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From Resource,
August 2005
Copyright by LOMA
Analysts
Debate Technology Challenges
At
the ACORD LOMA Insurance Systems Forum, leading analysts debated the challenges,
opportunities and trends currently facing the insurance industry.
By
Tammy J. McInturff
ACORD,
with its expertise in data standards, and LOMA, with its commitment to industry
education and information sharing, joined forces again this year to provide one
of the industry’s largest and most comprehensive technology and business
conferences. The second annual ACORD LOMA Insurance System Forum took place May
22-24 in
Orlando
,
FL.
Insurance companies are facing
a number of challenges today. Terrorism, hackers, viruses, regulations and
economic instability are just a few of the issues that insurers are tackling.
Today’s business climate is fraught with uncertainty, and in every area of the
organization IT is being asked to do more to effectively cope with these
challenges.
One of the many highlights of
the conference was an industry analyst debate, where leading analysts debated
the challenges, opportunities and trends currently facing the insurance and
financial services industries. The discussion focused on four key
areas—strategy, process, technology, and leadership and culture.
Strategy & Vision
In order to grow and
transform, insurance companies must focus on profitability and growth,
operational efficiencies and effectiveness, customer enablement and distribution
enablement. The analysts discussed the key business objectives that are helping
to drive shareholder value.
“We are seeing a lot of focus
around profitable growth, rather than growth for its own sake,” said Matthew
Josefowicz, manager, insurance practice, Celent Communications. “If you look
at the last few years, the industry has been in a very high growth state. In the
most recent couple of years, we have pulled back very significantly. From an IT
point of view there was a lot of focus on cost containment and really anything
that didn’t have a cost takeout ROI wasn’t getting approved. These days we
are seeing a little bit more openness in the checkbook, as long as there are
valid strategic and tactical reasons to support the investment.”
Kimberly Harris-Ferrante, vice
president and research director, Gartner, Inc., said that the CIOs and CEOs
often have different IT goals. “Gartner does several studies each year with
CIOs, and we also do joint studies with Forbes talking to CEOs,” she said.
“The interesting part is, as an industry, we are doing a lot of lip service to
what is very popular—growing revenue, increasing our market share, retracting
and retaining our customers’. But ironically when you talk to the CIO and ask
where they are investing their money and what their issues are, we are finding
that the CIO priorities aren’t in line with the CEO objectives. The CIOs tell
us that their major issues are privacy, security breaches, and how to deal with
business disruption. When you ask the CIOs where things like retaining
customers, customer data, and information management are on their list of
priorities, we find these things are much lower compared with all the
operational focus points which are often their top six priorities.”
The problem today, she said, is that, “We can talk about great deeds,
looking at new customers and growing market share, but the reality is we are
spending more time on operations. That is where our technology money and focus
are going continually.”
IT Spending
The analysts discussed how
insurance companies are currently spending their IT dollars as well as where
they should be focusing their investments. “When you look at a typical IT
budget, a big chunk is dedicated to just keeping the lights on,” said Todd
Eyler, vice president, financial strategies, Gartner, Inc. According to Eyler,
companies are trying to find ways to realign the percentage of spending for
maintenance with investments in new projects that can grow the business in the
future.
“We have found that on
average about 41 percent of a company’s IT budget goes to core processing,”
said Harris-Ferrante. “Then 19 percent of their IT dollars is going to channel
management and everything else is below 19 percent. So as we talk about growing
our business, the channel management is going to be core way we grow
distribution; but it definitely is one of the areas that we are not seeing the
most on. When we ask companies for projections about whether these investments
will increase, the greatest growth is still in core processing.”
Josefowicz noted that some
companies need to invest more in their back office systems. “It doesn’t
matter how good your distribution systems and your front end systems are if your
back end systems can’t keep up; and that is the situation a lot of insurers
are in,” he said.
Eyler agreed that more
attention needs to be paid to the back office. “I would say the smartest
companies, the companies that I think are going to be leaders in five or ten
years, are really focusing on aggressively consolidating the back office. And
the way they are selling these projects is unlike the way they have been sold in
the past. They are not selling those projects based on lowering maintenance
costs for legacy systems. They are really selling those projects as a part of
overall operational efficiency oriented kinds of initiatives that get the
attention of senior business people and get them to understand why it is really
necessary to do the consolidations. Getting way beyond just the maintenance cost
piece of it and through those efforts really freeing up IT dollars, and saving
operational expenses to really invest in the front office,” he said.
“The bottom line is the
company has to know how they want the business to operate and where they want
that business to be done,” said Cynthia Saccocia, research director,
insurance, TowerGroup. “Decoupling the operations and centralizing functions
makes sense. I think we are extremely optimistic about the insurance industry at
this point. We really feel that there is some substantial change. Companies are
starting to move into these large mega-global firms and regional niche specialty
players. There is not going to be a lot of room in the middle between now and
the next five years. Now, mutual insurers have to respond much more like a
publicly traded company than in the past. Regulations are demanding it. If you
can’t get a view into your financials across your organization easily at any
given time during a day, or a week, you know you’ve got some problems.”
Process Inefficiencies
A member of the audience
asked why the insurance industry seems to have a high tolerance for
inefficiencies and double data entry.
Harris-Ferrante said that
traditionally the insurance industry has had some trouble with inefficiencies
and double data entry. “There have been a lot of companies who have thought
that if it wasn’t broken then don’t worry about fixing it,” she said.
“Also, I think we have had bigger issues to deal with, particularly talking
about discretionary technology spending. We have heard a lot of companies
complaining in the last year or so when the new regulations came out around
compliant reporting etc., that they had to decrease their discretionary
technology spending. They spent the money that they were going to spend on more
core activities on regulatory reporting compliance initiatives. So we have
ignored it to a certain degree because we had bigger, more important issues. But
I do see the tide starting to change. I hear people thinking more strategically.
With our customers their questions are changing. They are coming at a higher
level of strategy development. We used to talk about the big companies who were
thinking more innovatively than everybody else. What I am seeing now is really
three different types of companies. You’ve got your super-large companies who
are definitely thinking very strategically. The problem is some of these
companies are very large; so it takes them a long time to get their act together
to move because they’re dealing with political internal battles. Then you’ve
got your second group who are smaller, maybe large regional companies for
example, who are more nimble. Once the management says lets do something, they
can move a lot faster. They have less people to get on board; so we are seeing
that group actually catching up with some of the strategies that we normally
wouldn’t have seen out of them. Then of course the group behind that tends to
still not have the budget; so some those strategies are out of their reach
today. But it is leading to a very interesting market potential, particularly
for that group who in the past has tried to compete with the large companies.”
Saccocia said, “Some CIOs are
starting to incorporate words in their dialogue similar to those heard in the
manufacturing industry. They are talking about moving data and information on
the conveyor belt and moving away from double-data entry. They feel pretty
strongly that the way in which to get away from double data entry and separate
silos is going to be through process.”
Harris-Ferrante added that
part of the reason companies are still dealing with duplicate data entry is
because, “application systems and developments of standards like those from ACORD have all been works in progress
in the last few years. “We are just at a point where all this is really coming
together very nicely, which gives us an opportunity to put the systems together,
to have the data flow seamlessly through the organization in a common
standardized format. We are just now at a turning point where we can actually
start tackling this head on, verses trying to tackle bits and pieces that really
may not have even provided great return on investment for us.”
Shared Services
There is a lot of talk in
the industry about shared service centers but some companies are finding that it
takes years to implement and is ultimately not the success they had hoped for.
Analysts were asked for their opinion on this problem.
Harris-Ferrante said that
shared service centers can work. “I think within your own companies when you
are doing shared services, you have a lot more power and a lot more control if
the management pushes it down. You’ve got to have everyone in agreement.
Everyone needs to be on the same page when it comes to what the accomplishments
are going to be, who is going to run it, what the priorities are and how
everything is going to be allocated—even down to how you are going to pay for
this. There is one company that we work with who was actually using this as an
external service provider relationship per say, where they are paying these
shared services to run particular operations for them. So I think you’ve got
to have service level agreements, almost the same type of mentality you would if
this was an external services provider but just coming within an internal
services group.”
Josefowicz said it is difficult
to make an internal IT group really competitive with external providers. “It
is in very few cases has that actually been successful in terms of making the IT
group really competitive with external providers,” he said. “You can take an
internal IT group, give it a different reporting structure and maybe a different
corporate name, but it still has familiarity with the systems that are in house.
It still has the history. It still has the personal relationships with people in
house. It may be administratively different and separate, but it is still really
an internal group. So I think there are various financial reasons why that is a
good strategy or not. But in terms of thinking about whether that is really
going to effect how we source IT projects, I don’t think I’ve seen that be
successful yet. I think one of the issues around shared services is who is going
to pay for what and how is that going to work. At the end of the day, it really
comes down to budgets and compensation and how are you rewarding people for
doing what they are doing. If you are just taxing them, then there is going to
be resentment. And if you are just taxing them without having it show up in
their evaluations at the end of the year and having it flow down into their
bonuses, then it is going to be arbitrary. It is going to be disconnected and it
is not going to get any buy in.”
Harris-Ferrante stressed the
importance of load balancing. “One of the most unsuccessful projects we saw
was someone who tried to do shared services. They were moving their processes to
one division; but instead of taking tasks off the plate of that division, from
what they were doing day to day, they left their day to day operations and moved
the processing for all other locations there. So not surprisingly, the whole
area buckled because they had too much processing to do and not enough
processing power or people to do this process. So you also have to think about
load balancing. If you add more stuff to someone’s job role you have to take
something off. You just can’t keep adding on top of it.”
Saccocia agreed. “You can’t
be dumping junk on somebody else,” she said. “And that is basically what is
going on. Companies have a problem or process that is not working so they decide
to do shared services and then they end up dumping a whole new or different
process on a very taxed situation. The strategy starts way back before you
decided to go to shared services. You have to ask if what you have is shareable
and in good order in a way in which somebody can pick it up and drive some
additional efficiencies out of it. You have to have the data, the process, and
the content fairly well aligned for whatever process or service or whatever the
design model is. Projects fail all the time and the primary reasons that they
fail always come back to poor strategy, poor compensation, poor organization,
wasn’t well resourced, or didn’t have the appropriate time line.”
IT Strategies
Josefowicz discussed
Celent’s four A rating for technology. These are four key principals in
designing IT strategies that filter all the way down to a tactical level.
According to Josefowicz, the four A’s are alignment, agility, accessibility
and affordability. “Alignment is business/IT alignment,” he said.
“Companies need to look at how a project is going to serve the business goals
of the company both at a strategic and a tactical level and that is much more
complex then it sounds. It really requires a very high level of communication on
both sides up and down the chain of command—from the executive suite with the
CEO and the CIO and all the way down to the VP of claims and a VP of claims
technology and down to business analyst and project managers on both sides.
There has to be that kind of communication so that the business understands what
value IT can deliver and IT understands what the impact is of the various
decisions that they are going to make. The second key principle is agility; it
is ability of systems to change. The ability of business structures that are put
in place to be adaptable, to adopt new business processes, to add new products
and new channels, to be able to change workflows. This is a key concept in
designing any new systems. It is not just about designing a system that is going
to solve today’s problem, but also be able to adapt and to solve tomorrow’s
problems.”
According to Josefowicz,
accessibility is really accessibility between different areas, one is other
internal systems. “Your policy system has to talk to your billing system, CRM
system and claims system and has to be able to exchange data,” he said.
“Your internal systems need to be able to communicate with external
systems—with your reinsurers, requirements providers and distributors. Then
fourth A is affordability, which speaks for itself. But think about
affordability not just in terms of what is the specific price point of the
system but what kind of maintenance is going to apply; what kind of training is
going to apply; what kind of flexibility is there in the contract if it is with
an external provider; and how much is it going to cost for your internal group
to improve it.”
Business Process
Management
Agility is not a term that
a lot of people would normally associate with insurance companies. The analysts
discussed the kind of changes or transformation that will have to occur in order
for companies to embrace these four key principles. Today there is a lot of talk
in the industry about business process management, which some believe is just
the revival of business process reengineering.
“We are seeing a lot of
companies saying we shouldn’t just buy technology for technologies sake; we
need to look at the process that goes behind the technology,” said Harris-Ferrante.
“Most of us realize that our processes aren’t quite the most direct or
effective. Yet a lot of these projects are related to speeding up the process to
make it go faster. Well if you are not going in the right direction or to the
right outcome do you really what to go there faster than you are today?
Companies need to be leveraging and analyzing their data. The fact is
insurance companies have a lot of data, but they are not doing a lot with it. A
lot of companies say ‘I’m very data rich but I’m information poor.’
Many companies haven’t yet figured out how to aggregate the data to
make sure it is clean and begin to model this data. We are also seeing a lot of
focus on product development. Companies are trying to figure out how to get
products to market faster, how to take their system and make it more agile so
they can respond to these industry needs. They are looking at
the process of how they deal with their distributors, looking at
traditional channels—independent, captive, and direct channels and looking for
new partners.”
“I would disagree that
business process management is just business process reengineering
reinvented,” said Eyler. “Business process reengineering projects were
almost all geared toward cutting people and not necessarily improving the
process. With business process management, we are looking not only at the people
part of the process but really involving systems in the mix. We are providing
viability across all the interactions of people in the systems, with the end
state being true process and better outcomes in real process improvement, not
just cutting people.”
“One of the most interesting
things about implementing BPM solutions is typically they are brought in for one
particular process, one particular area of the business,” said Josefowicz.
“But the first step in these projects is to map a process. We see it again and
again, you get twenty different stakeholders in a process together in a
conference room to map out the process and ten or twelve of them say, ‘oh is
that what we do,’ when they see the process mapped out. The lack process
visibility overall by people in the process as well as by IT, and in a lot of
cases by management, really inhibits the capability to find improvements. People
don’t know what to do better because they don’t know what they are doing
now. So a lot of the effect that we are seeing between BPM tools and BPM driven
business practices out in the market is creating this process visibility and
creating the opportunity to find marginal improvements. At the end of the day
most of gains in the insurance industry and most of the gains that are to be had
are from marginal improvements.”
“Most companies focus way too
much on the ‘as is’ and not enough on the ‘to be.’ The ‘as is’ is
brutal,” said Eyler. “Companies that have been successful with transforming
underwriting or claims have had a lot of strong leadership. Leadership that
would go into a room, take a white board and say, ‘lets assume for a moment
that we’ve never even had a claims process and just reinvent a process that we
think is very efficient,’ and then added the results to the ‘as is’
instead of starting with the ‘as is’ first.”
Transformation
Some believe that deep down
the industry is really not interested in transformation. The analysts explained
how insurance companies are dealing with transformation issues.
“Transformation is absolutely
a leadership and a cultural issue,” said Josefowicz. “Transformation implies
doing everything different. I think that a lot of processes need to be
transformed and a lot of thinking about what is important needs to be
transformed. A lot of internal communication needs to be transformed; but in
terms of transforming enterprises or transforming businesses I don’t see that
on anybody’s agenda. When it is on somebody’s agenda it tends to be, not in
all cases, but it tends to be a buzz word and a flavor of the month. No
specifics are communicated about it and everybody knows if they keep their head
down for six months it will go away.”
Harris-Ferrante explained that
companies are really more concerned with innovation and modernization than
transformation. “We are not transforming from an insurance company today to
one tomorrow that looks completely different—that wouldn’t even look like an
insurance company by today’s definition,” she said. “It is not that
radical. I think first of all we need to innovate; which means we need to think
differently about how we do our business and what it means to be an insurance
company. Second, we need to modernize. Just because the company has been doing
business a certain way for 30 years, doesn’t necessarily mean it is the best
way to do it, particularly now in today’s environment with the regulatory
pressures the consumer demands. Consumers are changing we have to be up with the
times.”
Saccocia warned that insurance
companies do need to be thinking about transformation. “If companies are not
thinking about transformation, they are at risk of eventually running their
business out, because the competitors are going to attract the best
distributors. They are going to price their products much more effectively and
they are going to squeeze out the business. Companies need to become much more
efficient and effective organizations, so that they are delivering more
profitable results, writing better business and attracting the best premium. If
transformation is not on your mind it creates a real risk for your future
stability.”
Best Practices
Analysts talked about the
best practices they are seeing, both within the industry and outside the
industry in financial services, banking and securities.
“The things that I’ve seen
that are good in other industries that are beginning to come into the insurance
industry is using methodologies like lean manufacturing or six sigma,” said
Eyler. “The methodology is less important than the fact that you have a
methodology just to get the troops rallied, both in IT and business, around some
kind of a process and structure for the conversation. Then the most important
thing I think is missing is metrics.”
“One of the great
opportunities of best practices we are seeing is around sourcing,” said
Harris-Ferrante. “Sourcing to certain companies is seen as a negative because
there has been a lot of hype about the loss of control, concerns over
intellectual property preservation, as well as the offshore issues. We encourage
companies to consider outsourcing. Consider all the sourcing options you will
have for your project and use that for both tactical and strategic initiatives.
Tactically, we’ve seen most companies use it for staff augmentation, to get
projects done quicker when they don’t have enough time to respond to something
or to help with what they are considering noncore.
There are a lot of opportunities also in strategic sourcing where you can
find partners to help you with process improvement. An outsourcer who really
knows a lot about the insurance industry can come in and help you identify how
your process can be improved; help you modernize your technology infrastructure;
help you look at what systems are available and help you migrate to
new systems. Also, with business process outsourcing you can find a
partner who is a specialist in that specific area. So we see that happening a
lot in banking, as well as outside the financial services industry altogether.
We are big outsourcing users but we are not necessarily always using them as
strategic partners. I think we can look at some of our peers in other industries
to get some ideas.”
Legacy Systems
Legacy systems continue to
be a concern for many insurance companies. While some insurance companies are
taking action to surround or replace their legacy systems, others are currently
not taking any action. One audience member asked how do you address the reality
of a legacy system that works, yet doesn’t work well with other systems, and
doesn’t show a clear ROI for replacement.
Josefowicz said if the legacy
system doesn’t show a clear ROI case for replacing it then run with it.
However, he added, “if you look around the ROI analysis is probably not very
thorough. There is probably a lot of hidden costs and a lot of missed
opportunity that those legacy systems are causing, in terms of delaying product
innovation and time to market, delaying adding additional distribution channels
making it impossible to generate timely compliance reports and business reports.
The system may be requiring too much staff to keep them up and running. I think
in a lot of cases it really depends on the thoroughness of that ROI analysis. If
you’ve done a fairly thorough ROI analysis; your business is static and you
are comfortable in the market; your niche is growing; you don’t require any
new business processes to support your business growth I would say you are very
unusual. But if that is your case then it is fine you can run with it for a
while.”
“When you look at legacy
systems you have to look beyond return on investment,” Harris-Ferrante added.
“It is more than just an investment. The major question I ask companies when
they talk about legacy systems is, ‘is it meeting your business requirements
today, will it allow your business to go where it wants to go five years from
now?’ And generally we can talk
about ROI. We can talk about the cost of a new system or new functionality, but
the fact is most of these systems will not allow us to be what we want to be.
That is going to be the biggest risk for us.
The legacy system is going to be a huge problem for you if you can’t
respond to the business needs and you miss opportunities or have great risks
because you can’t comply with regulations because that legacy system won’t
allow you to have the audit and reporting capabilities. We need to be focusing
more on that than necessarily the IT return on investment.”
“You can’t have the people
who are running the legacy systems making decisions about whether or not you are
going to keep the legacy system,” Saccocia added. “You have to integrate
dialogue between the business and IT. IT has to be able to articulate to the
business why the legacy system needs to be replaced.”
Data Transparency & Regulations
Some companies now have
processes that are driven by the perception that regulators require them to
change a lot of their processes and steps. An
audience member asked how real is the regulatory must-have verses perception and
how much does regulatory view inhibit transformation?
“A lot of the regulatory
stuff I see today is less about controlling processes and steps and more about
controlling data transparency,” said Josefowicz. “It is more about accurate
reporting. It is more about live snapshots of the business and knowing what is
going on in your enterprise then doing step ‘a’ before you do step ‘b.’
There is certainly some of that, but most of it seems to be around data
quality and data transparency. What I think is interesting about all this fear
of compliance that is going on in the industry right now, is that when it gets
down to data quality and data transparency the regulators aren’t asking for
anything that you shouldn’t have already, to be able to run your business
effectively. If a regulator wants a break down of your business by ‘x’ or
‘y’ factors, I am guessing that somewhere in the organization there is
somebody who wants that breakdown too, for marketing purposes, for strategic
planning purposes, for operational efficiency purposes and they can’t get it.
It is not just the regulators who need timely access to the data that is locked
up disparate systems.”
Leadership
Analysts gave their
perspective as to the role that needs to be played by the senior level
executives both on the business side and the IT side to ensure alignment.
“If you look to other
industries like banking or brokerage some companies in these areas actually
force their executives to have an appreciation for technology,” said Eyler.
“They are forced to go offsite and be schooled in technology at a functional
level, so that they can have an intelligent conversation with the people in IT.
Having a greater appreciation for technology on the business side is very
important. The CIOs in this industry are very smart people but are often not
respected as peers by the other senior business people. The CIOs need to be more
aggressive and assertive in providing business value and getting respect of the
other senior level business people so they can have more of a partner kind of
approach. I think that is going to be challenging but I do see it happening.”
“I think the years of strict
focus on cost containment created an environment where there is a relative
amount of distrust,” Saccocia said. “This forced institutions to find ways
to just do things cheaper, whether that was just cutting people or cutting
applications. Today though we are making a turn; we are trying to move toward
differentiation and growth and without having the strategic plan in place we
can’t support that business. I strongly believe today that business lacks a
fundamental understanding of what really is possible. I don’t think they truly
appreciate what the technology enablers can do for them today.”
Josefowicz said, “It really
comes down to communication. The CIO needs a seat at the table. He or she needs
to be brought in to the business side. All the way up and down the chain people
have to be working together between business and IT counterparts. The IT people
need to understand what the business drivers are, which way the money goes, who
gets paid for doing what, and how the company makes money. The business people
need to understand what is possible when they ask for this new function or new
capability. They need to know what they are really asking for and why it is so
hard to get.”
“Business executives have to
clearly understand that technology makes them more successful,” Saccocia
added. “At the end of the day if they understand how to use technology to run
their business more effectively, I think they would spend more time trying to
get it.”
Recommendations for Future Success
Analysts left audience members with
some parting advice and tips for future success.
“First, companies need to
realistically access the legacy system,” said Harris-Ferrante. “Realize that
modernizing a billion things around it probably won’t keep you successful in
2010, particularly if you’ve got 20- or 30-year old systems. The reality is
you may be able to bandage them together at that point, but they are not going
to allow you to do your business requirements. Make sure you are adequately able
to support your business. Second, understand your customers. You have to
understand how customer needs are evolving, how they want to be interacted with
and what their needs are.”
Josefowicz added, “The two
biggest things are to understand your data and understand your processes. That
is where your competitive advantage is probably going to come from.”
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