What is outsourcing?
The use of a skilled resource outside of the company to handle work which was previously handled in house. These external providers are independent specialists who can offer a range of services.
Give examples of outsourcing in the insurance industry? (There are 6 listed but there are many you could mention)
- Loss adjusting.
- IT.
- Data processing.
- Risk management.
- Claims management.
- Customer enquiries.
What key benefit does outsourcing provide?
The company has more time to focus on revenue earning activities. However, regulated businesses are required to manage outsourcing in accordance with regulatory requirements.
How does outsourcing work?
A working relationship governed by a legal contract is arrannged. The outsourced company will offer and agreed service for an agreed fee over an agreed period.
If the outsourced company fails to deliver the service then the contact can be terminated and damages sought.
The agreed service can be run from an external site, or the outsourced staff can work in-house.
Give 7 advantages of outsourcing:
- The firm can use external specialists to assist with business changes and only incur the costs of the work completed.
- Guaranteed a certain level of service.
- Business can budget for a pre-agreed fixed cost.
- Outsourced companies are usually specialists who can bring new skills and working methods.
- Outsourcing contracts can lead to new partnership oppurtunities between the business and the outsourced company.
- Business may increase its capability and speed.
- More time to focus on core business areas.
Give 6 disadvantages of outsourcing:
- Certain control and direction will be lost.
- Poor service, although can be awarded in damages, can lose customers and affect reputation.
- Extreme care needs to be taken with customers’ confidential information and data should be protected equally well at outsourced suppliers. Data protection law may restrict data transfer especially overseas.
- If a business becomes too reliant on outsourcing then it may be open to higher costs where competition is not.
- Possible problems finding another provider if the current provider goes into financial trouble.
- Full understanding of customer behaviour and satisfaction can be lost in the communications between both businesses.
Regulated businesses are required to source and manage outsourcing in accordance with regulatory guidelines. The rules relating to this are where?
In the PRA Rulebook and FCA Handbook in the High Level Standards, Senior Management Arrangements, Systems and Controls (SYSC), section 8.
Firms should take reasonable steps regarding outsourcing to ensure: (List 3)
- There is no undue additional operational risk in outsourcing an activity as opposed to retaining the function in-house.
- The quality of internal control is not impaired.
- The ability of the regulators to monitor the frim’s regulatory complaince is not hampered by any outsourced arrangements.
The requirements for the terms of an outsourced contract have been published by the European Insurance and Occupational Pensions Authroity (EIOPA). Detail all 6 requirements:
- Clearly stated duties and responsibilities of both parties.
- Service provider’s commitment to comply with all applicable laws, regulatory requirements and to cooperate with the firm’s appropriate regulator.
- Disclosure of any development which may have material impact on the service provider’s ability to carry out the outsourced functions and activities.
- Notice period for termination by the service provider, which must be sufficient to allow the firm to make alternative arrangements.
- Access the firm, its external auditors and regulators will have to all information related to the outsourced functions.
- Firm’s need to ensure the outsourced provider has effective risk management and internal controls.
