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From Resource, November 2005
Copyright by LOMA
Proactive
vs. Reactive:
Critical Factors for Insurance Success
In today’s business world it is crucial to know when to be an early technology adopter and
when to be a fast follower. Find out
how your company can achieve first- mover advantage.
By Tammy J. McInturff
Industry change is driving
insurers to reinvent themselves by building new strategies and deploying new
technologies. But it isn’t easy in the tight economic market to fund new
projects while prioritizing investments. It is more crucial than ever to know
when to be an early adopter, and when to be a fast follower. Kimberly Harris-Ferrante,
research vice president, Gartner, Inc., recently discussed opportunities to
achieve a first-mover advantage, and others where it is acceptable to follow the
crowd.
In the insurance industry today
there is a lot of talk about transformation. Is transformation just the latest
buzz word? How do companies change their business? Harris-Ferrante said, “No
matter what you call it—transformation, innovation, or modernization—the
critical fact is that organizations need to assess their market and be more
proactive in running their business. It is a race for many companies; a race in
which insurers will have to face industry pressures head-on and determine the
path that they are to take. Companies will have to find suitable responses, both
proactive and reactive, based upon project scope, target market and
competitiveness. Companies need to know when to be ahead of the curve, when to
be a fast follower and when it’s best to just wait and see first.”
Industry pressures continue to
rise. Companies are dealing with globalization issues, regulation, shifting
customer demands, consolidation, fraud, and loss from hurricanes, terrorist
activity and other catastrophes. “Most insurers do not have an accurate
estimate of the amount of fraud incurred annually,” Harris-Ferrante said.
“They lack the real-time data or models to accurately identify fraudulent
claims, therefore they have no solid method of measuring actual rates. Insurers
must realize the increasing risks that they are taking with inefficient
processes and take the necessary steps to revise these processes.”
CEOs and CIOs are
responding to the industry challenges today by growing revenue, improving
service, improving profitability, controlling operations, outsourcing, aligning
business and IT, cutting costs, managing risks and optimizing distribution. To
accomplish these tasks companies are moving in different ways; some are
responding proactively and some reactively.
Organizational
Personalities
Gartner defines companies
based on three organizational personalities—early adopters, mainstream and IT
laggards. Type A, the early adopters, are the companies that are the first to
embrace a new strategy or technology when it comes out. Even though the new
technology isn’t proven yet, these companies are willing to try it and see
what it means for their business. “Type A companies are the ones that take
risks and chances, and are typically proactive in their strategy and
visioning,” explained Harris-Ferrante. “However, they are also the companies
who test out new technologies, which often may be immature or lack user
adoption. Early adopters are gamblers who sometimes win, and sometimes lose, but
definitely lead the industry in bringing new insight and technologies to
mainstream insurance providers.”
Type B companies are often
broken out into two different categories. The first category is the mainstream,
which is the traditional company that waits and watches what the Type A company
is doing with the technology. “Mainstream companies let the Type A company
figure out what bugs are in the technology, watch as Type A implements it and
sees how the market responds,” said Harris-Ferrante. “If the technology is a
win, they will then put in place the steps to follow the footsteps of the Type A
organization.” The second Type B category is the fast follower. “These are
more insightful mainstream companies who not only watch the projects of the Type
A, but invest in their own infrastructure in
order to be able to quickly respond to the actions of their faster competitors.
They are focused on agility and flexibility so that they can reduce their
response time once the Type A organization proves the value of a new technical
approach,” she said.
According to Gartner, Type
C’s are the laggards—the companies who are the last to implement new
technology. They only adopt the new technology or strategy because they have to,
because regulation or market demands it. Harris- Ferrante noted that companies
are not always in one category. “Insurers can have different technology
personalities in each line of business or product line. However,” she said,
“mainstream and laggards are the two high risk categories; organizations
should strive to be an early adopter or a fast follower.”
Being
Proactive
According
to Harris-Ferrante, there are three key elements to being an early adopter or
fast follower. First is evolution. The industry is continually changing and
companies need to evolve with the times and realize consumer and market changes.
The second key element is
innovation. “Most companies in the insurance industry don’t innovate,”
said Harris-Ferrante. “They are more traditional in the way that they operate
and fail to see the driver for change. Many lack the internal culture to think
outside of the box or are too restrained due to budgetary restrictions to think
beyond day-to-day operations. Insurers should bring in fresh perspectives and
best practices from outside of insurance, for example retail industries to think
about product development and customer marketing intelligence, to strengthen
their business model.”
The third key element is
transformation. Transformation means changing the traditional structure or
process to maximize opportunities or avoid risk. This requires new approaches,
methodologies and use of sourcing to be able to transform a company to improve
business results.
Proactive
vs. Reactive
By looking at the
responsiveness of a company, especially the manner in which they build their
corporate strategies, organizations can be classified as either proactive or
reactive.
Reactive companies are
basically looking at their business through a rear view mirror. Some
characteristics would include having data that is siloed and difficult to
aggregate, lack of process innovation and investments in modifying core systems
and their infrastructure. They are more concerned with “keeping the lights
on.”
In contrast, proactive
companies are the ones who are thinking ahead and planning for uncertainty.
These companies focus on enterprise agility and being able to respond to market
changes at a reduced time and cost. They view real-time reporting and analysis
as critical. These companies are also continually looking for and adopting new
strategies and technologies for competitive advantage and efficiency.
Mainstream
Insurance Strategies
Harris-Ferrante
said many mainstream companies are still focusing on how to leverage the
Internet. “Not to say that Type A companies aren’t leveraging the
Internet,” she said. “But, a lot of Type B and C companies, who are
followers, are not using the Internet to its maximum potential or are investing
in projects that will not provide great returns on investments. For example,
there is a large investment in self-service among insurers, however consumers do
not report that they use these channels. It is more important to provide
extranets to agents and brokers. The return on investment would be better if
they focused on distributors and ensured real-time information and
straight-through-processing via these extranets rather than investing in other
portals that are less of a priority.”
The second area that mainstream
companies are focusing on is distribution. “Insurers generally support
multiple channels, with each channel having unique processes and
technologies,” Harris-Ferrante said. “None of these channels are going to go
away. In fact, many companies say almost every channel is anticipated to
increase its revenue potential in the next five years. Customers will continue
to have channel options and will utilize all channels. To ensure positive
customer experiences, insurers should think beyond single channel technology
deployments to build channel management strategies.”
These companies are also
dealing with legacy system issues. “The most common question we hear at
Gartner from insurance companies is what should we do about our legacy
systems,” Harris-Ferrante said. “Many insurers have redundant and aging
legacy systems that they must address. There is a wide range of
options—including outsourcing, legacy modernization, replatforming and
replacement—that should be assessed. Companies have more choices now than they
have ever had to overcome legacy challenges.”
However, most insurers continue
to do nothing or replace small components of their existing policy
administration systems. According to Gartner research, 24 percent of life
companies plan to do a complete legacy system replacement, while 27 percent will
replace components/parts. Of the companies that are replacing parts, the claims
component is the most problematic, followed by rating/quoting. “In certain
cases, certain functionality might be the root of the problems while other
functions work perfectly. Forthose organizations, componentizing or replacing
individual components is a good option,” said Harris-Ferrante. “However, it
is important to remember that there are risks associated with taking a component
approach. There must be a greater focus on architecture, integration and
application planning. You must ensure that these applications can work together,
be integrated, and have seamless flow. Having well defined IT requirements and
using standards, such as XML, will help facilitate these projects.”
Innovators
There are three ways
insurance companies in the Type A market are innovating. The first way is around
strategy. According to Harris-Ferrante, Type A companies think differently about
their industry. “Innovators start with looking at the quality of the insurance
products that they are selling. They will deploy projects focused on building
better products and improving the speed to which they bring products to
market,” she said. “The focus on product innovation becomes a key
competitive differentiator for these firms.”
P&C companies that are
early adopters are using telemetric devices—an installed black box to measure
how consumers drive their car. “It measures when, where, and how far a car is
driven,” said Harris-Ferrante. “The use of telematics allows insurers to
shift to products that are priced upon vehicle usage rather than traditional
ratings based upon age, demographics and credit scores. It is based upon
individual risk and behavior—and ultimately gives a totally unique and
personalized insurance product to the end consumer. Customers are presented with
a bill at the end of the month based upon usage.”
The second way that Type A
companies are innovating is in the process area. They are doing a lot of
exception based processing for underwriting, customer service, billing, claims
etc. “Insurers are heavily investing in business process management solutions,
including workflow and claims management solutions, to help automate and improve
their processes. Additionally, they are investing in business intelligence and
analytics to be able to better measure processes in real-time to allow business
users to more accurately run the company,” said Harris-Ferrante.
The third way these companies
are innovating is through IT and the extraction of business rules from legacy
systems as well as revamping legacy systems. “Past merger and acquisition and
siloed business decisions have lead to systems redundancy,” said Harris-Ferrante.
“Companies must begin to better manage their systems network, including
tighter integration and better ability to modify processes across systems in
response to regulatory changes or change in management. To help with this,
insurers may select to use business rules engines to extract and centralize
policy rules into one repository. This will allow them to have one location to
view and edit rules without having to hard code them in each of
the existing policy administration applications. This will reduce the time for
systems updates and ensure that all systems use the same rule.”
Harris-Ferrante explained that
technology alone won’t solve the problems that insurance companies face. “In
our industry technology is the enabler,” she said. “The biggest return on
investment, and return on equity that has been seen in the industry has came
from projects that are innovating
processes and using technology as an underlying tool to achieve that goal.”
Process
Management
While Type A companies are
focusing on business process re-engineering, rules centralization and exception based
processing, the Type B’s and C’s are still focusing on process automation
and knowledge management. “Knowledge management is a critical problem as staff
retires or leaves the organization. Many processes are not documented. It is
imperative that insurers start to better document their processes,” Harris-Ferrante
said. “Processes should be documented and put into a centralized repository.
Processes should be standardized across the organization and then improved upon.
Companies should use business process management to support these goals. It is a
tendency for Type B and C organizations to think about using process management
tools only to automate or speed up their processes. This is short-sighted.
Processes must be assessed first to eliminate inefficiencies and ineffective
steps, then automated. Taking this approach will help insurers move toward
‘intelligence processing’ or the ability to embed business rules into a
solution to support strategies like auto-adjudication or exception-based
underwriting.”
Improving
Distributor Relations
According to Harris-Ferrante,
to improve distributor relations companies need to focus on the end-to-end
process of building and strengthening relationships with distribution channels.
Companies need to have a good communication plan where they communicate
objectives, performance metrics, product requirements, etc. Compensation is also
an important part of improving distributor relations. “Companies need to
concentrate on realigning compensation plans to make sure they are paying their
distributors for activities that match their business objectives,” she said.
“It is important that you are incenting the right behavior.”
“Insurers must also ensure
that agents and brokers have the appropriate tools and technologies to perform
their job role,” Harris-Ferrante said. “They need easy-to-use software to
support the sales process, access to real-time information, and integration of
insurer’s portals to agency management systems, for example. Rather than just
buying a software package for point-of-sale, insurers must also realize the
complexity of agent-insurers transactions and invest in exchange models to
support single-entry-multiple-carrier interfaces (SEMCI).”
Channel
Management
According
to Harris-Ferrante, in order to strengthen the relationship with the
distribution channel and ensure customer satisfaction, companies need to have a
channel management strategy—a rules of engagement that says when you interact
with your customers, regardless of the distribution channel, the customers are
going to have a common experience. She said that Gartner’s data has found that
very few companies have this strategy today. “Insurers are far behind other
sectors of financial services when it comes to having channel management
strategies,” she said. “Banks developed these strategies years ago and it is
just now emerging in the insurance industry.”
“Many insurers are starting
to look for best practices from outside the industry. They could gain insight
from looking at how retail companies manage their supply chains, for example.
Type A insurers can innovate the way they communicate and interact with agents
and brokers to drive more profitable business and loyalty among their
distributors.”
In the past companies have
focused mainly on their proprietary channels. Many companies have wanted to
focus on the channels they owned and had power over. Harris-Ferrante said, “We
are now seeing a turn-around where companies are also focusing on independent
channels. Channel innovation is on the rise in the insurance industry and we
anticipate increased investment in these projects during the next two years.”
“Management and support of
distribution channels in insurance is complex,” said Harris-Ferrante. “You
can buy any software program you want to sit on that distributors desktop but
how you exchange information and transact with them still has to be resolved.
There are many new technologies and options for insurers to support transactions
between insurers and agents, brokers and distributors, including digital
certificates, XML, signature pads, SEMCI and exchange models, and digital pen
pad technology. However, Gartner studies indicate that most companies have not
invested in these solutions to date. While there is growing interest, investment
remains low.”
Streamlining
Insurer-Agent Transactions
The
use of SEMCI solutions is on the rise in the insurance industry. Gartner
research has found that 39 percent of life/health and 60 percent of P&C
insurers were looking at new strategies and technologies to support SEMCI with
agents. There is a wide range of technologies to support this strategy. The most
popular among these companies was IVAN’s Transformation Station. Approximately
73 percent, for example, of P&C insurers who were assessing SEMCI models
were looking at Transformation Station, compared to 50 percent who were
assessing AMS’ Transact Now. “The support of SEMCI is a complex issue,”
Harris-Ferrante said. “There are a range of approaches to support streamlined
transactions with independent agents, such as exchange models or software tools
to support data transformation and application integration. Simply offering a
distributor portal will not enable sales force effectiveness. Insurers will need
to invest in strengthening their transaction capabilities with agents to support
real-time information sharing and transaction processing. Gartner
research has found that these characteristics are key drivers to determine which
company an agent positions in front of customers. To drive revenue through
independent channels, SEMCI will be critical in the next five years.”
Building a BPM Platform
The
use of business process platforms is an innovative way to extend the life and
improve the performance of legacy systems. Not only are these companies looking
at replacement options to buy, they are also looking at how to establish a
business process management platform on top of a multitude of systems that they
have in the background. Harris-Ferrante said that companies will be going
through a transition in their back office systems for the next three years.
“Insurers must face hard issues around systems replacement, modification or
preservation. No matter the answer, it is imperative that companies ensure
quality interactions among business users and customers. The use of these
business platforms will insulate users from systems changes, as well as provide
a platform to automate and implement intelligent processing, such as
auto-adjudication and event triggers,” she said.
Real-Time
Intelligence and Information
Data
is the heart and sole of the insurance industry, and an area of key concern
among insurers. To be proactive, insurers should develop strategies to get more
value from their data, including better data management, cleansing and
validation.
Companies need to examine
whether they have the right data in their source systems to be able to give the
business users the information that they need. Companies also need to make sure
they are collecting the right data and that they can get it out of the source
system when they need it. Harris-Ferrante said, “To support data needs, core
systems must be integrated and managed in a way to facilitate data
consolidation. The use of data standards will greatly help organizations with
their data projects. Standardized messages will help disparate systems
communicate with each other—leading companies to straight-through-
processing”
Companies need to also then
analyze the data applying business intelligence, modeling, and real-time
reporting analytics. These types of analysis will allow companies to understand
more about their business verses just doing reporting. This will pave the path
for future enterprise analytic needs, such as corporate performance management
or enterprise analytics.
Innovation
in Sourcing
Outsourcing has emerged as
a tool to help insurers with both tactical and strategic IT and business
projects. According to Gartner’s research 57 percent of P& C and 53
percent of life insurers currently outsource IT. But, most are outsourcing for
tactical reasons such as lack of staff or not enough time, lack of people with
the right skill sets, etc. Proactive companies are looking for the highest
strategic sourcing partners to help with both IT and business process planning.
“Strategic project outsourcing is very different from today’s tactical
projects. There is a stronger relationship with the outsourcer, pricing is
outcome-based, and success is measured based upon business metrics,” said
Harris-Ferrante. “Insurers will expect services providers for strategic
projects to enhance and transform processes through a mixture of technology
competencies and domain knowledge. Outsourcers must deliver insight and
innovation on how to improve processes through new strategies and technology
use. This does not mean that insurers will not do tactical outsourcing, but they
will use both types of relationships and find different types of services firms
to fulfill these services.”
Comparing
Technology
Harris-Ferrante
explained that there are four key elements that companies should consider when
looking at new technologies. The first is the status of the technology—is it
mature, how long is it going to take this technology to mature in the industry.
Consider the value and benefit it can derive for a company to do this process or
this business transaction. Look at the cost of the technology. “In the
insurance industry we focus a lot on cost,” she said. “Companies should not
just rely on cost-benefit analysis or return on investment to determine whether
or not to buy a new solution. Insurers should consider issues around user
adoption and risks associated with not buying the technology. Critical
assessments should be conducted to look at risks for not acting. Market losses
may be felt from not reacting to emerging technologies, especially when a close
competitor adopts it.”
Top Five Technology Myths
There
are a lot of myths in the industry. Harris-Ferrante discussed the top five myths
of financial services emerging technology. The first myth is that the first
movers always have an advantage. Harris-Ferrante said this is not always true.
The second myth is that companies can do this between projects. “Most
companies focus the majority of their IT budget on keeping the lights on and do
not have dedicated resources on more strategic initiatives,” she said.
“There must be a commitment to advancing the organization and investing in
strategic projects. It must be a priority.” The third myth is that a
particular technology is the silver bullet. “Companies used to say that CRM
was the silver bullet, then it was Web services, now it is BPM; none of these
are silver bullets. All these technologies are great tools for the industry, but
they aren’t the answer.” The fourth myth is that metrics and return on
investment will come later in other words companies say they are going to do
this now and figure out later what it means to their business. Companies
need to have strong metrics and return on investment estimates for what they
invest in. And the fifth myth is that customers will use a particular technology
because it is leading edge. Harris-Ferrante said that companies need to realize
that this isn’t always true.
Insurance companies need to
think about where they are today and where they want to be in the future. To be
a Type A company it takes tight business and IT alignment, a corporate culture
to support vision and compensation alignment, a balance of operational
excellence, initiatives to know your customer, increased focus on data
management, strategic sourcing models and a strong compliance infrastructure. It
requires process savvyness as you go forward. It requires data management and
the capability to analyze. Being proactive also requires being quick on your
feet and thinking outside the box. “Market success relies on innovation and
focus,” said Harris-Ferrante. “Insurers must develop solid strategies to
support their operational needs and drive profit. While it is not always
required to be a Type A company, companies should avoid being a laggard.
Investment in enterprise analytics and infrastructure is essential to stay
competitive and be responsive to shifting industry demands.”
NOTE:
This article is based on a presentation by Kimberly Harris-Ferrante at the ACORD
LOMA Insurance Systems Forum.
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