Presented to the Actuaries Institute
General Insurance Seminar
Sydney
This paper has been prepared for the Actuaries Institute 2014 General Insurance Seminar.
The Institute’s Council wishes it to be understood that opinions put forward herein are not necessarily those of the
Institute and the Council is not responsible for those opinions.


1.
Introduction .................................................................................................................. 4
2.
3.
4.
5.
A Brief History of Offshore Outsourcing ..................................................................... 5
Growing Trend of Services Offshoring ....................................................................... 7
The Current State of Offshoring ............................................................................... 10
Offshoring Opportunities and Challenges ............................................................. 14
6.
7.
8.
9.
Future trends in offshoring......................................................................................... 20
What does this mean for actuaries? Will you be here in 10 years’ time? .......... 22
Conclusion .................................................................................................................. 29
Appendix A: Definitions ............................................................................................. 30
10.
References .................................................................................................................. 31
11.
Acknowledgements .................................................................................................. 36

Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Offshoring as a business strategy has been employed for several years in the manufacturing, services, and IT fields, but it has only recently begun to impact the actuarial profession. This paper will examine the trends that have led to the current state of offshoring. It will then consider the newer trend of offshoring actuarial work, with particular focus on the type of tasks that may be offshored and potential locations for offshoring actuarial work. Finally, the paper will comment on the new skillsets required for onshore actuaries in order to add value in a world where actuarial offshoring is the norm.
Keywords: Offshoring, Outsourcing, Actuarial Value Chain, Actuarial Skills, ITO, BPO,
KPO, Labour Cost
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Offshoring refers to the transfer of an element or process from one domicile in which a company is based to another domicile in which the company is not based. There are numerous types of offshoring, which can involve third party providers, a company’s internal resources, single or multiple locations, amongst other factors. The various types of offshoring are listed and defined in Appendix A. In this paper, we will use the term “Offshoring” to refer to offshore outsourcing, however, many observations will apply to other types of outsourcing as well.
Offshoring is no longer a new concept in the business world. It has been successfully employed in the manufacturing, services, and IT industries for a number of years. The actuarial community, however, is just beginning to see the impacts of this business strategy.
The purpose of this paper is to explore offshoring and provide:
 a summary of its evolution and common terminology;
 an update on the current state of offshoring;
 reasons for its emergence including the costs and benefits; and
 a view on how this may impact the Australian actuarial profession.
Section 2 of this paper examines the evolution of offshoring. We will explore the beginnings of offshoring, as well as its transformation over time from manufacturing to services, IT and business processes. Section 3 will explore some of the more recent trends in the growth of offshoring. Section 4 will then explain the current state of outsourcing, including ‘offshorable’ versus ‘non-offshorable’ tasks. Section 5 will provide key considerations for an operation which is considering offshoring a piece of work. The benefits and challenges associated with offshoring will be explained in this section. Section 6 will briefly cover projections of future trends in offshoring.
The paper has been constructed with reference to many papers that have been published on this topic over the last 10 years. Very few make reference to the actuarial profession specifically, although it is noted that the frequency of mention is increasing more recently, suggesting that offshoring as a business strategy is becoming more relevant for actuaries.
In section 7, we therefore turn our focus to Actuarial offshoring in particular. This section will consider where offshore actuarial jobs are currently located, and how this concentration may change in the future. In addition, we will consider the skillsets that actuaries onshore must develop in order to adapt and continue to add value once some actuarial tasks have been sent offshore.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Offshore outsourcing is by no means a new phenomenon. The concept of onshore outsourcing is embedded in the way most of us live. Historical evidence dates as far back as the Romans who outsourced the collection of taxes to external parties
(Kakabadse and Kakabadse 2002). Today, the type of services that are outsourced extend from a wide range of business services (printing, mailhouse services, IT, claim triage, customer relationship management, credit card services etc.) and personal services that make our lives easier (preparation of tax returns, personal shoppers, cleaning, cooking, child care and it is even possible to outsource the process of standing in a queue to buy tickets). Wherever there is a comparative advantage in using a third party to perform a process, outsourcing is considered.
Early offshore outsourcing was limited by the ability to travel and communicate.
However we can find examples in American history where the production of wagon wheels and sails were commissioned in Scotland by necessity of the availability of expertise. Within America, after the Civil War, northern textile factories moved to the
South to take advantage of the cheaper production costs (Gonzales et al). While this was within the same country, the stark cultural differences and distances (given transportation limitations at the time) between the North and South made the situation akin to today’s offshore outsourcing.
Gonzales et al cite the technological advancement in transportation and communication as key influences on the move towards outsourcing. While we can hardly imagine a time before the mobile phone and jumbo jet, the railroad and telegraph inspired companies at the time to think nationally and as technology improved, internationally.
Grant (2005) refers to three types of offshoring which summarise both the type and associated timeline:
1.
Political Offshoring – the exploitation of labour and resources during the centuries of European colonisation. Here, nations were the ‘offshorers’ rather than corporations.
2.
Production Offshoring – the free movement of capital to lower-wage high productivity offshore manufacturing providers in the 1970’s.
3.
Services Offshoring – the loss of white collar service sector jobs in the mid to late
1990’s associated with the transfer of information and communications technologies to low-wage offshore providers.
Services offshoring can be further broken down into three tranches (KPMG, 2008):
1.
ITO – IT outsourcing – Now at the mature stage, it was the first of the major services to be outsourced. This type of outsourcing emerged in the 1980’s, and grew in earnest in the 1990’s.
2.
BPO – Business process outsourcing – This can include back-office processes (e.g. payroll) and front-office processes (includes customer-related services such as marketing or technical support). Following the acceptance and growth in IT service offshoring, this was really a natural extension that started in the mid to late 1990’s.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
3.
KPO - Knowledge process outsourcing – Involves the outsourcing of processes that demand advanced research and analytical, technical and decision making skills. This is a more recent strategy employed over the last 10 years and has the greatest potential for future offshoring growth. This area of outsourcing is now moving into the core processes of companies.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
The growth in offshore outsourcing of business services is illustrated in Figure 3.1. This shows the number of business services jobs (primarily finance, HR and IT) that have been offshored over the last 10 years from companies headquartered in North
America or Europe. The total number of jobs for this sector in 2002 was 8.0m.
Therefore Hackett (2003) projects that over one quarter of services jobs will be offshored by 2017.
Figure 3.1: Growth of Services Offshoring
3.0
2.5
2.0
1.5
1.0
0.5
Projection
0.0
2002 2004 2006 2008 2010
Source: Hackett, 2013
2012 2014 2016 2017
3.1.
Major Growth Enablers
3.1.1.
Economic Reform
Offshoring was spurred on initially by Britain under Margaret Thatcher and the USA under Ronald Reagan who supported trade liberalisation and free market economy as solutions to the economic downturn of the 1970’s. Barriers to trade were reduced or eliminated through the establishment or reinforcement of various agreements and organisations. These include the General Agreement on Tariffs and Trade (GATT, which was established in 1948, and reinforced from 1986-1993), the North American
Free Trade Agreement (NAFTA), the formation of the European Union, and ultimately the World Trade Organisation (WTO) which superseded the GATT in 1995 (Stanford,
2003).
At the same time developing countries were recognising the opportunities to improve their economies through similar economic liberalisation. India commenced its economic reforms in the early 1990’s and in the late 1970’s the ‘opening’ of China began.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
3.1.2.
Technological Advances
Grant (2005) discusses the importance of ‘digitisation’ on the offshoring of services.
He defines digitisation as ‘the binary code of 0s and 1s that make up computer chips and enable sight and sounds to be sent instantly, anywhere in the world”. In particular, he refers to a quote from Thomas Friedman, author of “The Lexus and the
Olive Tree” which states that digitisation enables ‘all kinds of previously disconnected people the chance to access and apply knowledge’.
Whilst offshoring of manufacturing or physical production might take several months or years to implement and pay back from a cost-benefit perspective, the payback period for the offshoring of business or knowledge services is shorter, with the added advantage of being able to break processes into parts for distribution to various offshore sites – aided through the advancement in digitisation.
3.1.3.
Skilled Resource Availability
The final major enabler of offshoring has been the availability of skilled graduates who can work at a fraction of the onshore resource costs.
The United Nations Educational, Scientific and Cultural Organisation (UNESCO) publishes statistics on gross enrolment ratios which expresses the number of individuals who are enrolled in schools as a percentage of those of the corresponding enrolment age. The Gross Tertiary ratio considers the number of young people in the five year age group following secondary school leaving age
(usually 18).
For developing nations, the most recent ratio (2012) is 25.5, compared to 75.5 for developed nations. This is a considerable difference; however the growth in ratios is quite different between these two groups. Over the 13 years up to 2012, enrolment ratios have more than doubled in developing nations compared to only a 40% increase in developed nations (Figure 3.2).
Figure 3.2: Growth in Tertiary Education Ratios
240%
220%
200%
180%
160%
140%
120%
100%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Developed countries
Source: UNESCO
Developing countries
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
3.2.
Factors Influencing Outsourcing
The Shared Services & Outsourcing Network (SSON) recently published a list of the 22
World events that shaped the shared services & outsourcing industry (SSON IQ, 2014).
While they were generally described chronologically, we can classify them into 2 distinct groups:
Enablers – developments or events that:
 enable the easy transaction of information, data, finance;
 change the way and speed at which we communicate; and
 raise expectations for change.
The list of enablers and their implications are shown below:
Internet (1995)
Euro (1999)
Y2K (2000)
Linked In &
Facebook (2003-4)
Expansion of the EU
(2004)
Iphone (2007)
Work becomes borderless
Reduction in currency complexity
Fear of world-wide technical collapse
Real time services, competition for talent changes
Near shoring takes advantage of cheaper labour states
Consumerism of IT “anywhere, anytime access”
Disrupters – developments or events that:
 shift the focus to compliance through risk issues associated with safety, security or stability;
 impact the demand for services.
The list of disrupter events and their implications are shown below:
Fall of the Berlin Wall (1995)
9/11 (2001)
Bali Bombings (2002)
SARS (2002-2004)
Mumbai Attacks (2008)
Indian Ocean Earthquake and Tsunami (2004)
Hurricane Katrina (2005)
Iceland Eruptions (2010)
Japan Earthquake (2011)
North American Cold Wave (2014)
Enron (2001-02)
Global Recession (2002-03)
GFC and its impacts (2007-08)
The world becomes ‘flat’
Debate over safety and security.
Emergency practices and policies, business continuity plans, disaster recovery plans reviewed.
Impacts on growth and compliance controls.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
4.1.
Offshored Services
Figure 4.1 is an extension of Figure 3.1 and shows the historical and projected number of jobs classified as ‘non-offshorable’ and ‘offshorable’ for companies that are headquartered in Europe and North America. The overall reduction in the number of jobs from around 8m down to 6.8m represents the impact of productivity savings offset by jobs added through growth.
Hackett (2013) observes the extent to which ‘offshorable’ jobs have been offshored and the stability of the number of ‘non-offshorable’ jobs over time. It postulates that the number of ‘offshorable’ jobs is finite and will run out sometime in the next 10 years (noting that the projection considers only the elimination of currently existing jobs as a direct result of the movement of capacity offshore). At this point, business services labour capacity will be globally distributed ‘on the basis of regional comparative advantages in labour costs, capacity and skills levels.’
Figure 4.1: Offshorable and Non-Offshorable Jobs, Actuals and Projections
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2002 2004 2006 2008
Non-Offshorable
2010
Offshorable
Source: Hackett, 2013
2012
Offshored
2014 2016 2017
The impact of shifting transactional roles offshore is that the proportion of roles remaining onshore becomes skewed towards ‘knowledge centric’ roles. This however is the next frontier of offshoring – the KPO.
Knowledge processes require a higher level of skill, involving judgement, as opposed to business processes which are more rules-based. ‘Intellectual arbitrage’ is the new
‘labour arbitrage’. KPOs challenge the concept of any job being ‘non-offshorable’.
Figure 4.2 illustrates the differences between BPO services and KPO services as it relates to the financial services industry. Actuarial services have been placed at the top right – high business value opportunity requiring a high level of judgement. We
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time? also note the inclusion of analytics in the same segment. This is an area of recent growth in all industries – with services provided both onshore and offshore.
Figure 4.2: BPO vs KPO
Business Value Financial Services KPO
 Actuarial product pricing
 M&A deal synergy analysis
 Business and cash flow modelling fraud
 Analytics
 Delinquency analysis
 Discounted cash flow modelling
 Product line projections
 Market research
 Strategic customer segmentation
Financial Services BPO
 Mortgage servicing
 Consumer lending services
 Credit scoring
 Accounts payable
 Accounts receivable
 Payroll processing
 Customer support centre
 Credit & debit card services
 Transaction processing & data entry
Rule based Judgement based
Source: KPMG, 2008
The move from ITO to BPO is evident in the results of the Deloitte (2014b) survey, which summarises the types of functions currently being outsourced across all industries. Figure 4.3 below illustrates the high level of IT outsourcing compared to other services indicating the developed nature in this area.
Figure 4.3 Current Outsourcing Levels
Source: Deloitte, 2014b
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Figure 4.4 illustrates the type of outsourced functions in relation to Finance and
Accounting services only. Based on this survey, a high proportion of the services outsourced are business processes, rather than knowledge processes.
Figure 4.4 Current Outsourcing Levels – Finance and Accounting
Source: Deloitte, 2014b
4.2.
Geographic Locations
Figure 4.5 shows the locations of vendors for outsourced processes. In this graph, the level of development refers to the stage of advancement in offshoring services.
India continues to be the dominant destination for offshoring.
Figure 4.5 Current Outsourcing Levels – Locations
Source: Deloitte, 2014b
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
4.3.
The Australian Labour Force
To complete the picture in terms of the change in the Australian labour force, consider Figure 4.6 below which examines the growth in ‘interaction jobs’ (McKinsey,
2014).
Here the segments have been defined as:
 Transaction jobs – based around exchanges that are rules based and can be scripted, routinised or automated.
 Production jobs – converting material into finished products and tend to be movement intensive.
 Interaction jobs – higher level of reasoning, judgement and the ability to manage non-routine tasks. People in these jobs must be collaborative, and have strong problem solving skills.
Figure 4.6 Growth in Interaction Jobs In Australia
Source: McKinsey, 2014 using data from ABS 6291.0.55.003 Labour Force, Australia, Detailed, Quarterly
The graph shows that over the 5 years up to 2013, by far the majority of growth in jobs in Australia has been in the Interaction jobs. Both production and transaction jobs, which are considered to be more ‘offshorable’, have had either negative or minimal growth.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Offshoring may be a sound business strategy for any company when undertaken carefully. This section discusses the key benefits and challenges. It explores the pros and cons of these benefits and challenges, and provides practical considerations that need to be thought through as part of the offshoring decision process.
5.1.
Cost Savings
Cost savings is consistently identified as the primary driver for establishing offshoring arrangements. Labour cost arbitrage can result in 10-30% savings (Ernst & Young and
The Institute of Chartered Accountants in Australia, 2011). Other reports, including a
2003 study cited by the Australian Government, suggest the savings in labour costs can be anywhere from 40-70% (Grant, 2005). The relative strength of the Australian dollar also makes these savings even more significant (PWC, 2011).
In addition to labour cost savings, there is also potential for a portion of the associated onshore overhead costs to reduce (estimated savings of 5-10%).
5.1.1.
Counter Point: Wage Inflation
Wage inflation should be considered while calculating the true impacts of labour cost arbitrage. In the short term, there may seem to be a considerable gap between onshore and offshore wage costs, but this may taper off with higher inflationary pressures in the offshore country.
The Everest Research Institute estimates that labour costs for IT and process outsource providers in major offshore markets (including China and India) are increasing by 8 to 11% per year on average (Ernst & Young and The Institute of
Chartered Accountants in Australia, 2011). According to The Economist (2013), wages for analysts and product developers performing more demanding work further up the value chain are increasing by up to 30% per year.
The business case for offshoring should include sensitivity analysis around the expected labour costs, and a clear understanding of the point at which the reduced labour cost arbitrage makes offshoring no longer worthwhile. For example, assuming a starting point wage differential of 70% (that is, the average offshored wage cost being 30% of the onshore cost) and an inflation differential of 6.5% would result in a crossover point in wage costs in around 20 years. If the inflation differential were 10%, the crossover point reduces to around 13 years.
5.1.2.
Counter Point: Other Costs of Offshoring
Some examples of ‘hidden costs’ which may be overlooked in the organisation’s initial estimates of the cost of outsourcing include (Brown, 2008):
 Currency fluctuations leading to risk of contract payments fluctuating
 Cost of implementing new systems and processes
 Cost of hardware and software refresh in future years
 Cost of retaining some employees to assist in the transition to outsourcing
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
 Travel expenses for employees who travel offshore for training and meetings
5.2.
Scalability and Access to Extra Resource Capacity
Variable capacity is one of the major benefits of the offshoring arrangement. Large offshore providers can offer their clients scalability of FTE resource as project requirements change. This kind of scalability would be very difficult for the client company to achieve on its own, in a timely fashion.
Offshoring can help free up the resource capacity in the client company to focus on core competencies and innovation, hence positioning them to better deal with fastmoving market changes (Overby, 2007a). Many insurance companies are moving to a customer-focused operating model. This requires a shift in focus and a realignment of the non-core, support processes to allow this to happen (KPMG, 2008). The access to additional resources can also be the enabler of a growth strategy, supporting a larger customer base than would be possible using internal resources alone.
5.2.1.
Counter Point: Loss of Intellectual Property
Intellectual property includes code, pricing algorithms, budget information, and other processes or techniques that a client company must allow the outsourcing provider to access as part of the arrangement. Both intellectual property that a client created prior to the outsourcing arrangement, and intellectual property created during the relationship through the creation or improvement of processes needs to be considered (Aristidou, 2014).
Sharing of intellectual property introduces the risk of possible breaches, theft, misuse or loss of intellectual property, which needs to be carefully specified in the contract and monitored throughout the term of the arrangement
(Aristidou, 2014).
Management of intellectual property issues is even more important in KPO compared to BPO. KPMG predicts there will be increasing debate over intellectual property ownership of financial and statistical models due to unclear ownership rights between clients and outsourcing service providers
(KPMG, 2008).
5.3.
Access to additional skills to fill a knowledge gap
Offshore outsourcing can be a way of accessing skills that are not currently available in the client company in order to perform a task that it currently does not have the internal knowledge to do. For example, if an onshore company does not have the skills internally to build a certain type of model, an offshore vendor may be able to build that model. In turn, these work products can often be extended to apply more broadly to other lines of businesses or products.
5.3.1.
Counter Point: Loss of Intellectual Capital
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Intellectual capital refers to the expertise that employees develop through solving problems while performing their day-to-day function. After the basic functions are outsourced, the required skillset will no longer exist within the company. Instead, those skills will be developed over time by the outsourcing vendor, who may also apply them in work done for competitors (Baker, 2009).
According to Alton Martin, CEO and co-founder of COPC Inc., “the most expensive long term cost is losing the expertise on how to do the ‘simple things.’” He explains that when the basic functions are being outsourced, the expertise within these departments is transferred to the vendor, so the knowledge to fix any complicated issues that might arise in future no longer exists within the organisation (Baker, 2009).
5.3.2.
Counter Point: Vendor Turnover
Turnover rates in the outsourcing industry have historically been high; in some cases around 25%, because people working in offshoring firms have relatively high qualification levels, but the majority of the work being offshored is repetitive and process-driven. Jobs in ITO and BPO may also offer less attractive career prospects than local industries like retail, insurance and banking (The Economist, 2013). When a significant amount of intellectual capital is held only offshore, vendor turnover also becomes a bigger issue.
5.4.
Process Improvement and Efficiency
Ernst & Young and The Institute of Chartered Accountants in Australia (2011) estimate that organisations typically achieve 5-15% of cost benefits through productivity and process improvements driven by offshoring. Increase in market competition and ongoing pressure on financial results make efficiency extremely important in the current environment (PWC, 2011). In the process of moving work offshore, there is a greater need for standardisation, simplification and automation.
Offshore service providers are then able to focus more on delivering continuous improvements in efficiency and a stronger control environment. In addition, offshore providers are well placed to identify opportunities for consolidation of similar pieces of work previously completed by several different departments onshore. This can also drive efficiency gains and cost savings (Ernst & Young and The Institute of
Chartered Accountants in Australia, 2011).
5.4.1.
Counter Point: Poor Planning and Governance
Offshoring in the absence of a good business case can lead to failure. Since the global economic downturn in 2009, outsourcing has been increasingly pursued by organisations as a ‘quick fix’ solution to cost pressures, rather than an investment designed to expand or enhance capabilities (Overby, 2007b).
The planning process should include deliberate effort put into understanding the state of existing processes, to assess whether it is more beneficial to ‘shift then fix’, or to ‘fix then shift’. Businesses may choose to invest in fixing existing processes to avoid simply outsourcing a problem, and to maximise the value
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time? gained through the outsourcing arrangement (Ernst & Young and The Institute of Chartered Accountants in Australia, 2011).
In addition to upfront planning, a robust management system must be employed to ensure success of the offshoring arrangement. According to outsourcing consultancy TPI, the typical outsourcing deal loses between 5 and
30 percent of its expected value each year through ineffective governance
(Overby, 2011). A survey by the International Association of Outsourcing
Professionals also found that 63% of companies believed they were losing an average of 25% of contract value due to poor governance (Overby, 2011).
The importance of good vendor management is supported by considering the hindsight views of companies who have already implemented offshore processes (Figure 5.1).
Figure 5.1: Hindsight View
Source: Deloitte, 2014b
5.5.
Time zone efficiency
Differences in time zones at offshore locations can be exploited to effectively increase working hours. Progress on tasks can be accelerated because work is not limited to 8-9 business hours per day. This could potentially increase speed to market of financial results, new product offerings, etc. Customer service levels can also be improved by extending hours of service.
5.5.1.
Counter Point: Management Strain
Time zone differences may also have an adverse effect on the productivity of employees who manage offshore partners. The short period of shared work hours can make communication and collaboration more challenging
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time? compared to working with an onshore consultant. The strain can be overcome or reduced through the use of near shoring vendors.
5.6.
Young and skilled workforce
The median age in developing countries like India and Malaysia is around 24 years, compared to 36 to 38 in developed nations like Australia, the U.S. and U.K (Grant,
2005). While the workforce in developing countries could be seen as less experienced, they could alternatively be viewed as enthusiastic, creative and eager to prove their worth to employers.
5.6.1.
Counter Point: Cultural differences
Differences in the national or corporate culture between the onshore and offshore entities must be well understood at the start of an offshoring arrangement to ensure success. The relationship and quality of work produced depend heavily on this.
Some aspects of culture which may differ include (McCray, 2008):
 How quickly the organisation moves
 How decisions are made
 How the organisation is structured
 Language – including verbal, non-verbal and written communication
 Expectations around level of open debate and acknowledgement of problems
 Willingness to innovate beyond the defined process
One concept which seeks to measure these differences in culture is the Power
Distance Index (PDI). The PDI was introduced by Hofstede (2010) and is a measure of an employee’s comfort in dealing directly with a person of authority. It ranges from 1 to 120, with a higher number indicating a bigger ‘distance’ separating the power levels. In a culture with a low PDI, an employee would be comfortable expressing disagreement with others at higher levels in the company hierarchy, whereas in a culture with a high PDI, it would be seen as offensive
(Clearlycultural.com).
Figure 5.2 displays the PDI of a few selected countries.
Figure 5.2: Power Distance Index
Source: Hofstede, 2010
If the onshore entity has a low PDI culture, one in which employees are more comfortable with interacting and disagreeing with employers, then they may expect the same of the offshore vendor. The PDI values of major offshore
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time? locations like India and China are much higher than that of Australia. This would indicate that employees in these typical vendor locations may hesitate to interact with or question members of management. A lack of understanding of this concept could lead to unrealistic expectations of the relationship between the vendor and client.
A survey of 305 outsourcing clients and service providers in North America,
Europe, Asia and India conducted by the Outsourcing Center concluded that 9% of outsourcing relationship failures are driven by poor communication, and 16% by poor cultural fit (Goolsby, 2004).
The presence of cultural differences between onshore and offshore entities is not a sure sign of failure. Diversity of thought and perspectives often leads to innovation and improvements. If an effort is made to understand and adapt to different ways of working up front, these differences can be leveraged to the benefit of the onshore client.
5.6.2.
Counter Point: Retention of Onshore Staff
Outsourcing creates uncertainty for existing employees, which can lead to a loss of motivation or push staff to look elsewhere for employment, leading to loss of key talent (McCray, 2008). Hiring and training replacements is associated with both a monetary and a time cost.
It is important for the retained onshore team to have enough people and knowledge to make key business decisions as well as to take care of ongoing management responsibilities.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
As businesses and offshore service providers increasingly learn to exploit the benefits and manage the challenges of offshoring, we expect more and more processes to move offshore.
Figure 6.1 compares the current and future outsourcing plans of respondents to the
Deloitte Global Survey. This clearly illustrates future continued growth in outsourcing – particularly with respect to IT, where 26% of respondents who are not currently outsourcing plan to do so in the near future.
Figure 6.1: Current and Future Outsourcing Plans
Source: Deloitte, 2014b
Some of the trends we expect to see influencing the offshoring industry include:
6.1.
Cloud computing
New technologies such as cloud computing services are predicted to provide increased opportunities for the offshoring industry. With businesses keen to implement cloud solutions for reasons such as capacity, scalability, accessibility and cost savings, it is expected that cloud-based offshoring will grow in importance
(Deloitte, 2013). In fact, 69% of respondents to Deloitte’s 2014 Global Outsourcing and Insourcing Survey indicated that they are more likely to outsource because of cloud computing (Deloitte, 2014c).
6.2.
Managed Service Models
As outsourcing strategies of businesses mature, relationships are evolving beyond the traditional client-vendor relationship to more of a business partnership. It is expected that service providers will move increasingly from transaction-based delivery models
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time? to Managed Service Models, taking on end-to-end responsibilities that include both delivery and management. This model provides incentives for the vendor to make process improvements to improve their margins, and helps align their interests with client business outcomes (Govil, 2013).
6.3.
Analytics
Analytics and other high value knowledge-centric services are expected to drive the future growth of the offshoring industry. Social media and other new technologies will drive demand for specialised services that support organisations’ data-driven decision making (Govil, 2013). Offshoring represents an opportunity for organisations that currently lack the in-house knowledge and experience in analytics to tap into offshore providers’ capabilities.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
In the Australian market, several large insurers are in the process of implementing offshoring, or are considering offshoring components of their actuarial services.
Note that several consultancies already have offshore branches – but many of these were set up for the purpose of servicing the local market, rather than acting as an offshore provider.
7.1.
Actuarial Value Chain
In Figure 4.2, actuarial services have been classed as functions requiring a high level of judgement and offer opportunities for driving high business value. We have further broken down the individual tasks that actuaries perform into a more detailed
“actuarial value chain”. Figure 7.1 below is our suggested way of visualising the complexity and the business value of a range of actuarial tasks. Here ‘advanced’ refers not necessarily to technical difficulty, but tasks that require significant judgemental overlay.
Figure 7.1: The Actuarial Value Chain
Communicating business insights

Business Changes & benefit realisation
Generating business insights and solutions
Automate processes
Advanced model specification
Advanced Monitoring
Materiality & impact analysis
Basic Model Specification
Basic Monitoring
Basic Model Building
Advanced analysis
Advanced Model Building
Running Models
Data reconciliation
Data Extraction
Basic Analysis
Data Manipulation
Rule based Complex Judgement
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
To put this in perspective, a typical outstanding claims valuation could be segmented through the value chain and result in the outsourcing of:
 Data preparation – extraction, manipulation and reconciliation
 Experience monitoring – data driven
 Model preparation – population of models with data, previous assumptions and updated economic assumptions
 Parameter selection – data driven assumptions;
 Model validation – internal consistency checking
 Impact assessment – impacts of changes in assumptions
 Report preparation – in adherence to the local regulatory environment
The onshore team may then retain the oversight of adding depth in knowledge that is associated with having local context. This includes deliberating on the final model selection and parameters, messaging of results, communication to management and ongoing adaptation to post balance date changes. In this example, it naturally follows that advice in relation to the valuation is also presented locally.
Some of the key messages emerging for actuaries are:
 Rule-based work includes data extraction, reconciliation, and the running and automation of existing processes. These are process-oriented tasks that require less business knowledge and judgement, and represent opportunities for BPO.
 Tasks that require more judgement include various types of analysis, model building, data manipulation and monitoring. These represent possibilities for
KPO if it can be done more efficiently by an offshore provider, or because the required expertise does not exist within the client company. The KPO provider would still need to be managed by an onshore team who can combine their knowledge of the local context and the modelling process in communicating results to the business.
 Tasks requiring complex judgement and deep understanding of local context are more challenging to outsource. Insurers where senior management is comfortable with being able to deal with the challenges of outsourcing may consider outsourcing these tasks.
7.2.
What skills will actuaries of the future need?
The environment in which actuaries operate will change over time, with offshoring being one of the key drivers of change. In order to continue delivering business value, actuaries of the future will need to develop certain skills, with the focus increasingly moving towards:
7.2.1.
Insights and communication
Data extraction and data processing are relatively easy to offshore in comparison to the business insights and communication aspects of an actuary’s work. Actuaries of
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time? the future are expected to spend less time on data cleansing, data processing and updating inefficient models, and more time on insights generation and business centred communication (Deloitte, 2014d).
7.2.2.
Managing offshore relationships
Relationship management and project management skills will become increasingly important for onshore actuaries working with offshore partners. A successful actuary will have the ability to communicate remotely, work around time zone differences and collaborate with people from different cultures.
7.2.3.
Understanding of strategy and local context
Activities which have historically been most likely to be outsourced are those which are easy to automate and require few specialised skills. As the focus moves beyond cost savings and labour arbitrage towards delivering strategic value through KPO, local context becomes increasingly important (Gupta et al, 2014).
Michael Miller, the CMO of marketing services provider Hyper Marketing, believes that while architecture and analytics can be offshored, the understanding of business rules and logic needs to be kept in-house so that analysis can be turned into business insights, actions and strategy (Overby, 2012b).
Actuaries need to have a good understanding of the organisation’s business goals, the dynamics of the local market, and the local regulatory and legal environment, and will be valued for their ability to focus on what is really important considering the business and strategic context.
7.2.4.
Innovation
As well as having strong analytical skills, a successful actuary will also have the ability to ‘think outside the box’, innovate, ask creative questions and find better solutions by exploring problems from different angles to add value to the business. These ideas can then be sent to offshore resources for ground up development before being passed back to onshore actuaries to drive insights and value.
7.2.5.
Strategic thinking
As the pace of business becomes quicker, there will be greater focus on turning data-driven insights into business strategy across the whole organisation. As explained in Deloitte (2014d) actuaries of the future need to give advice that looks beyond the ‘what’ to the ‘so what’, and then to the ‘so what next’. There is a role for the actuarial profession to train the future generation of actuaries to think strategically and to make best use of the outputs from outsourced functions to add value (Deloitte, 2014d).
7.2.6.
Technical skills
The actuarial profession is respected for their insurance sector knowledge and technical ability, and technical skills will remain important in future.
As organisations increasingly offshore support functions, this will have implications for junior actuaries entering the profession and the opportunities available to them.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
If we consider the simple example of the outstanding claims valuation – elements of the value chain that could be identified as ‘offshorable’ are likely to be associated with the current role of junior actuaries.
This therefore raises the question of learning and development of junior actuaries in an environment where the ‘basics’ have been offshored. Organisations need to plan for this, and put in place structures and processes that allow junior actuaries within the organisation to develop the necessary technical knowledge base
(Deloitte, 2014d).
7.3.
Actuarial skillsets around the world
7.3.1.
Current State
Figure 7.2 shows a range of offshore locations classified as ‘developed’,
‘developing’ or ‘future opportunities’ based on responses to Deloitte’s 2014 Global
Outsourcing and Insourcing survey, as well as the current number of actuaries resident in each location.
Figure 7.2: Availability of actuarial skillsets 1 by level of outsourcing development of offshore locations 2
Sources: Deloitte, 2014b and International Actuarial Association, 2014.
1
A selection of offshore locations classified as ‘developed’, ‘developing’ or ‘future opportunities’ based on the proportion of survey
Association, where a ‘Fully Qualified Actuary’ is defined as a fellow and/or an associate, depending on what the actuarial society of which they are a member deems as meeting the minimum requirements .
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
While India is the most popular location for offshore outsourcing, it currently has relatively few qualified actuaries compared to other developed offshoring locations like the United States and China. However, the career opportunities for actuaries in
India are vast, and the profession has a reputation for paying well (Sodhi, 2012).
Students make up 95% of the total Institute of Actuaries of India membership base
(Institute of Actuaries of India, 2014), which is a much higher ratio than in mature actuarial markets such as the UK and Australia.
China has a larger number of Fully Qualified Actuaries compared to India, but is currently less developed as an offshoring destination.
Both India and China currently have a much lower general insurance market penetration compared to the world average, as shown in Table 7.3. This suggests that there is significant potential for growth in the domestic general insurance market, and hence for growth in demand for general insurance actuaries, even without accounting for companies from other countries offshoring to these destinations.
Table 7.3: General insurance market penetration in China and India compared to the World 3
Country/Region
China
India
Asia
World
2011 general insurance market penetration
1.01%
0.65%
1.59%
2.83%
Source: Lu et al., 2013
The above discussion suggests that there might currently be capacity restrictions in the more developed outsourcing destinations like India and China, due to the relatively small number of qualified actuaries available. Their domestic non-life insurance markets also have room to grow, and it is expected that actuarial resources will be required to support this growth.
But over time, as the large student membership base completes the actuarial qualifications and gains a few years of on-the-job experience, there is vast potential for future growth in these countries as destinations for offshored actuarial work.
7.3.2.
Where might actuarial offshoring move in future?
Figure 7.4 is an extension of Figure 7.2 which shows the percentage of respondents to the Deloitte 2014 Global Outsourcing and Insourcing survey who would consider various outsourcing destinations in the future.
3
Insurance market penetration is defined as the non-life premium to GDP ratio, and is used as a measurement of development of the insurance segment in the country’s economy .
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Figure 7.4: Availability of actuarial skillsets 4 by offshore location based on organisations’ future offshoring plans 5
Sources: Deloitte, 2014b and International Actuarial Association, 2014.
Figure 7.4 shows that out of the ‘developing’ offshoring locations, Australia currently has the largest availability of people with actuarial skillsets. Brazil has the next highest availability of actuaries, and is slightly preferred as an offshoring destination.
Out of the ‘future opportunities’ locations, South Africa has the highest potential as a destination for actuarial offshoring, with a relatively large pool of actuarial talent.
The growth rate for qualified actuaries in South Africa was 9.2% from 2013 to 2014 – significantly higher than Australia (5.9%) and the United Kingdom (5.6%)
(International Actuarial Institute, 2014). While the supply of actuaries is relatively high, demand is comparatively lower, because insurance penetration in South Africa is already high – its GDP per capita is similar to that of other emerging economies, but premiums make up 14% of GDP, versus 4% for emerging markets and 9% for industrialised economies (Tikam, 2012).
South Africa should be viewed as an opportunity for businesses to utilise additional actuarial capability and access high value services, rather than a simple cost arbitrage opportunity. This is because South African contact centres are more expensive than India, even though they are still about 45% to 50% cheaper than
4
A selection of offshore locations classified as ‘developed’, ‘developing’ or ‘future opportunities’ based on the proportion of survey
Association, where a ‘Fully Qualified Actuary’ is defined as a fellow and/or an associate, depending on what the actuarial society of which they are a member deems as meeting the minimum requirements .
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time? markets such as the UK (Planting, 2014). For example, one US-based insurance company has chosen to offshore its actuarial analysis to South Africa, but offshore its high volume claims processing work to India (Planting, 2014).
Of course, apart from the availability of talent and the cost, a large number of other factors will influence the selection of an offshore destination, including cultural match, government regulation and incentives, and any desire to diversify risk across offshore providers in different geographical locations.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Offshoring is a business strategy that has been around for a considerable length of time. More recently, it has begun to extend into the domain of the actuarial profession, driven by a combination of economic conditions, technological advancement and growing resource availability in offshore countries.
The evidence that is available suggests that the offshoring trend will continue – in short, it is here to stay.
There are certainly elements of the work that onshore actuaries are performing that can be relatively easily offshored. Other tasks requiring more judgement and local business context are more difficult to offshore, but there is no reason why an organisation that is comfortable with dealing with the challenges of offshoring, and has a partnership with a high quality offshore vendor, could not also offshore this type of work.
For onshore actuaries, the nature of the work will change – away from data and process-driven tasks towards communication and advising business strategy.
Onshore actuaries working with offshore vendors will also have a role in managing the relationship to ensure the additional resources are used most effectively for the business. In an environment where junior actuaries entering the profession may have fewer hands-on opportunities to learn the basics, more senior actuaries will need to consider how to provide adequate training, and succession planning. In addition, the change in the nature of actuarial work will present an opportunity for the
Institute to revise the curriculum to ensure future actuaries have the relevant skills.
In answering the question…”Will you be here in 10 years’ time?” our answer is “yes” but perhaps with a new look. The onshore actuary will be:
 strategic, dynamic, creative and business driven;
 a strong communicator;
 able to relinquish data custodianship without giving up the knowledge – work with the data’s insights, not on the data;
 more front office and less back office; and
 a relationship manager.
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
Offshoring
The transfer of a piece of work or process from one company to a third party which is in a different country than the one in which client company is based.
Outsourcing
When the services are performed external to the client company but may be within the same country.
Captive
When there is a complete ownership of the centre providing the services.
Home shoring
When the services are performed by electronically connected home-based contractors. However, technically, it is outsourcing only if the contract is between the company and third party.
Multi shoring
When a company does not only use only one external vendor, but multiple vendors, to procure products and services.
Shared Services
A business strategy that combines common processes or services used across a corporate into a single service centre.
Near shoring
When the vendor is located geographically closer to the client company, hence enabling better control over goods and services.
Lift and Shift
Processes are moved to the outsourcing company in their current form, with no development or changes.
BPO
Business Process Outsourcing involves outsourcing of a specific business process.
KPO
Knowledge Process Outsourcing involves the outsourcing of processes that demand advanced research and analytical, technical and decision making skills.
Source: TDONOVAN66, 2012
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
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Actuarial Offshoring – Will You Be Here in Ten Years’ Time?
The authors would like to acknowledge the time and assistance kindly provided by the following people, which greatly enriched our understanding on the topic of offshoring:
 Sujata Das
 Craig Price
 Rick Shaw
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