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From Resource, August 2004
Copyright by LOMA
Systems
Forum Panel: Sharing Success
Legacy systems, business and IT alignment and Web services were just a few of
the topics insurance industry analysts discussed at the inaugural ACORD LOMA
Insurance Systems Forum. Analysts
used real-time audience response to engage and advise attendees.
By
Tammy J. McInturff
ACORD,
with its expertise in data standards, and LOMA, with its commitment to industry
education and information sharing, joined forces this year to provide one of the
industry’s largest and most comprehensive technology and business conferences.
The
first annual ACORD LOMA Insurance Systems Forum took place May 23-25 in
Las Vegas
,
NV
. With over 2,400 attendees, the united conference surpassed expectations.
One
of the many highlights of the conference was an interactive analyst panel, where
attendees used an interactive audience response system to drive the panel
discussion by responding in real-time to pressing industry questions and issues.
Once the votes were in, a group of industry analysts responded to the results.
Demographics
Responses to initial questions provided demographic information about the
audience. Fifty-two percent worked for insurers, 33 percent for solution
providers, nine percent for intermediaries and three percent each for reinsurers
or other firms. Initial responses also revealed that two-thirds of the audience
were in information technology, 12 percent in operations, two percent in
distribution and 19 percent in other roles.
Current
Issues
During
the panel discussion, moderated by Gregory A. Maciag, president and CEO, ACORD,
and Denise Garth, vice president, membership and development, ACORD, attendees
were asked to identify their most pressing business issue. Forty-two percent of
the ISF attendees responded that product delivery via the Web was the most
pressing business issue for their company; while 25 percent said customer
relationship management (CRM) was the most pressing, 19 percent identified
agency management, and seven percent each said risk selection and compliance
with Sarbanes-Oxley.
“I’m
not surprised to see product delivery up there leading the pack,” said Matthew
Josefowicz, manager, insurance practice, Celent Communications. “I think a lot
of insurers are still focused around issues with distribution and using the Web
for that, especially when it comes to managing the agent channel. So that is a
high priority. I am also not surprised to see customer relationship management
rank as a pressing issue, although I am a little surprised to see it all the way
up there at 25 percent. I think that may reflect some second tries at a number
of companies. A lot of first tries early on were hampered by poor scope
definition and poor business objective definition and I think now people are
trying again in a more focused way.”
Kimberly
Harris, research director, Gartner, Inc. was not surprised to see CRM rank as a
pressing issue. “CRM is such a broad term,” Harris explained, “It can
almost mean everything and the kitchen sink, depending on how an organization
defines it—based upon either a policy, customer, or even a supplier/partner
relationship. It is a little bit concerning that things like fraud detection and
risk selection are so low however. Given the world that we are in where we are
all trying to reduce our operational costs, which means looking at how we can
reduce leakage and losses, it is kind of startling that those are ranked so
low.”
BPM
or Redesign
Eighty-four
percent of attendees said their organization was undergoing some kind of
Business Process Management (BPM) or redesign, with almost half, 46 percent, of
the initiatives being driven by the CEO. For those initiatives that were not
being driven by the CEO, 23 percent responded that this business realignment was
being driven by the business line head, 12 percent the CIO and four percent the
CFO.
Deborah
Smallwood, practice leader, insurance at TowerGroup found the results to be
quite encouraging. “I think the results are really encouraging,” she said,
“because 85 percent of you are saying that business process management or
improvement is really important to the organization and it is encouraging to see
that it is really being driven at the CEO level or business line manager. If you
think about some of the challenges in the business—growth, profitability,
customer service, and operational efficiencies, now is the time to really take
advantage of a lot of the tools, technologies, standards and guidelines out
there and really go to it. There is a short window of opportunity coming out of
the hard market.”
“In
the business process management data that we collect we see a lot of companies
saying that they are looking at BPM philosophies but a lot of that is related
towards process visibility, not process reengineering and redesign,” Harris
said. “A lot of companies do not necessarily want to change their core
processes. They are looking at better ways to manage and support existing
processes. When companies ask us about process management I ask them, without
changing or evaluating the underlying process, is your process efficient and
working properly today? A lot of
times they will tell me ‘no.’ So
my next question is, if you have a broken process, why would you want to make it
go faster or augment it because all it is going to do is lead to the wrong
destination faster. I encourage you to not only look at management based
technologies, which will just help you manage the process that you already have,
but also look at redesigning your process. You are going to get ultimate return
on investment if you actually redesign, reevaluate and change the process to
make sure it is meeting those business goals.”
As
companies are evaluating their core processes many are also looking for trading
partners or outsourcing opportunities.
“Companies
are definitely trying to figure out which processes are core to them and which
ones can be more properly handed off to other partners,” Josefowicz said.
“We are starting to see companies shed ancillary units and begin focusing on
what they do best. I think that makes a lot of sense. Where we see business
process management really taking hold is around specific sub-processes, such as
claims or new business, rather than an overall look of how they do business. I
certainly applaud any company who is doing it on a strategic level, but I think
we see more tactical implementation in the marketplace now.”
Redesigning
Processes
When
asked to identify the top business process under redesign, 31 percent of
attendees said underwriting, 22 percent said service, 17 percent said
distribution management and 16 percent selected claims. The results support the
theory that companies are looking back to core business processes and business
fundamentals.
“I
think underwriting, service, claims and distribution management are areas where
companies really feel their competitive advantage derives, so these results
definitely reflect what we see in the marketplace,” said Josefowicz.
“We
hear a lot in the marketplace on how, particularly in underwriting, service and
claims, there is a refocus on the foundational applications that support those
processes,” said John Flynn, senior vice president, insurance information
strategies, META Group, Inc. “There is a very big shift going on around
looking at inherent applications technology and whether or not that technology
helps to administer things or helps to manage things.”
When
asked what will improve the underwriting process the most, 59 percent of
respondents said better data management, 16 percent said greater ability to
predict losses and 25 percent said a better understanding of the composition of
the book of business.
Smallwood
found the audience results interesting. “If you think about why we want to
improve the underwriting process it really goes back to profitability. Insurance
companies are really going back to their core roots and saying we have got to
make money on our insurance and they are focusing on underwriting. Better data
management not only helps the risk evaluation process, it also helps the
underwriting process.”
“I’m
not surprised to see better data management at almost 60 percent,” said
Josefowicz, “because better data management is really the key to having a
greater ability to predict losses and a better understanding of the book of
business, as well as hopefully a better ability to price accurately.”
Business
and IT
The
relationship between business and IT is always a hot topic with insurance
companies. A good working relationship can mean the difference between a
successful project and a disastrous one. Thirty-seven percent of the attendees
at the ISF said there is a good working relationship between business and IT at
their company, 27 percent said the relationship could be better and 23 percent
said it was occasionally tense. However, 70 percent said that the business and
IT alignment was better today than five years ago, with only 14 percent saying
it was worse.
“We
just completed a qualitative study on business and IT alignment,” Smallwood
said, “because we really believe that it is the most critical component for IT
to be successful. Although the majority of you feel that it could be better, we
are seeing some really positive trends in the industry. What we are seeing is
that the process, strategy, roles and responsibilities are getting further
defined. Once that is in place and we start to have momentum then as you work on
projects and collaborate with your business, over time you will start seeing
some of the positive trends that we are seeing.”
“Back
in the late ‘90s, there was a lot of crazy spending,” Josefowicz said. “It
was the CIO Rock Star period, where business gave IT an open checkbook. A lot
invested in ill-defined projects, which led to the CIO Doghouse period. That has
moderated. I think that what you see now is more of a close working
relationship, whether it is friendly or not. We are starting to see program
offices and IT steering committees really take a newly empowered roll. We are
also starting to see a lot of CEOs and CFOs serving directly on those
committees. So any IT decision that reaches a certain threshold, whether it is
half a million or a million dollars, is actually being signed off on by top
level chief executives; so that is certainly helping to keep things lined up.”
“I
am not surprised by these results,” said Harris. “I applaud the honesty of
the audience. We do see most companies seeing a great improvement. We have gone
through a lot of changes. So we are seeing most companies focus on improving the
relationship and cooperation between business and IT.”
Flynn
predicts relationships will improve further. “The client server world was
complex,” he said. “Now we have simpler technology, and the business side is
understanding it better, which will help.”
“We
need to be careful though,” added Smallwood. “In the 1990s we became very
technology driven. Then in the late ‘90s to early 2000 the business started to
pull back on budgets and it became business driven. We have to make sure that we
have the right balance and commitment on the business side and on the technology
side to get the true value. That is going to be key for all organizations moving
forward.”
Harris
agreed with Smallwood and pointed out that the audience was predominately from
the technology side of the company. “I wonder if we asked our business what
the relationship was like between business and IT if they would give us the same
answer. The business counterparts may not consider it as much of a priority to
have business and IT alignment as we do in technology,” Harris said.
Sixty-one
percent of the audience said their corporate CIO reported to the CEO, while 21
percent said the CIO reported to the COO/President and only one percent said
that the CIO reported to the LOB head. The panel was surprised and encouraged by
the results.
“I’m
thrilled to see those results,” said Smallwood. “At the end of the day the
CIO needs to have a seat at the executive table. They need to be part of the
leadership team with the business.”
Strategy
Data
is one of the most important, if not the most important, assets that an
insurance company has. When asked if their organization has a data/information
enterprise strategy, 59 percent of the audience said yes while 41 percent said
no.
“It
is really shocking for me as we look at the number of companies who tell us
about their data strategy, most of them lack a formal strategy,” said Harris.
“We find very few companies who have a documented strategy of how they are
going to take corporate data, get it out of the silos, turn it into business
intelligence and leverage it across the enterprise. So, I find that 59 percent
is quite high and almost unexpected.”
Agreeing
with Harris, Josefowicz said, “Many companies may have a declared strategy,
but once it actually filters down to what is going on in the IT infrastructure,
it is only a very few forward looking companies that really have started to let
that enterprise strategy affect what happens on the ground.”
“I
was disappointed to see that only 59 percent have a data enterprise strategy. I
think it is pretty discouraging,” Flynn added.
“I
think that maybe the reason why companies are not acknowledging a data strategy
is because they have a lot of wounds from the early ‘90s, when we had a lot of
false starts and really disastrous projects with warehouses. I would hope that
those companies are all looking, because we all agree that data is the most
critical asset for insurance companies. It is going to be the differentiator
from a competitive advantage,” Smallwood said.
Competitive
Advantage
Seventy-three
percent of attendees said that they did not think that their organization was
doing an adequate job of managing and using data for competitive advantage.
“There
are cob webs of data,” Smallwood said. “I think it is an overwhelming task,
if you think about all the program interfaces, data stores and the false start
on warehouses. It is a huge challenge.”
Harris
noted a difference between raw data and useful information. “Maybe we are not
being successful because we don’t have an information strategy, we have a data
strategy,” she said.
Josefowicz
was not surprised that only 27 percent of the audience believe their
organization is adequately managing data for competitive advantage. “I think
that is absolutely typical of what we see in the industry,” he said. “I
think that is one of the reasons that it is such a large focus is because
insurers have woken up and realized that it is a shortcoming. It is something
that they need to address strategically. There were a lot of disastrous data
warehouse initiatives and I think it was along the same reasons that there were
disastrous CRM initiatives. It does not necessarily have to do with a
shortcoming on the technology, in fact the technology has matured quite well and
there are a lot of companies that are having success with it. In a lot of cases
it has to do with the way those projects were planned and implemented and the
lack of clearly defined business benefits, sponsors or a clear partnership
between IT and those initiatives. You
really do need to have a couple of concrete business goals to guide the project
otherwise it ends up too open-ended and it never delivers any business value.”
When
asked what their companies were doing to support their data and information
strategies, the audience response was scattered across the board. Twenty-nine
percent said new data warehousing or management solutions, 17 percent said new
analytical or data mining tools, 15 percent said packaged solutions that have
more robust data mining functionality, 10 percent said enterprise corporate
performance management solutions and 29 percent selected other.
“We
often say at TowerGroup that there are no trends in the industry, each company
is unique and has its own set of problems,” Smallwood said. “As analysts we
try to talk about strategies and trends but when you look at each individual
company, you’ve got your own set of legacy systems and data problems so I can
see why this could be split evenly across the board.”
Sarbanes-Oxley
Are
insurance companies concerned enough about Sarbanes-Oxley?
Data
is absolutely critical from a reporting standpoint for Sarbanes-Oxley. So it is
somewhat concerning that many companies still do not have a data strategy. When
asked his opinion on companies lacking data strategies in light of
Sarbanes-Oxley, Flynn said, “Well there are two different things going on.
There is the rush to be compliant and then there is the idea that after they
become compliant, they will sit back and really look at what they did and see
how they can fix it. So, first there is a need to just get there. So, I’m not
so concerned that companies know they have a looming deadline; they have to deal
with it. We hear from a lot of clients that they are recognizing that there is
an opportunity to go back and look at the underlying process and how they
contribute to the data. This practice is not untypical of the industry and I’m
not so sure it is the wrong way to do it either.”
“We
find that many companies are saying that Sarbanes-Oxley is a key concern but
technologically they are not necessarily investing in the appropriate ways to be
compliant to new regulations,” Harris said. “So to a certain degree these
are a scattering of different people with different strategies of what
compliance means. It can be confusing looking at the vendor market. There are
different types of vendors everywhere from data warehousing to the application
vendors and they all have a compliance or a Sarbanes-Oxley solution. And they
are all doing something that is radically different. So I think part of the data
you are seeing is just a lack of clarity of what technologically it means to be
compliant, as well as a lack of definition in the vendor market as to what
technologies are out there available to buy,” Harris said.
According
to the ISF audience 49 percent said difficulty aggregating data was the biggest
challenge in managing financial risk, while 43 percent said the biggest
challenge was having a clearly defined plan and eight percent said it was lack
of analytic software.
“I
think you are going to start to see the rating agencies pay more attention to IT
and IT infrastructure,” said Josefowicz. “Whether data standards will be a
component of that, I would imagine within three years they probably will. Or
they will be one component of an overall measurement.”
Technology
When
asked how they would characterize their firm when deploying IT, 31 percent of
respondents said late bloomer, another 31 percent said fast follower, 28 percent
said early adopter and ten percent selected fast mover. Most analysts agreed
this was a pretty typical characterization.
“I’m
not surprised by these results,” said Harris. “At Gartner we classify
companies into three categories, instead of four, and they are early adopters,
followers, who are mainstream, and laggards. Generally less than ten percent in
an industry would be considered early adopters. Somewhere between 25 or 30
percent are laggards, everyone else is in the mainstream. So if you combine the
early adopter and fast follower categories here and call the first movers the
early adopters it is quite matching what we have seen in every industry that we
cover vertically.”
The
majority of the audience, 68 percent, felt that the insurance industry’s use
of IT was behind compared to other financial service sectors, 18 percent thought
it was about the same and 13 percent said the insurance industry was in serious
trouble.
“It
is interesting that the participants feel they are behind,” Flynn said. “The
insurance industry has a tremendous advantage right now because other financial
industries have actually been cutting their spending for the last three years
consecutively. The insurance industry budgets have been consistently increasing
at about three to five percent. Granted they are not the numbers everybody would
love, like ten or twelve percent but at least they are positive. That is a
tremendous advantage; there are great things in consistency and the industry is
very consistent about a lot of things that it does. So I think there is a
tremendous opportunity in the next 12 to 24 months to really seize the
opportunity with Web services.”
“We
did a big study across Gartner looking at different industries to figure out who
is doing it right and who is doing it wrong,” Harris said. “When I came to
the table, as the insurance representative, they said what does insurance have
to give to this, you are behind in everything. I think as an industry, we hear
that we are slow. But the point is we weren’t slow 30 or 40 years ago when
technology came and all these mainframe systems, which are now our legacy
systems, were new and hot in the market. We were some of the earlier adopters
for technology. But it made us invest so much that we have been slow to do other
technology options, because we’ve got this legacy system to continually
maintain which hampers us from moving forward. But there were a lot of things
that insurance was leading in when we talked about it as a group—Web services
and ACORD XML are a couple of examples. I would say that we are not behind.
There are certain things, particularly from a back office processing
perspective, where we are challenged for new technology investments, but we have
a lot to be very proud of.”
“On
the flip-side, the banks have been buying software for years. So they don’t
have the legacy problems that the insurance industry does,” said Small-wood.
“They have been very aggressive in their use of technology and really
understanding the capabilities of technology. So it is hard to compare all three
industries together it is like different kinds of fruits. Insurers really need
to understand, especially on the distribution channels, what they are going up
against.”
Josefowicz
agreed with Smallwood saying, “Not to say that we shouldn’t feel good about
30 or 40 years ago, but the people who understand these legacy systems are
either retired or dead. As an industry we need to be able to compete with the
rest of the financial services industries, especially around distribution.”
Flynn
added, “If you think about this industry, it has gotten more return out of a
30 or 40 year investment than probably any other industry. Why is that such a
bad thing? Granted you have to
extend that technology and reinvent it, but I think as an industry it gets more
bang out of its technology buck than most.”
Fifty-four
percent of attendees said they viewed technology in their business as a
strategic business solution, 28 percent said they viewed it as a competitive
advantage and 16 percent said it was a cost of doing business.
“It
is all about business and IT alignment leveraging technology and I think that is
a really positive trend,” said Smallwood responding to the results.
Legacy
Systems
Thirty
percent of the ISF audience said legacy systems was the greatest technology
hurdle their organization is facing, 26 percent said budget and resources, 22
percent said corporate culture, and 13 percent said data integration.
Thirty-four percent of the audience said their legacy systems were between 20 to
30 years old, 20 percent said their systems were over 30 years old.
“It
is really important for companies to have legacy systems,” said Smallwood.
“So you have a legacy system that might be over 30 years old, if it is
performing, has feature functions and there are no technology issues, you can
either surround it, build interfaces or have shared components. There is nothing
wrong with that. It is really important for companies to look at their overall
legacy system and then make decisions from them.”
Almost
half of the audience, 43 percent, said their organization’s approach to the
legacy system was to replace it, 27 percent said it was to wrap it and 25
percent said its approach was to build shareable components.
“This
is very consistent with all the activity that we see,” said Flynn responding
to the results. “Either replacing with or renovating the existing application
with common off the shelf applications that are very industry specific.”
Responding
to the results, Josefowicz said, “I would guess that the replace number
includes component by component replacement as opposed to pure rip and replace.
True replacement would be a much smaller percentage, like 15 percent while the
rest of it is probably component by component. I know a lot of companies that
are proud of their legacy systems and they say they are not causing them any
problems and in a lot of cases that may be true.”
“I
would pretty much guarantee that a lot of the replacements are either mid-market
smaller-end providers or a smaller unit of a large company. The big legacy
systems are probably going to be a mixture of building shareable components and
wrapping verses the replacement and when you see replacement at large it is
going to be that one best of breed component rather than a whole system
replacement,” Harris added.
Web
Services
When
asked if they believe that the technology has reached a level of maturity that
allows for the proliferation of Web services, 65 percent replied yes, as opposed
to 35 percent who replied no.
Josefowicz
said, “It is a question of what kind of Web services. The technology of Web
services themselves and the technology of the various wrappers and translators
certainly are enabling companies to build at least early steps toward service
oriented architectures even if they are not building an internal directory or
broker system. So they have got essentially hard coded one to one Web services
with reusable interfaces as opposed to a UDDI structure and things like that.”
“A
lot of the Web services data that you see out there is over inflated because of
a lack of understanding the definition of Web services. A lot of people say they
have a Web service and it is using an Internet site, HTML or XML, but it is not
using UDDI,” said Harris.
When
asked about the ratio of resource allocation between maintenance vs. new
deployment, 49 percent of respondents said new development was greater than
maintenance, while 41 percent said maintenance was greater and ten percent said
they were equal.
Seventy-seven
percent of the audience said that emerging technologies have changed the
equation for new business practices and altered the cost structure. Flynn who
was not surprised by this number said, “You know we are going to see cost go
down in a lot of ways. Costs to develop IT components are going to go down. But
demand is not going away, so you don’t see the elimination of costs. In fact
you see demand going up so you expect more for your buck.”
Outsourcing
Fifty-eight
percent of the audience reported that they did not have a comprehensive sourcing
strategy, yet 64 percent said they did currently outsource.
“We
see very high rates of outsourcing and very high growth in the number of
outsourcing contracts a company will have,” said Harris. “If you compare the
64 percent who outsource, compared to the previous number of 42 percent that
have a sourcing strategy, you can see that a lot of companies are outsourcing
without any type of corporate vision. In our studies we ask companies the main
reasons why they are outsourcing in life, health, and property and casualty the
most common answers are lack of staff, lack of time, it is cheaper, or we
don’t have the resources with the skill sets. We have seven or eight questions
and the one that is always ranked as the least important is the corporate
strategy on sourcing. So it just tells us that most of the outsourcing that we
are doing is very tactical. You need to know why you are outsourcing, and you
should only be outsourcing those things that are not part of your core
competencies. It is quite alarming if you match action rates verse strategy
rates.”
Smallwood
agreed with Harris saying, “I find it somewhat troubling because you really
need to have a sourcing strategy. You need to understand why you are doing it
and how you are going to do it. It is tactical outsourcing and what happens in
cases like that if you don’t have the right executive sponsorship both from
the business side and the IT side and you don’t put the top people on it, you
are running a risk for failure,” she said.
“You
have to have a goal,” Flynn added.
Distribution
Most
of the companies in attendance reported using multiple distribution channels.
Specifically, 79 percent of the audience reported having multiple distribution
channels, 84 percent reported using independent agents and brokers, 51 percent
use captive agents, 65 percent use brokers/dealers and 46 percent use banks.
“Right
now distribution costs are extremely high in the insurance industry. A lot of it
is their inefficient operation and their use of technology. At TowerGroup we
talk about really creating a distribution model where you either have a high use
of technology or you have a high touch model. It is really important for
insurers to understand their customer base and determine which is the best
fit—high-technology which is via a Web portal or high-touch, featuring
personal meetings with agents,” said Smallwood.
“I
think right now it is becoming more complex,” said Harris. “You’ve got
more moving parts to control, moving parts particularly in the independent world
where you have little to no control over what processes they use to sell your
products and more importantly what technologies they use. It is making a lot of
insurers create almost two strategies—one for proprietary channels and one for
independent channels. IT is very challenging with that approach, to manage two
different business operations with two different philosophies of sales.”
Josefowicz
warned participants to remember that high-touch distribution may still require
high-tech investment. “I would caution people against thinking that the
high-touch channels don’t require a high-tech investment,” he said. “It
may not be at point of sale in terms of Web interface. But in terms of
supporting those independent channels with powerful technology tools, using
technology to unite data and improve processes internally is the way to capture
more wallet share from those independent channels. One of the results of a
survey we recently did of 1600 independent agents showed that high service
levels, fast turnaround and technology were the key differentiators in what
agents considered their favorite carrier to work with. So I would caution
against under-investment in technology for the high-touch channels, because it
is equally important.”
Seventy-eight
percent of the audience said that the best approach to overcome data differences
with trading partners was to adopt industry data standards.
Over
half of the audience 57 percent said their company has a CRM system or active
CRM project, with 45 percent saying that customer retention was the higher
priority for CRM, and 18 percent said distribution channel effectiveness was a
higher priority.
Smallwood
said, “It is really encouraging to see the numbers so high for CRM because it
is really going to streamline and it is going to be a solution for the
front-end.”
Advice
Analysts
left audience members with parting advice and encouragement. Harris said,
“Don’t think about technology in isolation. The largest returns on
investment are at companies that don’t buy technology just for tech-nology’s
sake, but make sure it’s tightly aligned to the business and underlying
processes—almost a three-dimensional plan. As you invest in new technology,
make sure it has business outcome potential.”
Josefowicz
added, “Key to successful IT projects is for business and IT to work together,
speak the same language, and have the same success metrics. Using the ROI
analysis process as a way to bring business and IT together, instead of for
project justification, can be very powerful. It teaches IT folks to put things
in pure business terms, and it gives business people a better understanding of
the real costs and processes behind the technology.”
According
to Flynn, “There’s a tremendous opportunity for IT people to play a greater
role in business process improvement. No other group in the company has a better
view of the whole process within an organization.”
Smallwood
said. “It is an exciting time to be part of insurance and technology. The
technology is ready for us. We are getting better synergy between business and
IT and the budgets are actually starting to open up. Now is the time; seize this
opportunity. Leverage technology to get your company a competitive advantage.”
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