Those outside of the financial services sector often assume it invests regularly and deeply in IT to maintain competitive advantage. However, our analysts find that parts of the US insurance industry have become legacy encumbered and relatively inefficient in their core operations. As a result, the BPO providers they require to survive are in a strong position to start taking their business. This is a form of the macro trend we call ‘business green-fielding’. The BPO providers have the advantage of a clean slate – they can build much more efficient, integrated processes on a modern technology base. However it may be hard to accept that insurers will willingly outsource to the companies that will then

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There is a precedent for this. Citicorp in the early to mid 80s acquired 23 banking data centers across the US. Each of these data centers created software for the banking industry. Citicorp combined the best processes used by all 23 data centers and then created a product that it marketed to a captive audience. It then marketed this product to banks across the US. Citi also used it for any new state charters i.e. Maryland. By the early 90s it consolidated all 23 locations into 1 center and sold this division to Fiserv but the product is still being supported by Fiserv. Citicorp took the best of all processes and repackaged them under their name and used them internally. This fits our model for banking. The same could happen for insurance.

So that suggests that a similar transformation could happen to the US insurance industry – but what about elsewhere? Is this likely to take place outside the US?

This trend is International in implications because regardless of location, the incumbent industry has not invested sufficiently in technology.

The prediction implies that the existing insurers are unable to make the deep structural changes they require to survive. Why can they not access the same investment capital and new skill resources the BPO providers are using?

They are too far behind. We have historic Gartner Dataquest survey data of IT investment for the Insurance industry which shows that traditionally they have not invested in new technology and they are behind the curve on technology deployment. Many of their resources are still coding in assembler to keep legacy systems up and running. It is more cost efficient to outsource these processes to gain insight into their cost structure and to remain competitive. Few insurers know their TCO for core processing routines. BPOs can provide this much needed costing info.

I have little different angle on this. (An outside US scenario here).In India LIC (PSU of Govt. of India) is doing exceptional well in past few years and more over is one of the leaders in the IT spending at least. Based on comments here (By Gartner & others), what would be interesting to see how this shapes-up in India. Already there are bunch of new FDI's coming in this space and if anyone is lagging in best utilization of IT spending surely out of business soon.