State Farm plans to outsource some IT services to Indian company HCLTech
State Farm said Thursday it plans to outsource some of its IT operations to an Indian IT services company, hoping to meet evolving needs at a volatile time for the insurance industry.
It’s unclear how many Bloomington-based State Farm employees will be impacted; State Farm declined to release that number. “Many employees” will be offered jobs at the outside company, called HCLTech, in similar roles supporting State Farm. "A small number of employees will no longer be associated with State Farm," a spokesperson said.
State Farm is Bloomington-Normal's largest employer, with over 13,000 employees, according to a 2021 report from the Economic Development Council.
State Farm says HCLTech will assume the day-to-day IT Help Desk and infrastructure services work. In a joint statement, the companies said the outsourcing would “enable State Farm to focus on critical technology priorities while elevating IT support experiences for its customers, agents and employees," and that it would help address recruiting and retention challenges. Beginning in early 2023, HCLTech will manage hardware, infrastructure software, and network connections support for State Farm.
“We did not make this unique decision lightly,” State Farm said in a statement Thursday. “State Farm considers the best interest of customers, employees, and agents when adapting to the ever-changing business environment to meet evolving needs. We’re committed to continuously improving processes, departments, and structure to better serve our customers.”
State Farm said it picked HCLTech because of its reputation in technical support for 250 companies on the Fortune 500 list.
“We are thrilled to welcome the incoming talent and combine the companies’ mutual expertise to help State Farm develop a stronger technology foundation,” Srinivasan Seshadri, HCLTech's corporate vice president and global head of financial services, said in a statement Thursday. “We are committed to supporting State Farm in its endeavor to serve its customers through advanced technologies and practices.”
Financial pressures facing insurers
It’s unclear how the outsourcing will impact State Farm’s bottom line. The insurer did not reference cost-cutting in a statement about why it hired HCLTech.
But the move comes as State Farm and other insurers face mounting financial pressure, due in part to an inflation-fueled downturn in the auto insurance market and Hurricane Ian which struck the U.S. in the fall. The industry overall in 2021 was barely profitable, and it’s expected to lose money in 2022.
Just last month, State Farm chairman and CEO Michael Tipsord said 2022 would lead to the “largest auto underwriting loss in the 100-year history of our company.” Indeed, State Farm recorded a net underwriting loss of $4.6 billion in the third quarter of 2022 in auto claims, according to S&P Global. That’s $1 billion larger than State Farm’s worst quarter in 21 years.
Inflationary pressures – which Tipsord said the company did not anticipate – include higher costs for auto repairs, car rental, and vehicle-replacement costs. Medical inflation is also accelerating, according to the American Property Casualty Insurance Association.
Also impacting claim severity is a phenomenon in which more crashes are occurring are higher rates of speed, costing insurers more money, said Tim Zawacki, principal insurance analyst at S&P Global Market Intelligence.
“The cost to repair and replace vehicles when they crash is something that’s weighed heavily on auto insurers,” Zawacki said.
It’s an abrupt financial shift for an industry that was flush with cash during the early months of the pandemic, when people drove less, crashed less, and submitted far fewer claims. State Farm gave back billions in dividends and rate cuts to its customers.
Now, State Farm and other insurers are raising auto rates again. State Farm raised auto rates in Illinois three times in 2022, totaling more than 16%, according to Crain’s Chicago Business. Nationally, State Farm sought 44 rates hikes across 22 states in the third quarter of 2022, according to S&P Global.
State Farm’s year-end financial results typically are released in February. Unlike many other large insurers, State Farm is not a publicly traded company and therefore doesn’t face the pressure of quarterly earnings reports.
“State Farm can take more time to manage through this, to determine how best to navigate what is choppy waters for really everyone in the industry,” said Zawacki. “Yes, this is a challenging time. But they also aren’t under the gun like some of their competitors are to turn things around immediately.”