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From Resource, November 2004
Copyright by LOMA
What’s
Hot; What’s Not in Technology
Industry expert Kimberly Harris discusses some emerging trends and technologies
in the insurance industry and gives insight into which are mature and which are
not.
By Tammy McInturff
The
insurance industry is undergoing an evolution and facing a wealth of challenges.
Underwriting, CRM, legacy systems, and distribution are all undergoing changes.
There is more than just hype surrounding outsourcing, wireless devices, and
business process management. But are they a necessity for your company? Kimberly
Harris, vice president and research director, Gartner, discussed these emerging
trends and technologies at the ACORD LOMA Insurance Systems Forum, providing
attendees with insight into which
are primetime.
Facing Change
The
insurance industry is facing a lot of dynamic change. “Everything that we
consider traditional and normal is changing around us,” said Harris. “There
are multiple drivers of change—social, technological, environmental, economic
and political drivers. Your customers, employees and supply partners are using
the Internet and wireless technology more often to conduct business. But
technologically, your core systems are getting older. There is no way we can
continue to overlook or deny the shortcomings of our legacy systems. Legacy
systems are going to be challenged continually by new technology development, as
well as changing business needs, such as supporting real-time information
requirements. Environmentally, the P&C sector will suffer losses because of
things it can’t control—environmental conditions, mold, asbestos,
unpredictable acts of nature, not to mention terrorist activity and other types
of war related traumas. Economically companies are facing commodization. Many
companies have products that are becoming commodities; many products are
becoming harder for insurers to differentiate in the market, especially for
consumers who are driven based upon the price. And politically, there
is more regulatory change on the horizon such as the fight against state level
insurance regulation versus national level regulation.”
New Business
Strategies
With
all of these changes happening simultaneously insurance companies have to think
about new business strategies in order to stay competitive. According to Harris,
the top three strategies that Gartner observes most from the industry are
reducing operational costs, increasing efficiency and revenue generation. “The
CIOs we talk to are most interested in balancing operational costs reduction
projects with projects focused on improved efficiency and productivity. The
business process management (BPM) trend has been fueled by efforts to cut out
inefficiencies to change core processes to be more effective and efficient. CIOs
are trying to reduce the cost of operations, whether by attempting staff
reduction, systems replacement or modification and outsourcing. On the contrast,
the top business strategy we hear from CEOs is organic growth and revenue
potential,” said Harris. “It is difficult to do one of these tasks, much
less all three in an economy that is challenged politically, socially, and
economically—not to mention that IT budgets year over year are not seeing
substantial growth.”
The
good news is IT budgets are improving. “Globally, insurance companies are
experiencing improvements in IT budgets,” Harris said. “In the past, Gartner
found that one of the greatest percentages of IT spending was targeted at system
maintenance. We are seeing a shift now, where there are increases in the
investment in development and strategic projects instead of just tactical
survival mechanisms.”
Moving to STP
Gartner
has been conducting new research on what major insurance companies around the
world are looking at when it comes to new technologies. According to Harris,
insurance companies are trying to understand the granularity of their processes
by studying each subprocess. She
discussed how companies can augment and improve each subprocess to create new
business strategies to both survive, as well as differentiate themselves. In the
marketing and pre-sales area, for example, strategists are using automation to
support targeting and customer segmentation, and putting more focus on
delivering the right product at the right time to the right customer. Marketing
strategists are also investing in improving product development so that they can
get new products to market faster and technologies that will allow them to
understand more about customer desires and needs.
Many
of the new sales initiatives are focused around improving distribution channels
and increasing agent/broker loyalty. Some of the sales strategies include sales
efficiency, collaboration between sales and underwriters, movement of
underwriting to point of sale (POS), and the use of new technologies such as
distributor portals, incentive and compensation management, performance
management, referral management, single entry multi-carrier interface (SEMCI)
and e-applications. One trend is a greater focus on seamless interactions with
distributors by using emerging technol-ogies and hubs that support SEMCI.
Other improvements are being
seen in new business and servicing. For rating and quoting processes, Harris
said that the new strategies include real-time quote generation, increased
accuracy and integration with product development engines. For underwriting new
strategies include exception-based underwriting using BPM concepts and
electronic information access and collaboration. For policy issuance the key
strategies are using
electronic fulfillment, as well as electronic policy creation, delivery
and storage. The goal is to reduce paper dependencies, lags in information
access as a result of hard copy usage, and to reduce the costs associated with
document creation, management and delivery. For servicing the key strategies are
increasing service quality, supply chain management, cost containment and loss
reduction, claims management, fraud detection and billing and payment
flexibility.
New Underwriting
Strategies
One
of the major changes Gartner is seeing in the industry is a stronger focus on
underwriting. “Underwriting is
going to be one of the major initiatives that we expect strategic insurers to
focus on. Companies are
looking at ways to strengthen underwriting and be more stringent in how they
price out and assess risk,” Harris said. “We are beginning to see
initiatives targeted on building an electronic work-force, movement of the
underwriting to POS, pre-filling the third-party information and case
management. There are also more insurers at this point focusing on Web
enablement for underwriting—moving underwriting to an Internet based channel
where everyone involved has access to the information.” Having all the
information electronic eliminates the data entry errors that sometimes occur
from re-keying the information over and over.
One
recommendation Harris gave attendees was to adopt exception-based underwriting
tools and technologies. For example, companies could use imaging and work-flow
to begin process viability and workstations that are Web-enabled and tightly
integrated to provide a collaborative environment with the distribution channel.
Business rules and decision-ing technology are key components of exception-based
underwriting and allow the insurer to put their business rules and processes
into a tool that can automate the process. Incoming cases are reviewed
automatically, and then either a decision or a recommendation is generated using
the input business rules. This serves to reduce underwriter workload, since they
are concentrating on exceptions only, and improve the speed of underwriting.
“Tolerances for exception-based underwriting have a wide range. Insurers can
use it very weakly and eliminate a small percentage of cases; or you can use it
to a more maximum degree to eliminate a higher percentage of cases,” Harris
explained. “We see a wide variation of comfort using automated decisioning
technology. One insurer may want to only automate 20 percent of their incoming
cases, compared to another that may want to automate 80 percent. Both companies
will experience positive return on investment from their initiative; however the
company automating 80 percent should have a much higher return.”
Software
isn’t the only option. Underwriting services are emerging that provide all
requirements of exception-based underwriting in an application service provider
(ASP) model. The service provider supports, third-party information gathering,
merging the data into the underwriting forms, running the models to provide
exceptions, and providing this information to the insurer. “They are
responsible for running the technology, getting the information, generating the
exceptions and giving the exceptions to your underwriting department,” Harris
said. “This may be attractive to smaller companies or those that are heavy
business process out-sourcers.”
CRM Challenges
Of
course, underwriting isn’t the only challenge. Harris said many companies are
still experiencing difficulties as an outcome of past CRM projects. “Many
insurers have not had positive experiences with CRM technologies in the past and
this continues to haunt them as they attempt new projects focused on customer
information, sales and service,” she said.
Many
insurance companies were quick to embrace CRM, but have yet to see a significant
return from their investment. According to Harris, companies are finally
beginning to see the benefit of their CRM investment as they begin to understand
it better. “Insurance com-panies
were a little bit confused by CRM since it was not something they were accustom
to and most early CRM models were built for a retail organization. This did not
match the insurance sales model which has a distribution positioned between the
insurer and the customer. Even though it wasn’t a perfect fit, insurers did
invest in CRM suites and solutions. Now, many years later, CRM has matured. The
insurance industry has improved its understanding of CRM and the vendors have
begun to make their solutions more fitted for insurance processes. Improvements
by both ends will drive greater investment in CRM going forward and focused CRM
strategies will enable greater return on investment for these projects,”
Harris said.
Enabling CRM and
Distribution Management
According
to Harris, insurers, customers and distributors all want different things when
it comes to CRM. So insurance companies have to learn to manage and build this
business to business to customer relationship by satisfying these needs.
Insurers want CRM to aid in customer retention, distributor loyalty,
sales/service efficiency, cross-selling and faster underwriting. Distributors
want better and integrated systems, more information, performance metrics,
product comparison and configuration capability. In contrast, customers want the
right product at the right time and at the right price, better selection and
service convenience.
“It
is very difficult for insurance companies to
please everyone in this value chain,” Harris said. “And because you
are a multi-channel organization it is not just one value chain. Many insurance
companies have independent channels. According to Gartner research, in the U.S.
58 percent of life and health insurers and 57 percent of P & C insurers
generates the majority of their revenue from independent channels. Most insurers
have little to no control over the technology, technology standards or processes
that are used by their independent agents and brokers. This creates a complex
problem and a major inhibitor to CRM with these independent agents and
brokers.”
So
not only do insurance companies need to look at how they manage customers and
distributors, they also need to be concerned with how they manage their
independent agents. “Companies
need to consider how they manage and support the independent channel and ensure
a positive relationship,” Harris said. “CRM strategies must be comprehensive
and take into account proprietary as well as independent channels. It is very
familiar and common in the industry for us to create CRM strategies for
proprietary channels, such as captive agents or call centers. But it can’t
stop there. Insurers must continue to round out their strategies. This is
happening already in both the European and U.S. market.
Gartner has found that approximately 55 percent of U.S. P&C insurers
and 45 percent of U.S. life and health insurers have a documented corporate CRM
strategy. Most of these strategies
include concepts such as focusing on specific CRM initiatives such as sales
force automation rather than grand CRM, sharing and managing customer
information, and balancing all channel requirements.”
“In
the current era of CRM, we are seeing companies shifting from a policyholder or
customer centric phase to that of promoting loyalty to the distributor,” said
Harris. “The goal is to try and make the distributor happy, more satisfied and
more loyal to the organization, so they will continue to sell more.”
Technologies to
Support Distribution
Gartner
research has found a high investment in distribution technologies by both
life/health and P&C insurers. One that is very popular is new point-of-sale
technology that helps support the transaction. Seventy-eight percent of the U.S.
life and health insurers that Gartner studied were implementing new POS
solutions targeted at improved distribution. Automated underwriting,
illustration solutions and sales CRM solutions also have a very high rate of
implementation. While lower than those, incentive and compensation solutions
were being implemented by 59 percent of the life/health insurers surveyed.
“Think
about what motivates a sales person to sell,” said Harris. “Giving them
customer information is nice, giving them new technology to execute the sale is
valuable, but giving them more visibility and improving how they get paid in the
commission programs is what is important to them. People are motivated by how
much they are going to be paid to sell products. Yet, solutions targeted at
incentive and compensation rank lower than other solutions targeted at the sales
transaction. This is ironic. ”
CRM and Distribution
Technology Advancements
Knowing
the right types of technologies to invest in is going to be crucial for
insurance companies going forward. According to Harris, life insurers should
consider aggregation solutions, financial planning and advisory services
software, and illustration software. Harris advised companies to invest in
technologies that will allow their agents to understand the requirements and the
long term financial goals of the customer. These solutions need to be able to
map different products, options, debts, risks and the customer’s opportunities
for financial advancement.
Harris
said that both P&C and life insurers should evaluate Web-based POS
technology—technology that will work when they are in the office, as well as
when they are out in the field. These solutions will allow synchronization when
they are connected and may support wireless connectivity also.
“Solutions
such as incentive and compensation and performance management are key to
distribution success. Finding new
options for the agent and broker is only the tip of the iceberg. It is essential
that insurers also invest in options to support real-time, seamless sales and
service transactions,” said Harris. “The exchange of information, real-time
sales execution and service queries are key to promoting a positive distribution
relationship. To support these transactions, security should be improved by
using digital certificates and e-signatures. Companies must understand
connectivity, as well as invest in the back office foundational technology, such
as CRM systems that will share that customer information.”
Harris
urged companies to share information with their distribution channels. She noted
that although insurance companies have done aggregation of their information,
analysis, predictive modeling, profitability analysis and customer segmentation,
they are reluctant to share that information with their distribution channel,
particularly the independent agents. Why? “Because insurers are scared that
the agents will turn around and sell a competitor product,” explained Harris.
“While this is a real threat, insurers must think of creative ways to share
information with the agent that is helpful in their day-to-day work. There is a
lot to be gained by sharing information with your distribution channel. Some of
the benefits are increased loyalty from your distribution channel, greater
assets under management, increased distributor productivity, ease of business
for small/mid-sized insurers, and cleaner data. The more that the agent
understands buying preferences and behavior, the better that they can select the
appropriate product, position it with the customer in the right way and at the
right time, and, therefore, improve the cus-tomer experience.”
The Claims Process
The
claims process is one of the most difficult, content intensive, problematic and
costly processes in the insurance industry. There are many problems that can
occur with the claims process—fraud, high HR costs, high litigation costs, low
customer value, poor supply chain management, brand risk, and long settlement
time are just a few. “Claims processes are typically hard for insurers to
manage. Bad claims experiences have a negative impact on brand strength,
customer satisfaction and retention,” Harris said.
She
explained that better CRM can help improve the claims process. “Claims is
going to be one of the biggest impact areas related to your CRM strategies,”
said Harris. “Ironically when CRM first came out, and insurers began to build
CRM strategies, virtually few insurers placed a lot of emphasis on how CRM could
help improve the claims process. The focus was targeted on sales and service
with little regard on how claims fit into the service area.”
At
that time, understanding of the complexity and components of CRM was low. But
now many companies are maturing in their understanding of CRM and considering
the impact of claims to overall customer relationships. As a result, Gartner is
seeing an increase in the investment of solutions targeted at the claims
department. Harris discussed three different classifications of claims
technologies—notification of loss, customer service & field adjusting and
processing & risk assessment. Notification of loss includes the activities
and processes that get the message to the insurers that an incident has occurred
and enters the claims information in the system to kick off the process. For
this process, insurers are investing in solutions such as intake devices,
customer service portals, and monitoring devices. “Intake devices are systems
such as OnStar computer devices in vehicles that can notify the insurance
company when the airbags deploy or when there is a point of contact for the
vehicle. Today OnStar is already capable of sending out notification for an
ambulance when an accident with injuries occurs, but it could just as well in
the future let the insurance company know that a wreck has occurred,” Harris
said.
The
second type of notification of loss technology, customer service portals, can
allow customers to enter a loss or claim electronically via the insurance
company’s customer service Web site. “We don’t anticipate that there will
be a large uptake of online claims submission in the next few years because it
will require a major behavioral change among consumers,” explained Harris.
Monitoring
devices, another type of notification of loss technology, could be particularly
important for P&C insurers. These are devices that can be purchased and
installed in a car system to monitor the mileage that is driven daily or record
the driving events. “Some of these monitoring devices are using recording
technologies that monitor events that happen and are especially applicable for
motor fleet uses. The recordings can be used to improve driver performance and
reduce litigation costs. While these solutions were originally created for
litigation, not insurance, insurers are beginning to offer discounts to motor
fleet operators who have these technologies installed,” said Harris.
Other
solutions that will improve claims operations include CRM vertical solutions
that can be used in the call center and fraud solutions. A call center
representative or an agent can input claims information into a CRM application,
including diagrams of images or property damage. “Fraud detection solutions
are real-time technologies that analyze data upon entry rather than running
against historical batch later in the processing cycle. Fraud probability is
generated in real-time at the front-end to begin the investigation process
before the claim is processed or paid. This will reduce claims losses and speed
up fraud identification.” Harris said.
Processing
and risk assessment technologies include fraud analysis solutions, business
intelligence, dynamic modeling tools and GIS systems. “Many of these solutions
are targeted at analyzing data to understand patterns and trends in claims
performance, loss and risk,” Harris said. “GIS systems will be a key
solution for P&C insurers and will allow insurers to analyze risk and
opportunity based upon geography. Catastro-phic events can be mapped based upon
an insurer’s book of business. Customers in the impact zone can be called
pro-actively before the event to provide recommendations for loss prevention,
and then be called after the event to offer proactive claims reporting. This
will improve customer service outcomes and provide positive customer
experiences. Furthermore, GIS can be used to impact underwriting and risk
assessment. This will help the insurer leverage claims information in other
areas of the enterprise and find greater ROI for internal analysis tasks.”
Legacy Systems
According
to Harris the most frequent question Gartner hears from the insurance industry
is, what do we do about our aging legacy systems? Insurance companies have aging
systems that are continuing to getting older and more outdated, which makes them
more costly to maintain, more difficult to modify as a result of regulation or
strategy change, and may not meet business user requirements. Due to the age, it
is often difficult for insurers to have enough people or those with the
appropriate skill sets to maintain the legacy systems. “We hear day after day
from insurance companies that the people who maintain many of these old legacy
systems are dying and retiring. How do you support a 30 or 40 year old system?
We’ve got a problem and this is further complicated as we integrate legacy
systems with newer systems. We are trying to make these legacy systems do things
they were never built to do. Many of them are not even high security systems,
because when we bought or built it 30 or 40 years ago the security and privacy
regulations that we have today were not even thought about.”
Legacy
systems must be addressed now. “These systems are like a time bomb,” said
Harris. “As the industry continues to change companies will find it difficult
to keep up. The desire to speed and improve product development is one example
of where the legacy system cannot meet business requirements. Gartner research
found that eighty percent of U.S. life and health companies reported that the
ability to improve and speed up product development was very important to their
organization. Many of these companies are already investing in solutions to
support this goal. Process re-engineering tools is the most preferred route to
improve product development by U.S. life/health insurers.” Gartner research
found that 90 percent of U.S. life/health reported a preference to business
process solutions, compared to 59 percent preferring product configurators and
55 percent preferring marketing automation. Product configurations technologies
allow your business users to design, rate and test new products without
requiring changes to the legacy systems. “The continued emphasis on product
development will challenge the legacy systems. Most of the investments that we
see are work-arounds or investments to improve the legacy environment without
major change. Insurers must use these solutions, but investigate the cost of
operations, the technology standards requirements and the business risks
associated with their legacy systems.”
Harris
encouraged companies to think long-term about the enterprise infrastructure.
Most insurance companies have multiple systems, particularly ones who have gone
through lots of mergers and acquisitions. “In the past, technology
compatibility wasn’t a main consideration of merger and acquisition due
diligence,” Harris explained. “Instead they compared political culture,
product concepts, and geography. But they didn’t look at the multiple
technologies and architectures that each company had to see if they could
actually integrate the technologies and systems. As a result, companies have
redundant systems that are siloed and not able to integrate. So companies have
an ecosystem of individual systems and they need to look at each system, its
performance and its ability to meet the business requirements. Then they need to
decide whether they should replace these systems, re-platform it or whether they
should componitize them.”
“Componentization
is a trend that is often used by large insurers. In the old days, insurers
typically bought or built comprehensive policy administration systems that
supported rating, underwriting, claims, policy, reinsurance and billing. Today,
rather than replacing the entire suite, insurers are focusing on the problem
parts and buying or building best of breed components,” Harris said. “Each
company has a different pain point and component-ization allows them to preserve
components that aren’t problematic. This makes legacy projects possible due to
a lower cost of replacement and a faster implementation timeframe.”
System
consolidation is crucial. “Most companies have multiple and redundant systems
that support policy administration. There is no logical reason for companies not
to evaluate overlap and gaps to determine if they can reduce the number of
systems that support each product line,” Harris said. “We expect that
systems consolidation, along with enterprise architecture, will be a major focus
for mid- and large- sized insurers during the next 12-18 months.”
After
companies look at each individual system they need to look at standardizing data
and processes across legacy systems. It is common that each legacy system houses
business rules for the processes that it supports. As a result, business rules
are spread out across the organization, making it difficult and time consuming
to modify these rules when a regulation or corporate strategy is changed. “We
are beginning to see a focus, especially with large insurers, on rules
extraction and management. Extracting rules from legacy systems and managing
them in a centralized rules repository will enable the company to be more quick
to respond and more accurate in their rules execution. Rules management will be
a key initiative among innovative insurers in the future and will help them
differentiate themselves against those who do not invest in improved methods of
managing and editing business rules,” Harris said.
Data
standardization and use of XML is already becoming common place in the insurance
industry. Harris said that insurers will continue to utilize XML standards and
Web services to assist in legacy preservation and achieve enterprise goals.
Insurers will move to a services oriented architecture that will further help
with these objectives.
According
to Harris most companies still aren’t ready to get rid of their legacy
systems. “We anticipate most large companies will continue to do the
extension, componentization and the wrapping of these large systems rather than
large scale replacement,” she said. “It is the smaller to midsized market
that we are seeing the greatest interest in replacing large systems with more
comprehensive systems.”
IT Requirements
for Data Initiatives
Data
is one of the best ways companies can promote competitive differentiation. “In
the past, the role of data in the organization and the use of new data
technologies wasn’t a key priority,” Harris said. “While everyone knew
that they had a lot of data and it wasn’t being managed appropriately, there
were more pressing issues. This is changing, however, as insurers begin to think
more strategically about data, including how to turn data into information,
standardizing data, data mining and enterprise data analytics.”
Leveraging
data also has its own set of challenges. According to Harris, companies should
first assess the source systems and how they integrate to support a
straight-through-processing model. Using enterprise application integration
tools and middleware will enable insurers to support system connectivity. But
that is only the first challenge. The second challenge is to consolidate and
centralize the data across the organization. Companies need to combine data from
the source systems, either logically or physically, to be able to have
aggregated data to compare and mine. Once the data is centralized, the next
challenge is to use the data to identify and evaluate events signaling
opportunities and risks. To meet this challenge companies should be looking at
corporate performance management (CPM) applications, business activity
monitoring (BAM), compliance solutions and on-demand analytics. With centralized
data, companies can use data to improve, create, and change processes to respond
to significant events. The goal is to turn the data in its granular form into
information that is easily digested and can be used by that organization using
business process management philosophies. “The agreement in the industry on
the ACORD XML standards is going to be key in helping the industry improve there
ability to manage and use data. Leveraging these standards, then focusing on
internal processes will help the organization have real-time predictive
analysis, and enterprise risk management,” said Harris. “Insurers need to
continue to develop data and information strategies, invest in data management
and analysis technologies and begin to think about how to leverage data across
the enterprise rather than continuing to think about line of business or
activity-based analytics.”
Prioritizing
Technology
Insurance
companies need to prioritize their technology investments based upon their risk
tolerance, technological maturity, and user adoption. Harris discussed current
and future technologies that will be important for the insurance industry. The
solutions that Gartner recommends that insurers assess in 2004-2005 to stay
competitive are: business intelligence and analytic tools, claims management
solutions, automated underwriting solutions, SEMCI models (especially for
P&C insurance), insurance-specific CRM solutions, componentization of large
legacy systems and Web services.
“These
technologies will help you find positive results in various units, such as
claims and underwriting,” said Harris. “Claims management technology will
support claims workflow and process management. Automated underwriting,
including exception-based underwriting, will allow insurers to automate and
improve your underwriting process through the management of underwriting rules.
Insurance-specific CRM solutions are CRM solutions that come off-the-shelf with
prebuilt insurance process templates or models that allows the user to have a
quicker deployment cycle and a better fit with the insurance industry
process.”
In
2006-2010, insurers should begin to deploy and invest in solutions, such as: XML
standards for underwriting and claims, CPM solutions, vertical document/content
management solutions, fully integrated POS solutions, advanced fraud
detection/analysis solutions, and wireless procurement applications. Harris said
that early technology adopters may deploy these solutions earlier, however.
According
to Harris, strategies and approaches that insurers will be focusing on in 2010
and beyond include: consumer facing claims devices, enterprise rules management,
end-to-end supply chain management, and large scale legacy system replacement.
She said that although enterprise rules management technologies are available
today, they are not yet mature or proven. Insurers will be reluctant to use
enterprise rules management until this time frame. “Enterprise rules
management will provide substantial ROI to insurers. But because companies are
siloed in how they make technology decisions, Gartner has not seen enterprise
rules management be adopted at this point,” Harris said. “Only a handful of
innovative and advanced insurers are in discussions on how to manage rules
across the enterprise and will find great first mover advantage when their
initiatives are complete.”
Recommendations
“This is a point of great
change. I recommend you think both tactically and strategically about how you
can use technology,” Harris said. “Make sure your technology is aligned with
your business outcome; it will allow you better longevity of the projects, as
well as provide greater business benefit. Select
vendor packages that meet business requirements and match enterprise
architecture. We are seeing a great shift in insurer’s thinking about vendor
packages. It is not necessary to build all core solutions. Focus on enterprise
agility and flexibility and understand the risks associated with technology
maturity. Many technologies are not mature at this point, and there will be a
risk in implementing these. Understand first mover advantage with emerging
technologies.”
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