Outsourcing’s role in SA insurance industry : important despite challenges

Pronounced in April 2012, this directive places certain duties on insurers to make sure that that appointed outsourced providers are sustainable in terms of business continuity.

The regulator has divided insurance administration into two main areas: first, where the Insurer allows a third party to bind it regarding its decisions, commonly known as binder functions, and secondly insurance administration which requires no formal discretionary decision-making by the third party but requires the performance of pure administration services on behalf of the Insurer, such as financial, IT, or even actuarial administration.

The FSB has stated insurers may outsource identified services or functions as long as they have applied their mind accordingly and in line with clearly defined criteria or principals. Further, insurers must make sure any risks are adequately mitigated through for example a formal outsourcing policy which should also detail how risks would be mitigated.

One area highlighting the good and the bad of outsourcing is second leg outsourcing functions or binder functions.

An example is where a third party company, such as a broker, settles claims for the Insurer as well as accepts the risk and rate this risk on the Insurer’s behalf. An Insurer would literally be handing over its "pen” or authority to the third party and would incur responsibility for any wrongdoing that the outsourced party may commit. It is a serious onus to bear.

The advantage would involve the expertise, service levels and focus provided by the third party.

Often brokers are able to provide far better service to clients, whom they know well and is running a file for that client anyway regardless of whether they are dealing with the settlement of the claim or not.

This eliminates duplication and the broker has an interest in ensuring the client is handled quickly and fairly. The Insurer, in terms of the new regulatory regime, must ensure sure they inform their clients precisely of what the outsourced entity can do as well as what they earn.

The FSB will also hold that Insurer completely responsible for all deeds committed in the Insurer’s name. If the right third party is chosen, it can and will certainly be of huge benefit for the insurer and policyholder.

Again it comes with a certain amount of risk that must be mitigated and monitored. A broker is dealing as an agent of the Insurer and by having a pen to settle claims on the Insurer’s behalf they can have a major influence on the Insurer’s profitability. They also have a major influence on the Insurer’s brand and reputation in the market with the public and regulator. Brokers cannot shy away from this responsibility and efficient monitoring mechanisms as well as effective on boarding procedures must be in place to make sure the correct party has been appointed and they are doing the outsourced work to everyone’s advantage.

To conclude, there is no right answer. Those insurers with a strong ethos of partnership and being able to influence and lead will benefit greatly from the outsourced model. However they are exposed to greater risk outside their immediate sphere of influence. Insurers with strong back offices, staff and systems may find it more reliable and less risky to run all the administration in-house.. All the various advantages and disadvantages need to be looked at. One thing is clear, as far as the client and the regulator are concerned, the Insurer will always be responsible. They cannot shy away from this reality.