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U.S. insurers are becoming increasingly reliant on business process outsourcing providers, says Boston-based Celent who anticipates a combined annual growth rate of 10% in the North American core insurance BPO market, with insurer expenditures growing from an estimated $2.3 billion in 2011 to $3.7 billion by 2016.

The report, authored by Celent Senior Analyst Mike Fitzgerald and Analyst Karen Monks, also expects that BPO revenue growth in life/annuity/health sector will be slightly higher than the P&C industry given the larger average deal size in that sector. The report augments finding from a November 2010 survey of insurers which found that 49% of respondents expected their company’s use of BPO to remain level in 2011, while 36% expected it to increase.

Fitzgerald and Monks note that BPO activity has most frequently been seen in non-core processes such as claims management, customer service, billing and payments, and imaging. However, in light of the budget restrictions faced by insurers following the financial crisis, they may be begrudgingly acquiescing to the use of BPO in more core insurance functions.

“It was expected that the economic events of 2008 through 2010 would force many insurers to rethink their views on business process outsourcing,” the report states. “As cost containment became a mandate and insurers looked for ways to manage costs, business process outsourcing experienced growth over the past two years, but adoption of BPO by insurers for core insurance services progressed at a slower rate than expected in North America.”

“BPO vendors will continue to expand their onshore and nearshore operations in response to customer/prospect demand, particularly for processes requiring customer-facing voice support,” Fitzgerald and Monks state. “As outsourcing of core functions expands, Celent expects they will be managed onshore. Every vendor interviewed reported some level of capability in this area. Political pressure and tax policy in the United States accelerated a “mixed shore” model in some instances, but cost pressures will still require that back office functions are processed offshore.”

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