Life insurance and pension companies are having a dismal time. The plummeting value of stock markets worldwide has led to a slump in profits, forcing many to slash staff numbers and cut annual annuity payments to customers.
Similarly stringent cost-cutting measures are also being applied to their IT operations, which typically account for a significant chunk of expenditure. Aside from simply reducing next year’s IT budget, many companies are now looking for the flexibility to be able to scale their IT operations up, or down, to meet peaks and trough in demand.
Scaling down was the goal for troubled UK insurance group Royal & SunAlliance (R&SA) after it closed its UK life insurance division to new business in August 2002. The move is an attempt by the company to focus on its core general insurance business.
R&SA explored the option of outsourcing the IT infrastructure of its life and pension business to a third-party services provider, but this would only have reduced its systems costs and not its administrative costs, says Peter Hanby, managing director of R&SA’s UK Life operation. In a bid to cut both, R&SA has embarked on a ten-year, £300 million business process outsourcing (BPO) deal with server and services supplier Unisys.
An increasing number of companies are now outsourcing specific areas of their businesses, such as logistics or human resources, in an attempt to both cut costs and free up resources to focus on their core competencies. “BPO enables a company to achieve the optimum price [for a contract], which cannot be achieved by just outsourcing the IT infrastructure component,” says Hanby.
According to analyst company IDC, organisations spent $132.5 billion on BPO outsourcing contracts in 2001, but this figure will increase to $231 billion by 2006 – increasing at a compound annual growth rate of 12%.
For R&SA, the main rationale behind the deal was that it needed to reduce the IT maintenance and administration costs for each of its 2.4 million pension and life policy holders. More importantly in the long-term, R&SA will pay less to Unisys as its number of existing policy holders decreases.
About 1,700 R&SA staff – including 200 IT staff – will transfer to Unisys’ insurance services subsidiary, as part of the deal, helping R&SA with its goal to slash its 50,000 workforce to 38,000 by 2004. Unisys Insurance Services Limited (USIL) will continue to provide insurance operations from R&SA’s existing facilities in Horsham and Liverpool.
Hanby expects the deal to deliver “significant cost savings”, much of which will come from the consolidation of R&SA’s IT infrastructure. At present, R&SA is running 12 different life and pension applications on two mainframes from Unisys and IBM.
Over time, Unisys will consolidate nearly all of these applications onto its own single processing system, called Unisure. Running on a Unisys mainframe, the Unisure platform supports all of R&SA’s applications, including individual, group life and annuity business applications, claims Philip Heggie, Unisys’ general manager of global outsourcing.
But R&SA is not completely relinquishing control to Unisys. It will retain a small governance team of about 150 staff. These will manage its outsourcing contracts and oversee the financial and regulatory responsibilities of the life insurance company.
The value of experience
Winning the deal over its much larger services rivals, such as IBM Global Services and Electronic Data Systems, represents a major triumph for Unisys. But according to Hanby of R&SA, the decision came down to experience rather than capability. The major influence was the fact that Unisys has been running a similar ten-year, £220 million BPO project since 2001 for UK life insurer Abbey Life, says Hanby.
That experience is going to be increasingly hard to match. With Abbey Life and R&SA combined, USIL now boasts more than 4 million life insurance and pension customers in the UK.