The insurance industry has changed dramatically over the past decade in response to increasingly stringent regulations, changing consumer preferences and falling interest rates. Over just the past 18 months, COVID-19 resulted in massive, high-speed changes to the insurance industry in technology, process automation, cybersecurity and work-from-home delivery models. Yet, the vast majority of insurance outsourcing contracts contain very little that reflect this new world. Insurance outsourcing contracts today look like they could be straight out of 2010.

Executive Summary

In this two-part article, ISG's Dennis Winkler observes that COVID-19-related changes in operations are not getting captured in contract terms with outsourcing firms, which means that insurance carriers are missing out on potential cost savings and changes in the scope of engagement. Lack of flexibility in overly long contracts and governance flaws are other shortfalls that Winkler addresses in the second part of this article, in which he provides ISGs insights for shoring up nine key areas out outsourcing contracts to best-practice levels. Part 1 of 2

Many insurance carriers are sticking with incumbent providers and renewing typically provider-favorable, often overpriced and sometimes underperforming contracts. Others are failing to update contract terms and service levels or benchmarking prices to achieve today’s best practices.

Over the next three years, six billion dollars of insurance outsourcing contracts are up for renewal. Insurance companies have a huge opportunity to update their outsourcing contracts to reduce risk, save money and improve performance.

Shifting Outsourcing Strategies

The past decade has brought tremendous change to enterprise outsourcing strategies. Insurance third-party administrator (TPA) contracts from the prior decade focused on offloading smaller closed blocks of business and, when necessary, the related computing platforms. Insurance business process outsourcing (BPO) and IT outsourcing (ITO) contracts were smaller and full-time equivalent (FTE)-based with benefits of labor arbitrage gained by moving work to India and other lower-cost locations.

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