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From Resource,
September 2005
Copyright by LOMA
CIOS Confidently Facing an Uncertain Future
Legacy Systems, regulatory demands and outsourcing were just a few of the
topics CIOs discussed at this year’s ACORD LOMA Insurance Systems Forum.
Attendees used an interactive audience response system to drive the panel
discussion.
By
Tammy J. McInturff
Insurance
companies today face more challenges than ever—globalization, information
transparency, regulatory demands, security, outsourcing and terrorism are just a
few of the pressing technology issues. 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 this year’s ACORD LOMA Insurance
Systems Forum was the interactive chief information officer (CIO) panel.
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 CIOs responded to the results.
Responses
to initial questions provided demographic information about the audience.
Sixty-one percent worked for insurers, 29 percent for solution providers, three
percent for intermediaries, two percent for reinsurers and four percent in other
roles.
Federated
IT Shops
During
the panel discussion, moderated by Gregory A. Maciag, president and CEO, ACORD
and Ann M. Purr, FLMI, CSP, PCS, second vice president, information technology
management, LOMA, attendees were asked if their company had a federated IT shop.
Sixty-four percent said they did not have a federated IT shop at their company,
with 36 percent responding that they did have multiple CIOs in their
organization.
Barbara
Koster, chief information officer, Prudential Financial, said that Prudential
does have a federated shop. “We have several business lines that we support;
they each have a CIO and I am the corporate CIO. I try to keep the balance
between handling the business needs and requirements and creating an
infrastructure for the company that will deliver across the businesses the
services that we can all share.”
Charles
G. McCaig, FLMI, CIO, Chubb, said that Chubb also has a federated IT shop. “We
run a federated IT both for the lines of business, which we have four in the US,
and then we have four international regionalized CIOs. It is the divisional or
regional CIOs who are responsible for seeing to it that the business unit or
region responds best to what- ever the competitive pressures are in that
particular marketplace or line of business. The corporate CIO is responsible for
ensuring technology standards and
enterprise needs are met. So basically the divisional CIO is responsible for
what specific business applications are done and the corporate CIO is responsible for seeing to it that those things are
done—technology standards and the enterprise needs factor on that. It is
basically a balancing act all the time.”
Business
and IT Alignment
When
asked to describe the relationship between IT and the business group at their
firm, 14 percent of the attendees said the relationship was excellent, 31
percent very good, 38 percent good, 12 percent not good, and five percent said
poor.
McCaig
said for Chubb the relationship between IT and the business group was at the
high end of very good and that going to a federated IT shop definitely played a
part in that. “When we went to a federated IT shop, it seemed to do two
things; one is the IT staff in each particular business unit certainly felt they
knew exactly who their customer was and who they were doing business with. The
business area all of a sudden took an ownership interest in IT and instead of an
‘us and them’ it became just an ‘us’ and that really made a difference
in terms of IT and business alignment.”
“Technology
is there to enable. and having a
close alignment with the business, understanding their requirements is critical
to success,” said Koster.
Forty-nine
percent of attendees were moderately confident that their firm can align IT and
business for differentiation and growth, with 36 percent saying they were very
confident in their firms’ ability to align business and IT and 15 percent
saying they were not very confident.
Koster
said that whether the company has a federated model or not, alignment with the
business is critical. “It is a must have,” she said. “Think about a
basketball team, a baseball team, or a hockey team for example. They can only
win when they are all aligned; when they all understand the plays and they are
executing together. A corporate team is no different; we need to be aligned. We
need to understand objectives and work them through together. We each have a
different position on the team, but it is the team at the end of the day that
wins. So in that sense, we are no different than any one of the sports teams out
there.”
IT Budget
Attendees
were asked a series of questions about their companies’ IT budgets, and
spending priorities. Fifty-four percent of attendees said that IT spending was
up at their company, 29 percent said it had remained flat and 17 percent said it
was down.
Koster
was surprised by the response. “I would love to know the companies that are
actually up in spending because most of us are either flat or down; at least
from what I’ve read,” she said.
McCaig
said Chubb has remained flat. “We have been flat since 2004 and we will
continue to be flat through 2006. In fact, that time line has been given to us
so that we understand all the actions that we need to take to make sure we make
that.” McCaig said that employee raises and vendor licensing fees also had to
be taken into consideration. He said, “Being flat in a sense really means you
are going to have less money after you get more efficient.”
Forty-eight
percent of attendees said their IT budget and resource management was strictly
about dollars and head count with 52 percent responding that it was not.
“For
us it is actually dollars,” said McCaig. “Although head count is such a big
part of the dollars it obviously comes down to headcount as well.”
When
asked if their budget process had become more collaborative, 64 percent of
attendees said yes, with 36 percent saying no.
Koster
said she wasn’t sure why 36 percent would not be collaborative in their budget
process. “I guess you would say that this 36 percent has a budget in their
hands and there is really no discussion. All you have to do is hit that budget.
It is certainly not the way that we need to do business. It really has to be
about the business priorities. It is bringing multiple pieces together business
priorities, innovation, technological obsolesce that often times force you into
having to do certain projects. Bringing those things together in a
collaborative way and deciding how you are going to spend the money is the best
way to do it. It wouldn’t be good if we were in a mode where you were just
given a number and told to hit that number.”
Planning and
Prioritizing
Only
half of the attendees said their company had a three to five year business plan
for prioritizing its IT
investments.
Purr
said that some companies may not have a three to five year plan but instead may
have a one to two year business plan. “I am hearing companies say that they
are not planning for three to five years anymore because they can’t work that
way,” she said. “They say they can have an overall plan; but the way funding
is coming and the way infrastructure needs are, it is a shorter time frame than
three to five years.”
Koster
said that Prudential used to have a short term business plan. “We used to do
that,” she said. “We were working in an up to the minute business mode. But
I think more and more now we are beyond that point. We need to be thinking three
years and five years out. We need to think about the generation to come who will
be consumers of our products and employees of our companies. They are going to
work very differently and that is not something that we will be able to
implement over night in a business as usual mode. We are going to have to plan
for that.”
McCaig
said that Chubb also has a three year business plan. “The reason is really to
sit down with everybody and get their best estimate of how we want the company
to operate and be more effective and efficient.”
Most
companies represented in the audience seemed to be working on a shorter time
frame. Seventy-six percent said they did have a one to three year plan for
prioritizing IT investments, 24 percent said they did not.
Attendees
were asked which area gets the most investment dollars. Almost half (46 percent)
said policy systems is where their company is spending most if its IT dollars,
20 percent said enterprise architecture, 15 percent said distribution systems, 9
percent regulatory compliance and 10 percent said the most money went to other
areas.
Purr
was surprised at the low number of respondents that said their investment
dollars were mostly going to regulatory compliance. “Right now a lot of what
we are hearing is that dollars are being diverted those that might have gone to
something like distribution or policy systems—to regulatory compliance because
you’ve just got to do it. You can’t put that off.”
McCaig
said, “I would say at Chubb certainly Sarbanes Oxley has really caused our
number one priority to be around regulatory compliance. It is the number one
investment. It pushed other things aside; we didn’t get additional funding for
that. One of the reasons why a lot of companies may be investing in policy
systems is because of a need to do a better job to get transparency across
systems. A lot of companies need to really work on their policy admin systems
and get them refurbished; so they can produce the kind of data that they need
and controls that they need to have for compliance.”
When
asked if their IT investments were part of a portfolio management approach, 55
percent of the audience said no and 45 percent said yes.
Koster
said Prudential does have portfolio management. “We put our investment dollars
into the categories of growth, reducing costs, regulatory compliance, and risk
management. We look at it every year and ask where the dollars should be spent
during budget time. We saw a shift this year between the quality of our
applications, because we had spent money improving them, into the regulatory and
compliance area. But regardless of how you split it, you have to ask if the
right amount of money is being spent on technology for where you are in the
business cycle. We are in a federated approach by business unit, so every
business unit is in a different place; some are in growth mode, and some have
mature systems that are simply maintaining. You need to make the decision about
where and how you want to spend those growth dollars.”
Regulatory Compliance
Seventy-eight
percent of attendees said that more attention is being paid to regulatory
compliance initiatives, 17 percent said it remained the same and five percent
said less attention was being paid to regulatory compliance initiatives at their
company.
However,
roughly two-thirds (62 percent) of the audience said they did not get any
additional funding for regulatory compliance initiatives.
“This
is my view on Sarbanes Oxley, not necessarily Chubb’s,” said McCaig, “but
I do feel that we were asked to take on just an enormous effort to make a lot of
changes with a deadline that was imposed that caused us to have push a lot of
other things aside because we didn’t get funding. So on the short term, Chubb
and probably other companies paid a penalty to be able to do that because we
missed other opportunities. It was an enormous effort and it is not over. There
is still some more work that needs to be done. But on the plus side if you look
down the road we have put in some standards, simplified some processes, and
consolidated some things. So we are presently in better shape in terms of some
of the internals that will make us more efficient and give us more transparency.
Therefore we are better but it was a rough way to get there.”
Koster
said that Prudential also did not get additional funding for regulatory
compliance initiatives. “Prudential actually stayed flat. So that meant that
we took dollars from somewhere else in order to handle Sarbanes Oxley, Gramm
Leach Bliley, HIPAA, and privacy regulations. I don’t think that is going
away. I think this is going to increase for the next few years and it is just
going to be part of our normal everyday business. We are going to have to find
better, cheaper, faster ways of implementing
the compliance activities because we are not getting more money for it.”
Fifty-eight
percent of attendees said that compliance like Sarbanes-Oxley has affected the
work they do.
When
asked about the current level of demand for data transparency at their firms, 33
percent of respondents said it was moderate, 23 percent said it was moderate to
high, 19 percent said it was high, 16 percent moderate to low and 9 percent said
it was low.
McCaig
said at Chubb the demand for data transparency is high. “It probably had been
moderately high before in terms of there was always an interest in the
corporation to be able to expand its business units and get a better handle on
how the business is doing. I think what happens with Sarbanes Oxley is that as
soon as you say that both the CFO and CEO are personally legally responsible for
the accuracy of the financial data, there is a lot of attention being paid to
ensure the data are accurate all across the company. They want to see how
dollars come in, go through all the systems and come out. Now it is a board
issue. When board members realize that their personal assets may be at risk the
board adds a lot of pressure as well. They want to be sure that end-to-end we
have the right controls and we can see how all the financials occur throughout
the company.”
Koster
said, “I’m looking at this question and wondering if people are defining
data transparency from a customer point of view as opposed to from the corporate
point of view. Both are important. From a customer point of view, we did a lot
of CRM work for many years. In insurance there is huge amount of data that is
not mined for new campaigns and I don’t see any drive coming from the business
over the last couple of years asking us to build more warehouses or providing
that mining capability. Corporate transparency has to be there.”
Many
companies are realizing the benefits of greater transparency. Seventy-one
percent of attendees said they had improved internal controls as a result of
greater transparency.
Systems
and Architecture
Insurance
companies continue to look at outsourcing as a way to reduce costs. The audience
was asked about their companies’ future plans concerning business process
outsourcing. Thirty-seven percent of attendees said their companies plan to do
more business process outsourcing over the next few years, 21 percent said it
would remain the same, six percent said they planned to do less, 25 percent said
they did not outsource and 11 percent were not sure of their companies’ plans.
McCaig
said that Chubb was outsourcing. “In the IT area just earlier this year we
outsourced our IT infrastructure. Now we are going to be looking at outsourcing
some of our application development probably next year. That would be more
gradual and we certainly would look to maintain the majority of our application
development maintenance in house. We also did BPO of our HR operations both the
business and the IT piece with it. We look at what is absolutely core to
Chubb’s strategy. For things that are not strategically mission critical, even
though they may be operationally mission critical, we would evaluate if those
things can be done more efficiently some place else. If they can, we would turn
that over to a specialized firm.”
Legacy Systems
Many
insurance companies are still dealing with legacy system problems. When asked to
rate the level of difficulty they have with their legacy systems, 27 percent of
respondents said high, 22 percent said moderate to high, 23 percent said
moderate, 16 percent said moderate to low and 12 percent said low.
McCaig
said, “Now we are in a position where we have legacy mainframe, legacy client
server, a legacy admin, and legacy Internet systems. In some ways the legacy
systems are very functionally rich and so they do a lot for the business. These
are large systems that tend to be very complex. Our business generally would
rate the systems that we have as doing a very fine job with supporting the
business today. The problem is they are not agile. They are not flexible; so it
becomes more difficult for us to make product changes and regulatory changes. We
looked at several of our systems to get a feel for how long we should keep the
system. I think all of us, in terms of looking at replacing these systems, at
least in large companies, now realize it is not so easy to replace these large
systems. We are looking to componentize them, take out pieces and gradually do
some other approach rather than have to go back in one more time and put in a
whole new major system; at least that is Chubb’s perspective.”
“Many
of us went down a path a couple of years ago looking into component
architecture, trying to break it all up, and getting vendors to build pieces,”
Koster said. “Then we were going to bring all these great pieces back together
and that would be the new environment. We quickly realized that wasn’t going
to work. The legacy is rich with a lot of process, a lot of information, and a
lot of our rules. With a surround strategy, which is what I think we are all
doing in different shapes and forms, we clearly are building messaging layers
that will allow us to go get information out of any or all of the legacies that
we have. For those of us who are working on acquiring businesses, you have to
get the information from those legacy systems as well and put them together. We
are building warehouses to pull out the critical information; so that you try to
only store it or warehouse it once. But I do think that legacy is going to be
here to stay. We run a system that is now 34 years old and that system produces
every night and the business is very happy with that. But at the end of the day
we know that technology obsolesces is sitting right there and you wonder when it
might break. But the surround strategy I think is the way to do it. I think
every business has to look at the component parts that are important and pull
them out and rebuild those when required. Obviously Web services is going to be
a big driver toward helping us with a solution as well.”
Attendees
were asked if their companies plan to consolidate systems across lines of
business. Fifty-two percent of attendees said their companies plan to
consolidate systems across lines of business, 48 percent said they did not.
Koster
said, “I think for us it is about looking at functions that you could share or
leverage across the company. So for example we just put our life and our annuity
call centers together because the customer is calling in and a lot of the
information is common. However, I don’t think every function lends itself to
being consolidated across the company.”
McCaig
said that Chubb has tried to consolidate systems where possible. “We did have
like business unit agent forms and so we put together a combination portal for
all business lines. We have a common claims system; although we did a recent
acquisition but that claim system will be folded into a lot of single claims
systems. We have a single agent licensing system and a single billing system. So
where there are certain common opportunities we do that. But our rating systems
and policy admin systems are all separate. So, where possible we do think having
fewer is usually better. Now that there is more pressure on costs, business
units are willing to come together and say ‘maybe we can do this as a joint
project.’”
Fifty-three
percent of attendees said that their firm has a data strategy, 47 percent said
they do not.
“It
is a tough question,” said Koster. “Data is the responsibility of many
across the company. The distribution channel has a lot of information about the
customers, in order to service them, that corporate may not have. The company
has a set of data elements that needs to be captured. We have a corporate
warehouse where we house the common information that allows us to look at the
segments that we are doing business with and overlay it with demographics. But
in essence each of the businesses really takes care of their data and has their
own strategy. But this is the place where ACORD is really critical because if
everyone is defining the data the same way then a corporate warehouse works well
because what goes in to the warehouse is common. Then when we do have to pull
together information across the company for the chairman we are able to get
consistent information back. I guess you could say we have a federated data
strategy.”
Purr
said, that perhaps some of the more medium sized companies represented in the
audience have a data strategy but it is not quite as formalized as larger
companies would be. “We all have data and we have a strategy for using that
data,” she said. “So perhaps the audience inserted the word formal data
strategy into this question. I think that is the answer that we got here because
clearly everybody has a strategy for handling the data. Some strategies maybe
better than others and the smaller the company perhaps the less formal it is
because it just doesn’t need to be as formal.”
Innovation
When
asked where the most innovation is taking place in their companies, 74 percent
of the audience said the front office, while 26 percent said the back office.
Koster
was not surprised by the results from the audience. “I think at the end of the
day the most important thing for us is bringing in new business and opening up
new channels for Prudential. We’ve had a propriety agent channel for a very
long time and we are adding third party distribution as well. There is more
investment dollars being spent on distribution.”
McCaig
said, “I would say we are probably a little more split maybe 60 percent back
office because what we are doing, for example is eliminating more paper being
distributed out to the agents. We are actually redoing our whole business
process management around policy administration all of those centers so there is
a lot of activity on driving efficiency into the back office.”
Facing
Uncertainty
With
all the challenges facing the insurance industry, Maciag asked the panelists
what they are most concerned about, what aspect of the business keeps them up at
night.
McCaig
said, “Manufacturing companies have been doing outsourcing for years. They get
parts from all over the world to build products and it seems to work well for
them. For a services company, at least for Chubb, in terms of moving to a model
where we are going to be dependent on other people providing services for us
that is a transformation for our company. That does not fund the business or
grow the business; that is actually transforming the business. Therefore there
are a lot of things that we need to know and learn that we didn’t have to know
and learn in the past; like how they get processes up to pace, understanding how
to deal with an outsourcer, how to make sure all those things are done in the
right way. So as we are going through these changes and looking at having more
functions provided by outside firms and bringing them together to know that we
are doing that in a prudent intelligent way is something that is really kind of
scary.”
Purr
said, “I think the two key areas are information architecture—how do we
organize it and IT security. We have a lot of data going across lines, across
oceans and maintaining that and understanding what it is and how do we take care
of it are things that I hear a lot about.”
Koster
said her biggest concern is security issues. “Every night I worry about the
security of our environment. Our easy to do business is not so easy when we have
to put all these security rules and regulations on dealing with our third
parties, our vendors and our consultants. Security is a big part of what we do.
It is important from a consumer point of view that we are getting it right. So I
worry about what I don’t know. I also worry about the future. I worry about
the next generation of consumers and employees. We are not yet putting
strategies together to handle the way that this generation wants to do business.
They are going to scrutinize what we do today. They are working very differently
with technology and I worry about at what point does the transition, to their
way of working, start to happen. We need to be there ahead of time. We know that
the technology takes time to build and prepare. You can’t do it over night and
when the shift happens we’ve got to be ready for it.”
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