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In with the out crowd

A significant increase in outsourcing activity in the life and pension industry over the next two years is inevitable.

The industry has had a difficult few years which have left the sector’s confidence badly rattled.

The situation is getting much better. After a restructuring which came as a by-product of the downturn, it is now the responsibility of those with influ- ence to reinvigorate the industry and drive towards disaggregation.

Despite the new level of optimism, the industry is still under a great deal of pressure. It will be necessary for product providers to maintain customer service in a cost-effective environment and focus on product development and distribution.

There are key drivers on outsourcing, including the need to maintain levels of customer service to compete, the advantages of focusing on core values such as industry skills, product development and distribution as well as the business requirement to convert as much fixed cost to variable cost as possible.

Senior practitioners are recognising how outsourcing can address these needs. An outsourcer can deliver a cost advantage through their considerable economies of scale. An outsourcer can spread staff and system resources across a big book of policies. An outsourcer can, for example, bring tier-one economies to tier-two companies.

The scale of an outsourcer’s operation should allow sizeable, yet economical, investment in customer service systems and personnel.

There is already a big take-up in outsourcing but some life and pension companies have not yet been persuaded. The reason why outsourcing stalled in the past is it never really offered life and pension companies anything significantly over what they could achieve themselves. The only one of the three core deliverables it really offered was a cheaper level of administration.

Recently, outsourcers have begun to refine their proposition. There has been an improvement in existing processes and cost reductions. Outsourced business processes are operating in a completely e-enabled environment and all admin can be relayed between the front-end client, life and pension organisations and outsourcers using web services.

In addition, there is shared service delivery: Outsourcing will increasingly not only deliver econ-omies of scale across areas such as call centres and processing platforms but will also provide the rewards of sharing high-value services, such as compliance and actuarial expertise.

These expertise-intensive resources are all too often inefficiently utilised in house, especially as there may be a requirement to have an excess of resources to cover workload variation.

Another important factor towards outsourcing is the environment of increasing regulation. Any significant piece of regulation requires an enormous expenditure of effort and expense and there is often concern that system changes will not be ready in time for the onset of regulation.

The costs of compliance can be spread across the entire scale of an outsourcer’s operation, as opposed to separate implementation across individual companies. An out- sourcer will always operate to ensure they are prepared for regulation. The knowledge that an outsourced book of policies will be constantly administered in a compliant fashion provides peace of mind.

The historic perception of outsourcing has changed. Key players now understand that outsourcing can have a genuinely transformational effect. This shift is an important factor in outsourcing’s growing relationship with the sector. Outsourcing firms will need to come with impeccable track records and solid financial backing. Life and pension providers will want to know they are investing in a solution that is proven and gives long-term stability.

The life and pension business and the nature of outsourcing have changed dramatically over the past few years. Almost 20 million life and pension policies have been outsourced. People in the industry are starting to understand how outsourcing, as it becomes increasingly sophisticated, can do more than just cut costs. It can maintain customer intimacy and allow companies to focus on their profitable core business.

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