Tag: insurance

TCS’s BPO Deal with Friends Life = The $2 Billion+ Gorilla in the Insurance Industry | Sherpas in Blue Shirts

On November 9, 2011, TCS announced that its U.K. subsidiary, Diligenta, had inked with U.K.-based Friends Life a $2.2 billion outsourcing agreement, spread over 15 years, for administration of 3.2 million life and pensions insurance policies, as well as its closed books line of business and much of its corporate benefits business.

While the size of the contract itself is indeed eye popping – although that the deal came to fruition isn’t surprising to industry insiders given Friends Life’s heritage – several other factors also make it significant.

  • This is the largest deal ever in the insurance BPO segment, one of the largest in overall BPO, and the second largest ever awarded to TCS, surpassed only by its 2008 $2.5 billion acquisition of Citibank’s India captive (and its ongoing service agreement with the bank, which was part of the deal)
  • This engagement also makes TCS the second largest provider in the insurance BPO space, effectively leap-frogging it over EXL, WNS, Genpact, and Accenture. And while the deal will significantly boost TCS’s and Diligenta’s revenues, in the short term, it will likely place a drag on their bottom line
  • The deal demonstrates that Indian providers are moving away from their previous “start small and grow the business” strategy and are now pursuing and winning mega deals – and there aren’t many such deals to be found in any provider’s new business portfolio these days
  • The deal sends a clear signal that outsourcing industry-specific functions is becoming increasingly attractive to buy-side organizations
  • The deal is another example of the convergence of IT and BPO, as TCS/Diligenta will be providing not only BPO services, but also IT and infrastructure services, and moving a significant portion of Friends Life’s policies to its BaNCS technology platform

Of course, the deal also raises questions. Why did this deal come to be signed? What does this mean for the United Kingdom as a market for insurance BPO? How will this deal impact TCS and Diligenta? And finally, given the backdrop of this deal, what are the key developments to watch out for in the insurance BPO industry?

We will continue to update you on these and other issues and developments in the insurance BPO market as they happen.

For more details on the TCS/Friends Life deal, read Everest Group’s Breaking Viewpoint The Two Billion Dollar (and some more) Giant: Implications of TCS’s Insurance BPO deal with Friends Life.

What’s your Policy to Serve Policy Providers? | Sherpas in Blue Shirts

Highlights of Everest Group’s Insurance AO Market Outlook and PEAK Matrix Assessment 

2010-11 has been a trying year for global insurers. Even though the industry returned to growth in terms of written premiums, challenges abound. Increasing competitive pressures, changing consumer preferences, need for multiple distribution channels, and a stricter regulatory regime have created a complex operational environment for global insurance companies.

As discussed in one of our recent research reports, IT AO in Insurance – Trends and Future Outlook, outsourcing activity is picking up across insurance business lines (see Exhibit 1 below), with the consolidation in the life insurance segment, and increasing price competition in the property and casualty segment. At the same time, the industry has also witnessed a lot of M&A activity, and faced pressures on underwriting results – which is prompting investments in sophisticated analytics, business intelligence, and consolidation /rationalization initiatives.

Exhibit I:

Insurance Outsourcing Spend

With significant shifts in buyer adoption trends, the service provider landscape has changed as well. This evolution has presented insurers with a wide array of third-party provider options, as well as the need to assess provider capabilities across key dimensions. Our just published report on Application Outsourcing in Insurance – PEAK into the Evolving Service Provider Landscape evaluated 18 leading AO service providers specific to the global insurance sector. Analyzing the performance and capabilities of these providers, we identified the Leaders, Major Contenders, and Emerging Players on the Performance / Experience / Ability / Knowledge (PEAK) Matrix:

Exhibit 2:

PEAK Matrix Applications Outsourcing in Insurance

 

Expectedly, the leading service providers dominate the insurance AO market in terms of revenue, depth of capability, and breadth of delivery footprint. The major contenders are witnessing strong growth in their insurance AO business by adding new accounts and expanding business with existing accounts over the last three years.

However, as economic conditions improve, we expect a much more competitive service provider landscape. Following are the themes we think service providers must focus on to gain and further solidify their leadership position in this marketplace:

  • Transform orientation to position themselves as “partners” rather than “providers”: With an increasing demand from outsourcing buyers to engage service providers in early product design and development activities, it is critical for providers to develop partnership-based engagement models. These could be in the form of creating joint Centers of Excellence (CoEs) to support product/channel transformation based on select “bleeding edge” technologies, or pursuing a combined go-to-market strategy in emerging areas.
  • Leverage M&A to build end-to-end capabilities in a market that is moving toward IT-BPO convergence: Outsourcing buyers are increasingly looking to execute broad-based, multi-tower contracts that have both IT and BPO services in scope. This trend is being driven by buyers’ sourcing strategy of forming strong relationships with providers in specific business lines, or portfolio clusters, rather than having different providers for different services. It is therefore critical for Major Contenders and Emerging Players to develop and enhance their domain expertise, scale (across IT-BPO functional areas), and products/services suite to provide end-to-end support. These providers must continue to focus on acquiring greater capability, solutions, frameworks, and tools through M&A activities, in order to address the specific needs of insurance outsourcing buyers.
  • Re-engineer pricing and engagement strategies to tackle uncertainty in the demand environment: Insurance markets around the globe are experiencing challenges that cause concerns about outsourcing demand. P&C lines are under pressure in the U.S., personal and automotive insurance lines are underperforming in Europe, and catastrophic losses in Asia Pacific (e.g., the earthquakes in Japan and New Zealand, and severe floods in Australia and Thailand) are burdening the bottom-line for insurance majors. While buyers need outsourcing support to effectively navigate through these situations, they have limited budgets and are apprehensive to participate in outsourcing deals that require heavy upfront investment or capex. Providers must therefore adjust their pricing and engagement terms innovatively to create a win-win situation for both buyers and themselves, e.g., pricing based on business outcomes, increasing deal terms in lieu of no upfront transition costs, and offsetting productivity-gain sharing with inflationary adjustments.

For more information, on this topic:

EXL’s Acquisition of The Hartford’s Trumbull Gives it a More Complete Portfolio of Offerings in the U.S. Insurance BPO Market | Sherpas in Blue Shirts

EXL Service announced on October 4, 2011, that it had acquired Trumbull Services, a specialized provider of Insurance BPO services in the Property & Casualty (P&C) segment in the United States. This acquisition is not large in terms of the additional headcount obtained (Trumbull is a less than 200 employee company) or the deal amount (not announced, but likely to be in the range of US$50 million). However, it is strategically significant, as it gives EXL Service a greater foothold and a ready-made technology platform to offer in the U.S. P&C Insurance BPO space in general, and the insurance subrogation BPO business in particular.

Even without the acquisition, EXL has been the dominant third-party BPO provider in the U.S. P&C market (excluding TPAs), with the highest scale in terms of FTE count. However, offerings in the Insurance BPO space are no longer just about scale – the increasing role of technology is becoming an important consideration. With this in mind, EXL had been looking for a suitable acquisition in the Insurance BPO space in the United States/Europe for a while now.

Going a bit deeper into the strategic value of the Trumbull acquisition, the addition gives EXL deeper expertise in the P&C Insurance BPO space with the important ability to offer subrogation BPO to insurers. (Subrogation is a process under which the insurer can pursue action against the party causing loss to the insured, in order to recover at least a portion of the claimed amount paid out to the insured. This also involves proportionately repaying the deductible paid by the insured to the insurer.). By offering this capability to insurers, EXL gives them a chance to lower premiums, lower deductibles, and, therefore, increase market share. In the U.S. P&C Insurance market, which saw consistently falling premiums and declining investment yields in 2008-10, this is an enticing offering.

The acquisition also bolsters EXL’s capabilities on the technology front. In May 2010, it acquired PDMA, the maker of LifePRO, a policy administration system in the Life Insurance BPO market deployed with 40+ insurers around the world. With the Trumbull acquisition, it also gets SubroSourcePro, a platform solution to maximize recoveries from claims. This bolsters EXL’s technology offerings, giving it greater ability to offer insurers flexible scalability and a transactional, pay-per-use pricing model that allows them to convert some of their fixed costs into variable costs.

With the acquisition, EXL also strengthens its onshore presence in the U.S. market. This is an important capability to have in an economic environment where regulatory requirements and customer preferences are mandating onshore presence for some processes. However, although EXL now has greater onshore presence in United States, it still lacks significant presence in the Western European and Latin American markets. Given that demand for Insurance BPO is rising in these locations, EXL will probably go for another acquisition in these regions in the near future, to ensure that when insurers go BPO shopping they can clearly see the store (vendor) with the most wares (capabilities).

Finally, EXL also gets a marquee client in The Hartford Financial Services with this acquisition. Trumbull had been a captive of The Hartford, and EXL has committed to honor existing service agreements. It will also tap into Trumbull’s existing client base, which includes a number of insurers with which EXL did not have any existing relationships.

However, EXL will face some challenges as it integrates Trumbull with its existing business. One is smoothing through cultural and operational style differences, as EXL is a global BPO major while Trumbull was a small captive held by a financial services major. Integration of Trumbull’s operational capabilities with EXL’s offerings will be another hurdle as EXL goes to market with a combined offering. Finally, there will be some drag on EXL’s margins, as Trumbull has an exclusive onshore presence while EXL’s own resources are largely offshore.

The bottom line is that  the Trumbull acquisition has given EXL not just a stronger foothold in the P&C Insurance BPO space, but it has also strategically deepened EXL’s portfolio of offerings, enhancing its potential in the U.S. Insurance BPO market.

Healthcare Reform Will NOT Negatively Impact Industry Profitability | Sherpas in Blue Shirts

A client recently engaged Everest Group to analyze the U.S. health insurance industry and identify long-term trends and their implications. From the outset, I realized that due to the ongoing healthcare reform, this was an unusual case in which one couldn’t extrapolate existing industry dynamics into future periods. Trying to understand the implications of President Obama’s healthcare reform on overall industry profitability, I discovered many contradicting predictions. As a result, I conducted my own study of the most important elements, and unlike many analysts, concluded that the reform will not negatively affect the industry from a profitability standpoint.

Pre-Existing Condition Threat Demystified

The biggest perceived threat to industry profitability is the legal provision that prevents insurers from refusing to provide, limit, or drop coverage, but this provision alone is expected to add more than 30 million members to the insurance rolls! Granted, pre-existing conditions and other issues will preclude this customer segment from being the most profitable, but the provision will drastically increase overall insurance premium revenues with very little impact to the SG&A cost structure, which will just be leveraged for incremental volumes due to economies of scale.

Benefits from Increased Bargaining Power

The U.S. health insurance industry already achieved a sufficient level of consolidation, driven in large part by an appetite for increased bargaining power. With substantially greater membership, all major industry players will possess even more negotiating clout with medical services providers. Moreover, health insurance providers’ intermediary role in the overall healthcare value chain has been continuously helping the industry to maintain its profitability, as constant increases in providers’ rates have always been successfully passed on to the end-users. Traditionally, the industry operated under a cost plus mentality wherein every year health insurance providers estimated the expected increase in medical costs (hospitals, physicians, and prescription drugs) and factored this increase into their renewal rates. It is not unlikely that, driven by expanded membership, insurance firms’ increased bargaining power will manifest not only on the provider side but also on the buyer side via higher rates for enterprise clients.

Additional Regulatory Pressure on End Users

Government also indirectly contributed to the shift in bargaining power from buyers to insurance providers by establishing a mandatory requirement for employers to provide coverage for their employees with associated tax breaks and penalties for non-compliance. The impact of the latter provision may be partially offset by the proposed monitoring of insurance rate increases on the state level and the quarter billion dollars of funding available to the states, via the PPACA, to establish the necessary monitoring capabilities. But these days the bulk of commercial coverage is sold to large enterprises that purchase benefits on the national level for all geographies in which they have employees, so control on the state level may become irrelevant.

Ambiguity of Medical Loss Ratio Requirement

Another potential impact to profitability arises from newly imposed limits on medical loss ratio (MLR) –the percentage of insurance premium actually spent on medical services – at 80 percent for small groups and 85 percent for large group plans. However, legislation is not very prescriptive in terms of what does/doesn’t go to the numerator and denominator. The National Association of Insurance Commissioners already released an industry-wide clarification allowing exclusion of state and federal taxes from insurance revenues in the denominator. What SG&A costs can be included in the numerator is still an open question. Keeping in mind the “too big to fail” concept employed by the current administration, it is very unlikely that the government will attempt to tighten up the MLR definitions, as doing so would put the solvency of the whole industry at risk.

Health Insurance Exchanges

There is a lot of hype around the provision in the healthcare act calling for the establishment of health insurance “exchanges,” where otherwise uninsured individuals can shop for insurance plans. Some experts believe this kind of “priceline-dot-com” health insurance will essentially drive transparency, intensifying price competition. I am skeptical about the potential of such an outcome. First, wholesale purchases will still comprise a dominant segment of the overall market. Second – just as in the auto insurance industry – it is nearly impossible to conduct an apples-to-apples evaluation of rates. In health insurance, the law still allows substantial differences based on an individual’s risk profile (three to one based on age, three to two based on tobacco use, etc.), which means that even two people purchasing identical medical coverage from the same insurance provider cannot accurately check the rate competiveness.

Aggressive Cost Takeout

Finally, it is quite clear that the industry is undertaking many cost takeout and improved efficiency efforts. Nearly all large healthcare players have initiated different care management programs in an attempt to preemptively address the most expensive items in their cost structure. Along the same lines, all insurance companies have achieved substantial progress in risk management analytics and fraud detection/prevention measures.

It is quite interesting that stock market performance demonstrates investors’ optimism about the future of the health insurance industry. More than a year after the PPACA was signed into law the S&P Managed Health Care Stock Index demonstrates strong performance, and is constantly outperforming not only the S&P 1500 but also the S&P Composite Health Care Index.

The most challenging part of all this is estimating the impact from the second degree of implications, as healthcare reform is not limited just to the health insurance sector. The law brings many regulatory changes to the provider side, and these will quickly cascade through the entire value chain, forcing healthcare providers to make corresponding adjustments to their delivery models. Despite remaining ambiguity around different regulatory nuances, I do believe that under healthcare reform the industry will maintain its profitability.

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