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From Resource, August 2006
Copyright by LOMA
Strategies,
Technologies and Your Future
Speaking at the Systems Forum, industry
analysts discuss the current tools and techniques that can help insurance
companies do more, be more and to reimagine their future.
By Tammy McInturff
Today, insurers are presented
with a wide array of tools and technologies to rearchitect their systems and
reimagine how they do business. Web services, SOA, business process models, and
new strategies arm business and technology professionals with an arsenal of
tools. At the 2006 ACORD LOMA Insurance Systems Forum in Las Vegas, NV, a panel
of industry analysts discussed the current tools and techniques that can help
insurance companies do more, be more and to reimagine their future. The analysts
tackled many topics including competitive advantage, business and IT alignment,
enterprise architecture, Web services and services oriented architecture (SOA).
Leapfrogging
As the insurance industry
continues to change, some carriers are struggling to keep up. One industry
challenge the panelists discussed was the concept of “leapfrogging.” Some
carriers are worried about being left behind by their competitors who are
leveraging technology to their advantage.
Cynthia
Saccocia, insurance research director for TowerGroup, said that TowerGroup has
conducted over 200 interviews with industry executives and leading vendors who
are helping insurers transform their business. She explained that in these
interviews, executives were continually telling TowerGroup that they were
worried about getting leapfrogged by the competition. “The bar has been
raised,” she said. “Technology has changed substantially and people are
doing a lot of big things with it.”
Matthew
Josefowicz, manager of the insurance group at Celent, LLC agreed with Saccocia,
but added some insight into why more insurers haven’t updated their
technology. “As we talk to established carriers with large market share and
large pools of agents to support, they find they have a hard time modernizing
their technology because the cost can be very high. It may also be perceived as
unsupportable by management. There
is really a big job that IT and also the different components of business need
to do to be able to communicate what the long term value is going to be of
technology investments.”
Josefowicz
also added that the anonymity of the Internet helps level the playing field for
smaller carriers that might not have the resources to fully modernize. “On the
Internet, no one knows you are a $20 million carrier,” he said. “You’ve
got the same screen real estate to present yourself to an agent as the top five
insurers. So if you are a start-up carrier with good capabilities in a
particular niche market, if you are focused on distributor service and ease of
doing business, you have a real opportunity to erode share from some of the
large players. Large players who don’t invest in keeping their edge in ease of
doing business and in pricing competitiveness risk being leapfrogged by smaller
upstarts, or risk having their market share erode.”
However,
small and medium-sized carriers have to have key technologies in place to
compete with the larger carriers. “Portals are no longer a competitive
advantage,” Saccocia said. “They are a cost of doing business. You have to
be present with a Web site that enables ease of use. If you don’t have those
tools then you are not even in the game. So there are a lot of key structures
that have to be present today in order to survive as a small or medium-sized
carrier against a large global player that has a lot of resources.”
Saccocia
also added that for smaller niche, regional companies “this isn’t just about
technology.” “It is about the value you can provide, what you can provide to
the industry that is unique,” she said. “Technology plays an important role
as an enabler but if you don’t have the strategy, the plan and the path you
are not going to make it.”
Legacy Systems
Legacy systems were another
topic discussed by the panel. Many insurance companies are still struggling with
what to do with their old, outdated systems. In most cases companies cannot
effectively replace all of their legacy systems because it is cost prohibitive.
Panel moderator Denise Garth, vice president of membership and standards, ACORD,
asked the panel to comment on the idea that “40 years of IT investments have
hindered innovation” for insurance companies.
“It
is a very complex process,” said Saccocia. “There is no easy answer and
there is no one answer for all of the industry.” She said she is often asked
by insurance companies about what the trends are around legacy replacement and
what competitors are doing about them. “In some respects it really doesn’t
matter what your competitors are doing,” she said. “How does that affect
what it is that you are doing?” She explained that the focus needs to be on
the company’s own strategy. “Not everybody has 40 years of IT investment,”
she said. “There are those that have started far fresher and those that are
much further down the reengineering path. But there needs to be some strategic
direction.”
Stephen
Forte, senior research analyst, Gartner, agreed that innovation has certainly
been hindered by legacy systems. “If a company is getting into a situation
where they are spending 70-to-80 percent of IT budgets on maintaining legacy
systems and they have 15 percent or so to transform their business then there is
no way they are going to compete with the larger guys,” he said. As for the
right percentage to spend on IT maintenance, Forte said there are no magic
numbers. “It really depends on what your business strategy is. Certainly if
you’re spending more than 2/3 of your IT budget on maintenance you have to
think about why and you have to think about what the opportunity cost is that
you are missing out on. Most of the companies that we talk to are aspiring to a
50/50 or beating a 50/50 ratio between maintenance and new types of projects.”
Competitive Advantage
Josefowicz talked about what is
happening in the industry in terms of competitive advantage or as he called it,
“the technology foundations for advantage.” “Our perspective is that
advantage in the insurance sector is supported by two pillars—service and risk
management,” he said. “Service isn’t just customer service; it is service
to your agents, distributors, policyholders, business partners and internal
employees—anything that gives people information and transactional capability
to do what they need to do to interact with your product. Risk management is
everything else that insurers do—pricing, actuarial, claims, asset management,
reinsurance, everything that has to do with managing risk and money.”
According
to Josefowicz, those two pillars are supported by three foundations; the most
basic one is treating data as a strategic asset. By this he means that companies
need to understand that the insurance business is a data business and that
information only comes from having transparent accessible and high quality data
throughout your enterprise, whether it is operational data, customer data, or
risk data. “Straight through
processing is a term we resisted for a long time in the insurance sector because
it has such a specific meaning on the security side of no human touch,” he
said. “Most commercial lines insurers or high value life insurers do not like
the idea of no human touch. But that is not what we mean by straight through
processing; rather than try to popularize a new term we decided to go with this
one. But the caveat is what we mean is that information remains consistent and
electronic throughout the entire value chain; it never goes into a cul-de-sac.
It never leaves the electronic pathway. It maintains a consistent electronic
form and that supports the data quality and accessibility that is so important
to treating data as a strategic asset. It also supports frictionless
communication, reducing the cost of every transaction whether it is an agent
inquiring about their commission check or a policyholder inquiring about their
claims status.”
Saccocia
noted that to be competitive insurance companies need to be aware of the changes
that are happening in the marketplace. “We have to be in an environment where
we are providing services that are addressing the marketplace demand,”
Saccocia added. “The business of insurance isn’t just about the business of
insurance; it is completely influenced by the surroundings. The work force is
changing. We don’t hire people for data entry anymore. Demographics are
changing the way in which our customers are going to look for services from the
insurance carrier. Technology is changing how consumers interact with their
providers. You have to move from product-centric focus to service-centric focus,
where you are addressing services and the experience for the producer, the
customer and the employee.”
Saccocia pointed out the
changes that have occurred since she started working in the insurance industry.
“I used to type letters to clients when I started over 20 years ago in the
insurance industry,” she added. “I don’t type letters anymore; I’m
actually communicating in real-time with these customers. It completely changes
your customer service environment. We talk about this single customer focus, how
are you going to staff for someone who needs to address the life, annuity, and a
property question all at the same time? Are we really going to be ready to start
paying our service personnel upwards of $70,000 a year to service a
multi-product client, to be able to upsell and cross-sell and to actually
address the client’s needs as opposed to talking to them simply about the
products?”
Forte
agreed with Josefowicz that data is a strategic asset. “Data drives
underwriting and claims and all the functions within an insurance company, but
do insurers today really have a grasp on what their data is and how they can get
at it? Data is trapped in silos they have no idea how to take it and slice it
and dice it and use is for a competitive advantage.”
Saccocia
disagreed. “There clearly are insurers that are on the path,” she said.
“And there are some vendors that are very focused on data and they get it
too.”
“Our
last CIO survey showed more than half either had an enterprise data standard in
place or were working on one,” Josefowicz added. “And almost every single
respondent to our survey had some kind of enterprise data warehousing and
business intelligence initiative in progress. So even though they haven’t
achieved the nirvana in that area, they all are going towards it; some are going
faster than others.”
Top Initiatives and Operational Priorities
Garth asked the panel to
comment on the top initiatives and operational priorities for the industry.
Josefowicz said that Celent’s
research shows that distribution and e-business are among the top initiatives
for 2006 among insurers. He said many carriers are focused on ease of doing
business, making distribution faster and easier while also reducing costs.
“The Internet has leveled the playing field to some degree in terms of
distributor communication,” he said. “Top initiatives folks are really
focused on how they can make life easier for their distributors and how they can
let distributors do business with their company easier and faster and with less
cost to them than our competitors. It is very difficult to innovate in a
sustainable way against your three closest peers on price, product and
commission but in terms of ease of doing business that is all about execution
and that is an open race.”
Saccocia
said that distribution needs to be personalized for different customer
audiences. “We have a polarized customer base—those over the age of 50 and
those under the age of 50. Those over the age of 50 are going to transact
business very differently than those who were brought up on Game Boy.” She
said that companies need to be conscious of the way these different groups want
to transact business. “Older individuals tend to read the screen from left to
right and they read everything on the screen,” she noted. “The younger
generation reads everything all at once; they only want to find exactly what
they are looking for.” She said the challenge is personalizing that experience
for different types of customers. “They are two completely different
demographics; their needs are completely different and their focus is completely
different,” she said.
Josefowicz
added that another trend he has seen lately is “the focus on data mastery
which supports the shift towards treating data as a strategic asset.”
IT and Business Alignment
IT and business alignment is
continually a topic of interest for insurance companies. While some companies
have made significant strides in improving their IT and business alignment
others are still struggling with improving operations and communication between
the two.
“How
do we want our business to run?” Saccocia asked. “The employment landscape
is changing; demographics are changing and technology is changing. When are we
going to start changing the business model? When are we going to set up
enterprise services of those noncommoditized types of the business and focus on
the service-centricity that is necessary? You are going the wrong way if you are
starting in IT and moving towards the business architecture. You are going to
run into a lot of obstacles. We need to start with business architecture.”
Josefowicz
noted that advancements in technology allow insurers to “trim down the service
group to high-value people who are providing high-value services. Anywhere that
a human being is serving as an interface layer between my phone and the computer
screen at the carrier that person should be turned into a computer,” he said.
“But when I have a high value question, and the CSR is going to do something
besides just read the screen to me; at that point I want to talk to a person.”
Enterprise
Data Strategies
The panel also discussed
enterprise data strategies. For insurance companies, an enterprise data strategy
is a design for improving the way the organization leverages its data. Having an
enterprise data strategy allows the company to turn its data into information
which can produce measurable enhancements in business performance.
“In
terms of how companies are approaching enterprise data strategies there are a
couple of differ-ent areas,” Josefowicz said. “First, we see a lot of focus
around enterprise data standards in a lot of cases those are based on the ACORD
standard. There is nobody that I’ve talked to that has said that the ACORD
standard is 100 percent sufficient for what they need it to be for an enterprise
data standard. But even if it gets you 50 percent of the way there, that is a
lot of work you don’t have to do yourself. And it is a common starting ground
for your internal departments who are used to managing their own data
structures.
Enterprise
data warehousing is certainly something we continue to see especially with an
initial focus on a specific area like customer data or claims data. But we
continue to see insures maintaining a long-term vision. Long-term, many
companies plan to consolidate data across the enterprise.”
“You
do have to have customer focused data and you do have to consolidate it,”
Forte said. “Most insurers don’t understand how corrupt or bad the data is
until they actually go in and do a policy or claims replacement type system.
They go in there and find they have missing data fields or there are fields with
random characters filled in instead of data because no one had the information
at the time.”
Service Oriented
Architecture
Service Oriented Architecture (SOA)
is currently a popular topic in the insurance industry. However, there is still
some confusion and misunderstanding of SOA within the industry. There are some
real short-term opportunities for SOA, as well as long-term innovation
possibilities that can add real operational efficiencies to the business.
The
panel discussed SOA and tried to clear up some of the general misconceptions
that exist.
“We are seeing a lot of focus
on SOA and internal Web services,” Josefowicz said. He noted that companies
really need to “focus on solving the integration problem that the industry has
been dealing with for the last 20 years and trying to figure out how to get all
their different systems to communicate. How
do we avoid doing point-to-point integration to share transactional capability
and data between systems? So that is driving a lot of the interest in SOA.”
“SOA
is a concept,” added Saccocia. “SOA is governance; it enables you to have
forethought as to where you are going. Vendors are not SOA vendors; they support
and they provide services. SOA is an architectural strategy. You cannot go buy
SOA and not everybody is an SOA genius.”
“But
what has really changed to drive SOA now,” asked Forte. “SOA is a concept
that has been around since the mid-1980s. I think that most insurers feel like
this is a path that they want to go down but they are waiting to see if others
are successful at it first.”
Saccocia
disagreed; she said “many life insurance carriers and small insurance carriers
are on that path and are already working with SOA. There is a clear direction in
which this industry is moving. The technology is far more ready than it ever has
been and the standards are much further along than it ever has been. Change is
the only constant and change is here.”
Josefowicz
agreed with Saccocia. “When we did our CIO survey last year more than half of
respondents had services architecture life in some mission critical system. It
doesn’t mean they’ve reached an SOA nirvana and that is the only way that
they integrate systems in their infrastructure, but it is a mission critical
tool,” he said.
“There
was a lot of confusion about SOA and Web services early on because a lot of the
hype in the general business press and technology press about Web services was
about open business practices,” Josefowicz said. “Radically, on demand type
business models where different partners were going to be coming together and
coming apart in a very dynamic way which is not something that the insurance
industry really had a lot of appetite for, nor should it. There is one sentence
that is why SOA and Web services are important for the insurance industry. It is
open, faster, and cheaper.”
Saccocia
agreed with Josefowicz. “Three years ago business was really afraid of this
new acronym and what it actually meant,” she said. “They are less afraid
now. IT has been on this path doing components, creating new ways of integrating
their applications and their data and now there is means by which they can
educate the business on what that means. But you have to be clear; you have to
have your strategy and your plan. Otherwise, you are going to run into a
spaghetti mess. Your business needs to decide how you want to do business. There
is the opportunity now to actually do business in a really different way, in a
way that focuses on the services that you are providing that the products are a
component of that. You are very much focused on the customer, the producer and
the employee experience. Lowering your cost does not create a sustainable
advantage,” she added. “New products, new services, retaining customers and
growing up is a sustainable advantage.”
Advice for Carriers
Josefowicz offered some advice
for carriers. First, he said it is important to treat data as a strategic
asset—making sure that the quality and the transparency and accessibility is
there. He said it is also important to continue focusing on straight through
processing—letting data flow seamlessly through the organization. “Companies
need to think about how those things in every IT initiative that you undertake
reinforces your brand promise and reinforces your company’s strategy. If you
are a low-cost personal lines, commodity product your IT strategy is going to be
very different then if you are a high touch advisor network.”
Forte
added, “And it is also business and IT people understanding each others goals
and objectives when going on any sort of strategic project whether that be
replacement of full policy admin system or adding a distribution channel or
creating a new product.”
“The
business side needs to be clear about what they want to do how they want to
position their products, what demographics they want to be going after and how
they want to service those clients,” Saccocia said. “Technology is in a
completely different place today. It can really transform the way in which you
are executing and positioning yourself if the business is not clear and the
business does not provide the strategy. IT is continuing to be reactive and
tactical and they are not on a strategic path with you.
Business owns this, business needs to take responsibility. The point is
that business needs to articulate the strategy and then they can come together
in a path. That is where the concepts of SOA have enabled that conversation to
be something different and that is where we hope the business services
architecture will align and set up the structure for the application, the
information and the infrastructure.”
Advice for Vendors
“We have a lot of pervasive
very qualified vendors in the industry that are coming with advancements in
their applications,” Saccocia said. “Vendors are coming with services to
help carriers but there has to be a path to get from all this pervasive 40 years
of IT investment that the carrier is not only responsible for but also that you
as a vendor are responsible for because you provided it. All of our vendors
struggle with dropping off boxes verses really selling solutions. They need to
be engaged in that process.”
Josefowicz
added, “Understand where you are going to fit in your prospects architecture;
you are not going to have a green field. You are not going to take over
everything unless it is a brand new startup and you are the first system they
are buying. Understand how you are going to integrate and get a sense of that as
early as possible in the process. The second thing is to focus on communication
and messaging. It is no good to position yourself in what you think is the hot
category that the analysts are talking about and get to the sales meeting and
when people actually drill down on what you are offering it is one small
component of that. It is much better to under promise and over deliver then to
blow a lot of smoke. Just be honest; be as transparent as possible in your
marketing and your sells.”
“One
other key point for vendors is to understand what is going on in the vendor
marketplace and understand how carriers are viewing you,” Josefowicz said.
“Carriers have to understand not only your product but your strategic future.
Are you going to get bought? Are you going to be putting more R&D into this
product? You need to be able to address those concerns because those are on
everybody’s mind.”
The industry is changing.
Carriers have to keep up with the advancements in technology and the changes in
the marketplace. There is a chance of being left behind, not just from a carrier
perspective but from a vendor perspective as well.
NOTE: The 2007 ACORD LOMA
Insurance Systems Forum is scheduled for May 20-22 in
Orlando
,
FL
at the Walt Disney World Dolphin Resort.
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