Tag: insurance

Insurance BPO Exploding in APAC | Market Insights™

Ins BPO Ann Rpt 2013 EGR-2013-11-R-1004-I1

Although its base is small, the Asia Pacific insurance BPO market has grown by about 250% in recent years, with its share of contract signings more than doubling in 2011-2012 over the prior four years (from 6% of all contract signings to 15% – second only to the U.S.).

Mobility in the Insurance Industry: Insurers Move on, Customers Get their Groove on | Gaining Altitude in the Cloud

While insurers have traditionally been slow with technology adoption, they’re now jumping on the mobility bandwagon, leaving no stones unturned in devising their mobility strategies.

So what has made mobility adoption a non-negotiable choice for insurers? They’ve realized that investments in mobility are essential for keeping pace with competitors and meeting the demands of an increasingly mobile “Facebook generation,” and that mobile offers unique benefits over the traditional brick and mortar, or even online, engagement models.

Following are some innovative uses of mobility in insurance and how they are transforming the industry:

  1. Usage based insurance (UBI) through telematics: Telematics allows a sensor installed in a user’s automobile to transmit real-time information about his or her driving behavior to the insurance provider. The insured individual is rewarded for good driving through reduced premiums, discount vouchers, etc. And as the practice encourages safer driving, insurers pay out on fewer accident claims. This win-win situation for both the parties is significantly altering the auto insurance landscape.
  2. More effective claims processing: P&C insurers are investing in native apps that can be used for claims reporting. In one form, the insured individual can take a picture of damaged property and post it via the app to initiate the claims process. In another form, inventory management apps allow the consumer to take photos of belongings and catalog all with the product price and purchase date, which can be used for claims processing in case of accidental damage or theft.
  3. Better customer service and support: Many insurance providers today provide “Mobile Live Chat” functionality to enable better connectivity between the insured and the insurer, and a “when I want it, where I want it” experience for the customer.
  4. Sales force automation through enterprise mobility deployment: Most insurers have armed their sales force with tablet/mobile-based solutions that provide real-time access to carrier systems. These enable agents a convenient way to showcase their offerings to prospects, and to readily adapt per unique client needs. Further, team managers can use mobile-based performance dashboards to monitor and optimize sales performance and make commission payments to agents.

To support insurance companies’ needs for industry-specific solutions and enablers, leading service providers are investing in development of a wide range of mobility solutions. While telematics and UBI are broad areas of investment, key insurance functions in which providers are investing are sales, claims and account management. The graphic below illustrates select major investments by service providers:

Insurance Mobility Investments

To gain additional insights and perspectives on leverage of mobility, key mobility initiatives by leading insurance firms, and questions key stakeholders must have answers to, read Everest Group’s IT Outsourcing in Insurance – Annual Report 2013: SMAC is the Panacea for all Insurance Industry Problems, and IT Outsourcing in Insurance – Service Provider Landscape with PEAK Matrix™ Assessment 2013. So, will insurance customers of the future use mobile as their primary interaction channel? Our research and current industry trends certainly bode so!

What Can We Learn from the EXL-Travelers Contract Termination? | Sherpas in Blue Shirts

If you follow the news, you probably saw last week that three people working for EXL used some operational process materials about EXL’s client Travelers with a competitor of Travelers. Travelers found out about it and terminated the contract. We see companies terminating for cause all the time, but terminating a contract for breach of confidentiality is very unusual. I’m not aware of another situation with as abrupt, Draconian and significant action as Travelers took.

This was a longstanding relationship, and we know from public releases that this will have significant impacts on both companies. But let’s look at the bigger picture of the impact on the industry at large as well as EXL’s other clients and the impact to both companies. What can we learn from this unfortunate incident?

The facts

We don’t know how the confidentiality breach was brought to light, and both parties are being appropriately very tight-lipped about it. EXL appropriately took disciplinary action and fired the employees involved. The provider also apologized, is undertaking a process to review its policies and procedures and is retraining all its employees to ensure this won’t happen again. They are obviously taking this breach very seriously, as they should.

The contact termination is a significant financial hit to EXL. Its stock plunged 20 percent. The provider’s biggest vertical is insurance, and Travelers was EXL’s largest customer, accounting for 9.6 percent of EXL’s total revenue for the quarter ended September 2013. The termination likely will impact EXL’s 2014 revenues by US$14-$28 million. EXL also must bear the cost of transitioning the services from Travelers over the next 18 months.

The situation certainly speaks to the importance of confidentiality. We speculate that the termination also may be combined with Travelers’ strategic intent, as the contract was coming up for renewal.

People being people, they will make mistakes and will use materials inappropriately. In fact it happens to every organization, internally as well as with its vendors group. I’m not excusing EXL, but I’m saying there are only two types of companies: those in which a confidentiality breach has happened and those in which it will happen.

How the situation impacts stakeholders

EXL stockholders — These stakeholders have been hit the hardest. Last week we saw a pullback in the EXL stock and also saw EXL respond to that by announcing a stock buyback. In the short run, they have suffered a loss in value.

But over the long run we predict that this value will recover quite quickly because of the buyback situation and also because EXL is a strong company. Although losing a customer that represents nearly 10 percent of revenues is serious, EXL’s pipeline is strong, its reputation is strong and its other customer relationships are strong.

This is not the first time for a provider to lose a large customer. For example, HP is in the process of losing GM (although not for a breach of contract but, rather, a change in strategic direction by GM), which has a similar or larger proportion of impact, and it is recovering from the loss.

So we anticipate that EXL will recover and be back on a strong growth trajectory. BPO is an attractive space; the market holds a promise of further growth, and EXL is well positioned in this market. It is disappointing to have this setback, but its stockholders will recover over time. 

EXL management team — Clearly management is taking this very seriously. It is asking: How did we get here? It has already taken steps to make changes in policies and procedures and implement a robust education program within its employee base to ensure that this never happens again.

EXL employees — The approximately 2,000 EXL team members won’t immediately be moved out of Travelers; it will take time to transition. Given EXL’s strong growth prospects, it should not be difficult for them to find other positions. Certainly other EXL clients are in need of talent, and the Travelers team was a talented and mature group. The talent for insurance BPO is a scarcity, and we expect that all of them can easily find work inside or outside of EXL. 

EXL’s existing customers — This unfortunate situation could be a bonus for EXL’s other clients. EXL is redoubling its efforts in confidentiality. Also, the scarce talent that will come out of Travelers will give great opportunities for existing or prospective EXL clients. A new talent pool of 2,000 people with mature experience is a huge boon for EXL customers. 

Travelers — It clearly sent a very strong, powerful message to its own organization and its third-party communities that it will not tolerate breaches in confidentiality at any level. We expect this message to resonate through its organization and its provider organizations for years to come.

It seems likely that other interests were combined with this message. Although we have no actual information, it is very unusual to go to such lengths to make this statement, and it’s very costly in terms of time and effort, even if not paying formal transition fees. So it’s possible and, in fact, probable that Travelers was thinking of making some significant change in any event and has combined this object lesson with the need for that change.

The change will be significant. Approximately 2,000 EXL FTEs will need to be moved into other delivery vehicles. Something of that scale is likely to last between 18 months to two years. Travelers could take this work in house or distribute it among other providers. So there will be significant realignment going on at Travelers. The good news is that clearly Travelers feels confident in its ability to transfer this work and provide the same delivery at a similar level of quality.

Services industry —Obviously confidentiality is very important, and this incident is a wake-up call for the industry. Confidentiality breaches can never be tolerated, and all companies need to be vigilant with confidential information and manage it like security breaches.

Another important observation is that this contract termination also says something about the maturity of the insurance BPO industry. That a company of Travelers’ size and sophistication would feel comfortable that it can replace delivery capacity at this scale speaks to the fact that Travelers believes that the industry has gone beyond small pockets of rare skills to the point that these skills are more widely available than they were five years ago. And no provider is indispensable.

Again, this is a very unfortunate situation. But it’s not the end of the world for EXL. The company will move on, learn from the experience and prosper. EXL’s clients and employees will be well served. Travelers also will go forward. They undoubtedly feel confident that they can replace the delivery that EXL was providing, whereas a few years ago they could not have done so.

To date, BPO has been highly sticky in work not shifting to other providers because clients did not want to run the risk of not being able to duplicate expertise in another provider. Travelers now is willing to do that. There are now multiple delivery options where there used to be only a few, so we may see other clients switching providers. BPO may turn from purely a greenfield environment to both a green and brownfield environment, much like IT.

Part 2: Verticalization in the Health Insurance Industry | Sherpas in Blue Shirts

In an earlier blog, M&A in the Insurance Industry: Is the party over, or yet to get started?, I talked extensively about horizontal consolidation in the health insurance industry. Now, let’s take a look at vertical integration, wherein up and down the value chain healthcare companies merge and the different business units within the resulting conglomerate type of organization become internal suppliers and buyers.

A prime example in today’s marketplace is Kaiser Permanente, which for years has been operating under this model. The company provides health insurance via Kaiser Foundation Health Plans (KFHP), and delivery of medical care through Permanente Medical Groups.

First, there is very little synergy in terms of primary value creation due to the disparate core focuses of the two businesses (risk management versus healthcare provision.) Second, an inherent conflict of profitability maximization interest arises from the two businesses  serving each other – the health insurance business unit is primarily incented to squeeze the most attractive pricing out of the medical services business unit, but in the opposite direction, there’s a 180 degree flip. Granted, industries such as oil & gas have been dealing with this internal pricing issue quite successfully for a long time, and it is not an impossible obstacle to overcome. But to succeed, there must be a clear decision on which of the two businesses will be the cost center, and which will be the profit center.

Against the backdrop of general public dissatisfaction with the overall cost of healthcare, many credible sources have mentioned Kaiser’s model as a potential alternative with positive qualities. The first is superior control over cost structure. In the Kaiser model, all delivery of healthcare services is squeezed into a fixed cost of running a chain of hospitals and physician offices  where majority of medical personnel consists of salaried employees. Even if this does not result in much lower comparative services costs (as some mega insurers can obtain equally good commercial conditions by exerting enormous pricing pressure), it at least provides considerably more cost transparency and predictability, allowing for much more accurate decisions on selective growth initiatives. Additionally, the internal nature of transactions allows elimination of costly activities such as rate negotiations, reimbursement management, pre-approvals, and litigation, as well as other processes associated with conducting business between independent entities. Finally, vertically integrated companies can exploit some economies of scale by consolidating various back-office functions such as HR and IT. And given how IT-intensive healthcare has become in recent years due to the need for implementation of various capital intensive projects to establish electronic medical records and health information exchanges, these economies of scale are especially attractive.

Not surprisingly, all these considerations have triggered some discussions and investigations of existing opportunities in the industry. Case in point: Highmark’s acquisition earlier this year of of West Penn Allegheny hospitals. This is a very aggressive, “stand out from the crowd” move, given the multi-billion dollar scale of operations of both involved parties. And it raises the question of whether we should expect a series of similar deals from other industry players  trying to optimize their cost structures in the current ambiguous business environment resulting from President’s Obama healthcare reform. Obviously, this is a difficult question to answer, in part due to the controversial nature of the model, but primarily because very few healthcare providers operate on a national level, while large health insurance businesses typically do.

Think about it: Highmark’s acquisition of West Penn Allegheny will allow it to provide healthcare services to roughly three million of its five million existing members, so it will have to maintain a dual delivery model (i.e., based on both external and internal delivery), which drives additional governance cost. To completely switch to a fully internal delivery model, most large insurance companies would have to conduct multiple acquisitions, practically one deal per region, resulting in ownership of an extremely diverse set of assets, thereby requiring enormous integration and standardization effort. This is the primary obstacle for massive replication of the Kaiser model.

I believe any vertical integration in the nearest future will remain limited to a regional type of play, wherein some locally existing benefits justify an insurer’s move down the value chain. What do you think?

M&A in the Health Insurance Industry: Is the Party Over or Yet to Get Started? | Sherpas in Blue Shirts

Before the economic crisis began in 2008, some ambitious forecasts predicted that by now due to industry consolidation less than 50 large health plans would comprise the entire market. Economies of scale were so attractive in the health insurance industry that even such an aggressive consolidation scenario didn’t sound unrealistic. Obviously, it didn’t happen.

The question is, why? Was there some type of intervention that disrupted the natural evolution path of the health insurance industry and prevented the “presumably inevitable” consolidation, just as human intervention kept the Leaning Tower of Pisa from toppling? Before we address that question, let’s briefly talk about the fundamental premises for consolidation.

There are multiple benefits to being a big player in the U.S. health insurance industry. First, you gain access to the most lucrative client segment in this industry, the Fortune 1000 companies, as it procures health coverage for its employees in a single national chunk, rather than location by location. The Fortune 1000 target category is also the most attractive client segment because of the fixed cost associated with each sales pursuit, which can be spread across a much higher number of beneficiaries, as opposed to closing a deal with a “Mom & Pop” shop. Obviously, to be able to serve such mega clients on the national level, medium-sized firms were expected to close the gaps in their geographic footprint, and selectively acquire niche/state level players.

Second, locking down a large number of beneficiaries allows health insurance companies to exert pricing pressure on providers of medical services, while simultaneously withstanding pricing pressures from more consolidated adjacent healthcare verticals such as pharma and medical device manufacturers. Essentially, large insurance firms are discouraging their customers from consuming out-of-network services, while demanding from in-network providers extremely favorable pricing, frequently in the form of low-priced, fixed monthly payments independent of the actual volume of patients (“capitated contracts”).

Third, due to the very high level of regulation on the federal, state and local levels, as well as quite complicated value chain processes, for every industry player there is an almost mandatory cost category associated with various compliance measures, proactive legal support, and lobbying. Obviously, the bigger you are the more you can afford to spend in this direction (or the less this expense item contributes to your overall cost structure percentage-wise). This is especially true for those firms that deal with Medicare and Medicaid programs, where reimbursement requirements are changing almost on a monthly basis, and staying compliant requires an enormous effort.

With these strong driving forces, why did the expected consolidation trend de-accelerate? Several credible sources point to the recent financial crisis as a primary inhibitor, but I personally don’t think it played any major role in this situation.

I think we should mainly look at President Obama’s healthcare reform. It impacted the operating model of the industry in many ways – the medical loss ratio (MLR) requirement, preexisting conditions, individual buyers, and new coverage limits, to name just a few. Basically, healthcare reform brought so many changes to the fundamental operating principles of the industry that adapting to them requires a significant change management effort. Moreover, as reform impacts not only health insurance but also the entire healthcare industry, some secondary implications from the adjacent verticals are yet to fully cascade throughout the value chain. Just judging from the level of involvement of and extensive guidance from the National Association of Insurance Commissioners (NAIC) in interpreting various Patient Protection and Affordable Care Act (PPACA) provisions, it is quite clear that it will take some time for the industry to adapt to the newly imposed rules of the game. All in all, the healthcare ecosystem is not yet fully balanced, and in a time of ambiguity, it is difficult to make aggressive acquisition bets.

However, the above represents just short-term implications of healthcare reform. Its long-term consequences are quite the opposite. The PPACA made an already regulated industry even more regulated. With so many operating constraints and requirements, it is inevitable that small players that are teetering on the edge of solvency will either get out of the business or be acquired by the bigger firms. Moreover, our government recently introduced another strong incentive for operating on a mega-large scale, when being “too big to fail” serves as indemnification for taking a little extra risk under expectations of getting bailed out if something goes wrong.

All this makes me believe the consolidation trend will reaccelerate, and that within the next couple of years, we will see a number of intriguing M&A announcements. However, the potential M&A activity may not stay limited to horizontal consolidation with mergers of like companies, but also to vertical integration. In this respect, Kaiser’s model (payer/provider) seems to be quite a controversial example for replication because of the multiple pros and cons associated with such a business paradigm. But I’ll save that subject for a separate blog.

Where Are the Opportunities in Health Insurance Mobility? | Gaining Altitude in the Cloud

Mobility in the health insurance industry has been an extremely hot topic during the past several months; white papers on the subject abound, the media is hyping it, all major IT service providers have announced service offering expansions, and a multitude of high-tech startups are hoping to capitalize on the expected spike in spending. Despite all this activity and buzz, what is the actual potential of mobility for payers in the health insurance industry?

In fact, there are many opportunities to leverage mobility in both the business to business (B2B) and business to consumer (B2C) segments across the payer value chain.

Health Insurance Mobility: Myriad B2B and B2C Opportunities for Payers throughout the Value Chain

There are efficiency gains from further minimizing paper-intensive processes, and time savings from capturing data real-time with built-in error-checking. Revenue growth potential by harnessing mobility’s advantages of immediacy, ubiquity and unique personal engagement to capture buyers and members attention and build brand loyalty. Wellness improvements through using the GPS/accelerometer and other features of mobile devices along with the power of social media. This has a double-edged benefit for payers; mobility-enhanced wellness can be most appealing to the younger and more-educated demographics which are the most profitable segments, and can move others to an improved and thus less costly health state.

Mobility presents great potential opportunities and gains for the healthcare payer industry. While there are inherent differences between the B2B and B2C segments across the healthcare value chain processes, those payers that leverage the right opportunities for their unique strategic growth plans stand to reap significant rewards.

To learn more, please read the Everest Group Executive Point of View: Health Insurance Mobility: Myriad B2B and B2C Opportunities for Payers Throughout the Value Chain.

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