Outsourcing optimization model in the Russian car insurance market

Abstract

Outsourcing is a popular management strategy aimed at optimizing the operation of various organizations, including insurance companies all over the world. However, the involvement of an intermediary between insurance parties does not only serve to improve the efficiency of the insurer's business operations, but also poses extra risks. This article proposes a risk optimization model regarding the insurer’s risks when outsourcing certain operations. The model was analyzed on the example of car insurance using the Russian insurance market data (the Ingosstrakh Insurance Company). To our opinion, the presented optimization model is capable of bridging the gap in the insurance theory and lay a foundation for further economic studies of insurance intermediaries. The model was tested with the data of Russian insurers and showed that outsourcing in the current insurance market of comprehensive car insurance cover is unprofitable due to a high concentration of fraud. We calculated the optimal threshold for fraudulent payouts in car insurance, which should be as low as 0.64%. The proposed hypothesis for further research consists in the following: In terms of the ratio of profitability and risk, selling insurance policies through intermediaries can be profitable for insurance companies with respect to inexpensive insurance products only.