The growth in the take-up of outsourcing services in the insurance industry has, in no small part, been aided by the interpretation of the European Union's Sixth VAT Directive which has until recently exempted certain services provided to the insurance services industry from being charged VAT at the national rate.

This interpretation has, however, been challenged following the March 21, 2005, ruling of the European Court of Justice that the outsourced back-office services, including claims handling and dealing with insurance applications, provided by Accenture to Dutch life insurer Universal Leven NV, were not exempt for VAT (sales tax) purposes.

"The ruling has wide-reaching implications for both the insurance industry and the outsourcing community," said Mike Friend, head of European BPO research at IDC. "Business process outsourcing has emerged as a significant driver of growth and profitability in the financial services sector, helping organizations to lower policy administration costs, improve customer service, and increase the speed with which new products have been brought to market. The ruling may force insurers to raise premiums, see the exit of a number of outsourcers from this sector, where the VAT charge significantly impacts their business model, or indeed encourage a speedier transfer of processes offshore."

This document, part of IDC's European Business Process Outsourcing service, analyzes the likely impact of the ruling on the provision of outsourcing services to the insurance Industry.