The function and structure of outsourcing are changing in the insurance industry as global outsourcing continues on a meteoric growth trajectory. “What Insurance Outsourcing Trends to Watch For” for Digital Insurance by John Rodgers, Rajeev Aggarwal, and Brian Nordyke looks at the latest outsourcing trends and best practices for insurance companies forming external partnerships for non-core and support functions.

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The function and structure of outsourcing is changing in the insurance industry, as global outsourcing continues on a meteoric growth trajectory. One estimate holds a nearly tenfold rise in insurance outsourcing in a three-year period, from $24.6 billion in 2017 to a projected $220 billion by the end of 2020.

As it’s well documented that leading firms are focused on building their core strengths and differentiated capabilities, how must organizational structures shift to accommodate outsourced functions and knowledge sourcing? What has changed and how must the industry change with it?

Here are some of the trends we’re seeing in insurance outsourcing, and why we believe this is happening. We’ll also lay out some best practices for insurance companies looking to form external partnerships for non-core and support functions.

Outsourcing is not new
Why are companies outsourcing today? The simple answer: there’s a massive shortage of talent. What started as a way to drive efficiencies by lowering costs and overhead has morphed into a much more serious problem of simply not having enough people to recruit into working at insurance companies, particularly in the middle and back-office functions. We’ve heard that a quarter of insurance executives are slated to retire in the next 10 years; meanwhile, too few new graduates are thinking that insurance is a viable career for them.

Amidst this talent shortage, it is not surprising that some firms are using different partner networks to access talent, at times even at a similar cost structure to in-house resources. Firms are finding people in several different ways: some are outsourcing certain functions, while others are beginning to use emerging “star platforms” as a way of accessing talent—something we’ll see increasingly in the future. There are also third-party talent platforms, pointing to the continuing evolution of accessing core talent.

Which skills and capabilities should be outsourced?
Broadly speaking, firms should rarely outsource roles or core capabilities that lead to a career path within the company. In insurance, this means anything leading to, and stemming from, the underwriter position, or more generally any position that has core responsibilities in managing market relationships and evaluating risks. In contrast, some insurance firms may want to grow their reputation for good service through “white glove” claims servicing, which is not their core function. The business of insurance is not to provide service, it’s to mitigate risk. So, underwriting as a capability—as the core industry function—is how insurance companies truly make money, it’s the driver of a successful firm. Underwriting is thus the pinnacle of what companies should strive to keep as an in-house capability.

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