the top tier of insurance BPO providers. Celent also conducted follow-up interviews with a half dozen key vendors to validate the findings from the raw data. Detailed data were received for a total of 286 insurance BPO deals, including 194 deals for which the provider indicated that the client was based in North America. (Much of the analysis in this study is based on the 194 North American deals. Instances where all deals are included are noted.) For the purposes of this study, Celent defined BPO as true process outsourcing, in which the vendor provides staff to do the actual work, perhaps in addition to providing software, IT development, and technical support. This was done to contrast BPO from ITO, which is a more established service for most vendors. (For more on ITO, see the Celent report “Raising the Bar on Offshore IT in Insurance,” August 2003.)

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L I M I TA T I O N S

Celent believes that this study provides valuable insights into current thinking on insurance BPO. However, readers are encouraged to consider these results in the following contexts: Provider sensitivity about BPO. BPO providers are aggressively ramping up for this business, and competition for market share is fierce. As a result, some providers said that the information requested was too sensitive to make public. However, we believe the firms that did participate are the major ones currently active in North America. In addition, our broad market estimates are adjusted to reflect the fact that not all invited providers participated. Public sensitivity about BPO. BPO clients and prospects face mounting public criticism about outsourcing. This makes many carriers unwilling to disclose details of their BPO plans, and most appear to be unwilling to be named as references by their BPO providers. The use of self-reporting by vendors. Participants in the study were asked to indicate which processes they perform for their clients, in addition to providing generic information about each client. While this information was supplemented with publicly available information where possible, Celent did not confirm the details of all 286 deals with the carriers themselves. As a result, it seems likely that some providers painted an overly optimistic picture of their BPO activities, perhaps blurring the line between their BPO and ITO successes.

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BPO OVERVIEW

T H E

M A R K E T

Celent’s review of the deals submitted for this study and discussion with key BPO providers suggest that there are two key markets within core insurance services. Many of the largest BPO deals to date have been for closed books of business, in which a carrier offloads support functions for a business line that is no longer writing new business. In the life/ pension market particularly, these books of business are expected to linger for decades, so outsourcing support for them is one way to transition from a fixed expense model to a variable expense model. The other key BPO market is for discrete business processes that are easily transitioned to outside providers. Our discussions also suggested that BPO providers and prospects typically evaluate BPO opportunities using a handful of key criteria. Processes that are good candidates for BPO generally have one or more of the attributes described in Table 2 below.
Table 2: Key Characteristics of BPO-Friendly Insurance Processes
Attribute Description Processes that rely on images or other electronic data. Advantage More “portable” than processes that require physical handoffs of documents. Easier to manage transition and execution. Example Data entry of imaged applications

Easily Digitized

Self-Contained

Processes that have only one owner, involve few systems, and have relatively few participants. Processes in which technology is a viable substitute for staff expertise. Processes that do not involve sales activities and other regulated functions. Processes that are already supported via application service provider (ASP) model, or processes in which technology vendors already play key roles.

Property/casualty claims

TechnologyFacilitated

Allows for staffing by less expensive and less knowledgeable staff. Eliminates complexities of sales practices oversight, licensing. Easier to outsource processes if systems are already outsourced.

First notice of loss (FNOL) call center

Agent service center

Post-Sale

Network help desk

TechnologyOutsourced

Source: Celent Communications

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Table 2: Key Characteristics of BPO-Friendly Insurance Processes
Attribute Description Processes that are done repetitively, usually in high volumes. Advantage Easy to make business case. Also easier to monitor, staff for, and track. Example Health claims

Transactional

Source: Celent Communications

M A R K E T

S I Z E

There is little question that the market for core insurance BPO services is significant and growing. Celent estimates that total core insurance BPO (excluding non-core BPO services) will total more than US$2.5 billion in 2004. Further, we expect that market to grow to almost US$3 billion by 2006. Key drivers of this growth will include continued pressure on expenses, improvements in technology, and increased acceptance of outsourcing strategies by once-skeptical carriers.
Figure 1: Core Insurance BPO Spending in North America

$4,000,000 BPO/ITO Providers $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 2003 2004 2005 2006 $2,419,073 $2,540,027 $2,951,285 $2,699,481 TPAs

Source: Celent Communications

© 2004 Celent Communications. Reproduction prohibited.

US$ thousands

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P R O V I D E R S

A key aspect of insurance BPO—though it is sometimes overlooked—is that this space has several players, each of which brings a slightly different perspective. Much of the press (both good and bad) goes to the major providers of onshore and offshore information technology outsourcing (ITO), including all the firms with a strong presence in India. Celent believes these companies are well positioned to build out their BPO capabilities for several reasons. First, they are experienced at managing outsourced projects and typically have rigorous project management practices in place to ensure that projects are well documented, communicated, and executed. Second, they have an inexpensive labor pool that can help drive cost efficiency, especially for projects that fit the offshore model. Finally, they are already intimately involved in the development, maintenance, and integration of core insurance systems, so they understand at least the basic insurance processes that those systems support. Celent believes this is a real advantage that helps these firms transition to providing process support and not just ITO. The downside for these firms—particularly for the India-centric firms—is that it has proved difficult for them to obtain much-needed vertical expertise in insurance. Helping carriers conquer cultural issues and making them view providers as more than a body shop for IT was the first challenge. Convincing them that the providers can contribute value-added business oversight and direction is the next. TPAs are another major provider of core insurance BPO services. These companies provide a broad range of back-office support for insurance and employee benefits, primarily to selfinsured corporations and insurance carriers of property/casualty products. TPAs have been providing BPO services for many years and have strong ties to both carriers and reinsurers. Some have strong ties to carriers (see Table 3). TPAs are generally below the radar in the public debate about the negative consequences of outsourcing. One reason is that TPAs typically have a local feel, even though many of them have a national reach. TPAs are licensed by most states and typically make limited use of offshore resources, if they use them at all. Thus, they are not typically viewed as taking jobs from their local economies. Leading TPAs are summarized in Table 3.
Table 3: Leading TPAs Providing Insurance Carrier BPO
Company Crawford & Co. Constitution State Services GAB Robins North America Source: Public data, Business Insurance magazine Travelers Carrier Involvement Approx. Employees 4,000 4,000 3,800

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Table 3: Leading TPAs Providing Insurance Carrier BPO
Company Fiserv Health Broadspire AIG Claim Services Inc. ESIS, Inc. The Frank Gates Cos. The Principal Financial Group Berkley Risk Administrators Co. GatesMcDonald Risk Enterprise Management Ltd. Keenan & Associates York Insurance Services Group Ward North America Inc. Helmsman Management Services The ASU Group Hertz Claim Management Fleming & Hall Administrators Inc. Chubb Services Corp. Chubb Group Liberty Mutual Insurance Co. The Principal Financial Group W.R. Berkley Corp. Nationwide Zurich Financial American International Group ACE USA Carrier Involvement Approx. Employees 3,400 3,200 2,400 1,600 1,400 1,300 800 800 800 600 500 400 300 300 300 200 100

Source: Public data, Business Insurance magazine

Celent estimates that TPAs generate almost 60 percent of the total core insurance BPO revenue, although by FTE count they constitute only 45 percent of the outsourced workforce used by carriers. We believe this is so because TPAs do somewhat higher level work for carriers (including claims adjudication and medical bill review). Moreover, the ITO and BPO players have a significant number of workers in lower-wage countries and continue to increase their use of resources in these nations, in some cases without even informing their carrier clients that the work is being sent offshore. None of the TPAs Celent interviewed for this report currently use offshore resources in work done for carrier clients, although several said they were considering this possibility. It seems likely that over time TPAs will form partnerships with other BPO providers to achieve the benefits of the offshore and near-shore models while maintaining their solid local relationships with carrier clients.

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Figure 2: Insurance BPO Market Segments

Market Share by 2003 Revenue (US$2.4 Billion)

ITO/BPO Players 40% TPAs 60%

Market Share by FTEs Provided to Carriers (31,000 FTEs)

TPAs 45% ITO/BPO Players 55%

Source: Celent Communications

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DETAILED ANALYSIS

D E AL S

B Y

C L I E NT

L O C A T I O N

The primary focus of this study was BPO providers that are active in North America. So it is not surprising that 68 percent of all the BPO deals for which Celent received data were for North American carriers see Figure 3). However, conversations with several providers suggest that North American carriers may lag their European peers in terms of willingness to outsource business processes.
Figure 3: Location of BPO Deals

Other 9%

North America 68% Europe 23%

Source: Celent Communications

Analysis in this section is based on the details behind the 194 North American BPO deals provided by the 14 participants in this study.

D E AL S

B Y

B U S I N E S S

M E TA - P R O C E S S

Once a carrier has decided to pursue BPO, the most common question is what processes are the best fit for the approach. The broad framework outlined in Table 2 (page 9) is a good place to start the conversation, but many carriers seem keenly interested in how their competition has answered the question.

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Provider responses to all the detailed process questions in the Celent survey were integrated into eight meta-processes to illustrate the major areas in which BPO is taking place today. See Table 4.
Table 4: Meta-Processes and Components
Meta-Process Policy Administration Components Policy admin hosting and tech Policy issue/delivery Rate and product updates Correspondence Management reporting Policy administration/policyholder services Prospectus/statement issue/delivery Managing network Managing entire IT function Managing e-business application Managing new software development Managing data warehouse Managing CRM application Managing ERP application Policyholder customer service Internal technical help desk Agent service Agent technical help desk Claims first notice of loss only Policyholder technical help desk Tele-underwriting Payment processing Print and mail bills Billing dispute resolution E-Billing application Claims document imaging Disbursements Full claims adjusting/adjudication Requirements gathering Managing underwriting process Application imaging Underwriting requirements imaging Accounting Training Imaging/workflow New product launch services Conversion services HR/staffing Benefits Purchasing Facilities management Illustration services Payroll Commissions Training Licensing/appointments

General Systems

Call Center

Billing

Claims

Underwriting

Support Functions

Distribution

Source: Celent Communications

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The most significant finding by meta-process is that systems-related activities (e.g., hosting of policy administration systems, complete management of a carrier’s IT) are common types of services provided as part of BPO deals. In fact, virtually every BPO deal detailed in Celent’s study included some systems components. Celent believes this reflects the pedigree of the major BPO providers. Many gained their place in insurance as systems consultants and developers, including both domestic-based firms and the India-centric firms that have dominated the offshore IT market. These firms have developed business process awareness (though in most cases, not deep process expertise, according to naysayers) as they have supported software development and integration efforts. BPO providers clearly are trying to convert their existing relationships, in which they provide mostly IT support, to higher-value relationships whereby they provide staff to support business processes. This is a better long-term strategy because it is harder to displace people doing work than it is to replace a system vendor. Call centers are another area of heavy activity, in keeping with the conventional wisdom that call centers by their nature are relatively easy to outsource. From the carrier’s perspective, outsourced call centers can provide flexibility to meet varied call volumes, and the technology to help call center reps navigate through calls consistently is often already in place. It is also interesting to note that the top areas of activity are consistent across industry segments. In the policy administration, general systems, and call center categories, deal volumes are similar for life/health and property/casualty carriers. See Figure 4. The three exceptions to this trend are claims, support function, and distribution, where the majority of deals were for life/health carriers. But considering that most property/casualty

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carriers have a long history of using TPAs for at least some of these functions, this seems logical.
Figure 4: North American BPO Deals by Meta-Process and Carrier Type

Policy A dministration

35

13

68

Call Center

33

12

55

General Systems

37

7

46

Billing

33

10

38

Underw riting

23

5

45

Claims

56

11

4

Support Function

21

1 L/H Multi-line P/C

Distribution 0

11

5 3

20

40

60

80

100

120

140

Number of Deals Involving Each Category

Source: Celent Communications

Celent believes that the newer BPO providers will not displace TPAs in their traditional areas of strength—particularly claims management and adjudication—because of the TPAs’ vertical expertise and strong carrier relationships.

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For comparison’s sake, Figure 5 shows the breakdown of non-North American deals by metaprocess. General trends are similar to those for North American deals, with systems-related activities playing a prominent role and call centers close behind.
Figure 5: European, Asian, Latin American BPO Deals by Meta-Process and Carrier Type

General Sy stems

43

20

9

Polic y A dministration

42

18

10

Call Center

28

20

10

Billing

39

11

3

Support Func tion

35

2 4

Claims

17

10

5

Dis tribution

24

22 L/H Multi-line P/C

Underw riting 0

9 10

7

2 20 30 40 50 60 70 80

Number of Deals Involving Each Category

Source: Celent Communications

D E AL S

B Y

D E TA I L E D

B U S I N ES S

P R O C E SS

A detailed view of survey responses by business process is shown in Figure 6. It reinforces the key finding in the previous section: Two of the five most popular types of BPO are related to managing IT. BPO of closed books of business represents a fair number of the deals in Celent’s survey, and for closed books, the BPO vendor almost always manages both IT and policyholder services. But even for deals not involving closed books of business, IT management is a commonly provided function. Again, this reflects both the background of the BPO providers covered in this study and the nature of insurance BPO. Most providers have strong IT backgrounds, and it usually makes sense to keep the servicing of the business and its IT together.

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Figure 6: BPO Deals by Detailed Process and Carrier Type

Policy Admin Hosting Payment Processing Managing Network Policyholder Customer Service Managing Entire IT Function Policy Issue/Delivery (paper or electronic) Internal Technical Help Desk Print and Mail Bills Billing Dispute Resolution Rate and Product Updates Correspondence Requirements Gathering Claims Document Imaging Agent Service Managing Underwriting Process Managing E-Business Application Agent Technical Help Desk Accounting Application Imaging Managing New Software Dev. Underwriting Rqmts. Imaging Disbursements Other (besides call center-related) Full Claims Adjusting/Adjudication Management Reporting Policy Administration/Policyholder Services Claims First Notice of Loss Only 5 7 Commissions Policyholder Technical Help Desk 20 16 13 18 31 7 33 37 32 37 37 21 6 4 9 4 15 9 5 16 22 19 32 10 55 11 8 24 30 39 12 55 10 39 41 34 53 62 53 48 58

76 18 13 21 1 17 11 9 8 14 10 39 14 38 40 16 38 1 26 14 29 8 6 81 6 4 5 4 8 19 3 39 36 40 29 43 28 40

21 39 44 36

45

E-Billing Application 5 8 Claims Other 10

Managing Datawarehouse 4 15 2 Imaging/Worfkflow Prospectus/Statement Issue/Delivery 19 14 1 L/H Multi-line P/C

Other (besides call center-related) 6 4 4 Managing CRM Application 4 8 New Product Launch Services 10 1 0 30 60 90 120 Number of Deals Involving Each Category 150

Source: Celent Communications

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D E AL S

B Y

L O N G E V I T Y

Two-thirds of the deals described in this study were more than two years old, while 13 percent were one to two years old and 20 percent were initiated in the last 12 months (see Figure 7). This is a somewhat surprising finding, given the rising noise surrounding insurance BPO, and it suggests that fewer new BPO deals are being created because the aggressive first movers within insurance have already started their BPO programs. Celent does not take this to mean that BPO use is on the decline—if anything, we think carriers with BPO in place today are considering ways to expand those efforts.

Figure 7: Age of BPO Deals

More than 2 years 67%

1 year or less 20%

One to to years 13%

Source: Celent Communications

D E AL S

B Y

C L I E NT

TY P E

BPO deals appear to be spread fairly evenly across various insurance segments, as shown in Figure 8. Most providers that participated in this study reported having clients in multiple product lines.

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The two lines that appear to be under-represented are commercial property/casualty and worker’s comp, which accounted for only 8 percent and 3 percent of total deals, respectively. However, it is clear that these two lines are prominent in the BPO services provided by TPAs.
Figure 8: Insurance BPO Deals by Line of Business

Group L/H 8% Multi-line P/C 8% Commercial P/C 8%

Worker's Comp 3%

Personal P/C 29%

Individual L/H 12% Multi-line 14% Multi-line L/H 18%

Source: Celent analysis

D E AL S

B Y

C L I E NT

S I Z E

Celent groups carriers into three financial tiers. Tier 1 carriers have premiums of more than US$1 billion, while Tier 2 carriers have premiums between US$100 million and US$1 billion; Tier 3 carriers have premiums of less than US$100 million.

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The BPO deals highlighted in this study are spread evenly across the three tiers as shown below.
Figure 9: Insurance BPO Deals by Carrier Size

Tier 3 27%

Tier 1 34% Tier 2 39%

Source: Celent Communications

D E AL

S I Z E

The largest deal size category in the study included deals under US$1 million—43 percent of all deals reported (see Figure 10). If one considers that a deal generating US$1 million in annual revenue probably represents the work of eight to 12 FTEs, this suggests that a good number of BPO deals are very narrowly defined, at least currently. Over time, Celent expects

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that many of these deals will expand as carrier comfort levels grow. But for now, many carriers appear to be dabbling in BPO.
Figure 10: Size of BPO Deals

$1 mn to $5 mn 30%

$6 mn to $10 mn 26%

More than $10 mn 1%

Under $1 mn 43%

Deal Size by Client Size

Under $1 mn

6

4

19

$1 mn to $5 mn

2

8

11

$6 mn to $10 mn

2

12

4

More than $10 mn 1

Tier 1 5 10 15 Deals 20

Tier 2 25

Tier 3 30 35

0

Source: Celent Communications

This finding also means that in many cases, providers must be able to aggregate smaller deals to achieve efficiency. A good example of this might be a first notice of loss call center, which could provide a large number of clients with relatively few FTEs each, creating a flexible and still profitable call center environment.

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Not surprisingly, the larger deals are often generated by larger carriers. Sixteen of the 19 deals in the top two categories (more than US$6 million annually) were orchestrated by Tier 1 and Tier 2 carriers. In contrast, 30 of the 50 deals in the smallest two categories (under US$6 million annually) were done by Tier 3 carriers.

C A T E G O R Y

L E A D E R S

Among the 14 participating providers in this study, Computer Sciences Corporation (CSC) is the clear leader in providing BPO to North American carriers. The firm is among the top providers both in terms of estimated BPO FTEs and estimated BPO revenue. CSC also is the category leader in seven out of the eight meta-processes by number of deals (see Table 5). EDS is also a prominent provider—it finished second to CSC in four meta-process categories. While EDS did not provide revenue estimates for its BPO deals, Celent’s analysis of publicly available data shows that EDS is a major insurance BPO provider. ACS is a leader in terms of estimated BPO revenue, based on data it submitted for 48 total BPO deals. It also ranked ahead of CSC in the claims category by number of deals. ACS says the majority of its claims-related deals are based on imaging and indexing services it provides, while a growing number include some aspects of claims adjudication.
Table 5: Top Insurance BPO Leaders by Meta-Process
Meta-Process Policy Administration Top North American Providers (in descending order) Computer Sciences Corporation (CSC) EDS CSC EDS CSC EDS, First Notice (tie) CSC ACS CSC CSC ACS CSC CSC EDS

General Systems

Call Center

Billing Claims

Underwriting

Support Functions Distribution

Source: Celent Communications

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Breaking down the deals by client count for several major insurance categories produces similar results (see Table 6). CSC and EDS are top providers for both property/casualty and life/health segments, in addition to being top providers for carriers in all tiers. While ACS is a top life/health provider by client count, as noted above they have a relatively narrow focus compared to CSC and EDS. IBM appears to have a strong presence in providing BPO support to Tier 1 carriers, which may be related to its traditional strength as an IT services organization.
Table 6: Insurance BPO Leaders by Client Count
Category Top 3 Property/Casualty Providers Providers CSC EDS First Notice ACS CSC EDS CSC EDS IBM CSC ACS EDS

Top 3 Life/Health Providers

Top 3 Providers to Tier 1 Carriers

Top 3 Providers to Tier 2 and Tier 3 Carriers

Source: Celent Communications

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CONCLUSIONS

Results of this study and interviews with BPO providers and users support the hypothesis that use of BPO for core insurance services is growing. Despite strong concerns about loss of control over key business functions, disenfranchised employees, and possible political fallout resulting from loss of local jobs, most carriers have not ruled out use (or expanded use) of BPO.

K E Y

F I N D I N G S

The following summarizes the insurance BPO market: • There is significant BPO activity for core insurance services. Growth has not been explosive to date, but Celent expects growth to continue despite concern over potential negative effects. Celent estimates that total core insurance BPO (excluding non-core BPO services such as HR, benefits, and payroll) will total more than US$2.5 billion in 2004. Further, we expect the market to grow to almost US$3 billion by 2006. There are two basic groups of external providers of BPO for core insurance services: TPAs and a growing assortment of consultants, IT developers and integrators, and BPO specialists. Celent estimates that TPAs generate almost 60 percent of the total core insurance services BPO revenue. There are two key insurance BPO markets. Many of the largest BPO deals to date have been for closed books of business, in which a carrier offloads support functions for a business line, typically to transition from a fixed expense model to a variable expense model. But discrete business processes that are easily transitioned to outside providers are now candidates for BPO as well.

Celent’s analysis of survey data further defines key aspects of the current insurance BPO market in North America: • Systems-related activities (e.g., hosting of policy administration systems, complete management of a carrier’s IT) are commonly provided as part of BPO deals. In fact, virtually every BPO deal detailed in Celent’s study included some systems components.

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Most insurance BPO deals are limited in scope. The largest category in terms of deal size was deals under US$1 million, which accounted for 43 percent of all deals reported. Newer BPO providers are not displacing TPAs, particularly in their traditional areas of strength such as claims management and adjudication. Celent believes that TPAs will continue to dominate these areas because of their vertical expertise and strong carrier relationships. Celent believes that most carriers with BPO in place today are considering ways to expand those efforts. Even so, 67 percent of deals described in this study were more than two years old, while 13 percent were 1–2 years old and 20 percent were initiated in the last year. See Figure 7 on page 20. Computer Sciences Corporation is a clear leader in terms of providing BPO to North American carriers. It is among the top providers both in terms of estimated BPO FTEs and estimated BPO revenue. CSC is also the category leader in seven of the eight metaprocesses by total number of deals (see Table 5, page 24). Other prominent players in North American insurance include EDS, ACS, IBM, and First Notice.

Celent believes that virtually all insurance carriers can benefit from assessing their operations for possible BPO applications. Clearly, BPO use offers potential cost benefits. But just as importantly, effectively managing business processes requires a clear understanding of how those processes work, how they fit together, and how information technology supports them. An organizational review for BPO often helps carriers by creating process discipline and awareness that may be lacking.

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OBJECTIVITY & METHODOLOGY

Objectivity. Celent is an independent, privately owned research and consulting firm that provides technology and business strategy advice to the financial services industry. Celent provides unbiased insight into industry trends, competitors in the market, and market sizes. Celent’s research reports are written by in-house analysts with extensive experience at a variety of top global financial services firms, technology vendors, and consultancies. Celent’s research clients include financial institutions, vendors, and consulting firms. Occasionally, our reports evaluate clients who are solution providers, along with providers with whom Celent does not have a relationship. Celent evaluates all vendors using the same criteria, whether or not they use our research and advisory services. Vendors and financial institutions profiled in our reports are given the opportunity to correct factual errors prior to publication, but cannot influence Celent’s analysis or opinions of the products, solutions, or strategies we are evaluating. Firms may not purchase or influence positive exposure. Methodology. The findings and analyses in Celent’s reports reflect our analysts’ considered opinions and research of market trends, sizes, and participants. Celent analysts use the research methodology detailed below.
Research Phase • Analyst experience • Client feedback • Conferences • Regulatory studies • Academic studies • Industry organization studies • Third-party commercial information sources

Research Phase
• Vendor demos & briefings • Interviews with financial institutions • Interviews with other contacts, e.g., regulators, academics • Surveys Primary Primary Research Research • Verification of data • Follow-up interviews • Analysis of survey data

Production Phase • Market analysis • Vendor evaluations • Spending analysis • Case studies

Production Phase
• Publication of report • Client feedback • Continual coverage and updating

Topic Topic Identification Identification

Secondary Secondary Research Research

Synthesis Synthesis

Report Report Generation Generation

Feedback Feedback & Updates & Updates

When citing third-party data or opinions, Celent provides source information. When citing formal survey results, Celent provides as much information as possible about survey methodology and participants, within the limits of confidentiality. All other material appearing in Celent’s reports is created by the analysts and is derived from the sources listed above and from Celent’s experience. Figures and charts based on this analysis cite Celent as their source.

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ABOUT CELENT

Celent Communications is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology, and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally experienced analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent’s research services cover the following six sectors of financial services: Retail Banking, Wholesale Banking, Retail Securities and Investments, Institutional Securities and Investments, Life/Health Insurance, and Property/Casualty Insurance. For inquiries, please visit www.celent.com, email info@celent.com, or contact:

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