Insurance IT 2006

Coming Up Roses

It's been an eventful and, at times, challenging year for theinsurance industry, but senior IT executives at some of the leadingand best-run carriers believe insurance IT is flourishing and willcontinue to do so in 2006. In a roundtable discussion, six leadingIT executives offer their views on the direction their companiesneed to pursue, the tools that will help them get there, and how weall need to work together.

The insurance industry went through some tough times in2005–everything from government investigations to un-precedentednatural disasters–but one sign the industry is in good shape comesfrom speaking with leaders in insurance IT. When asked whetherthere is a single area the industry as a whole needs to focus on in2006, not one of the executives taking part in our roundtableagreed with any of the others.

John Chu, senior vice president, e-business and technology atThe Hartford, probably summed things up most effectively when hesaid insurers today are focused on how best to use all theinformation they possess in their different business areas toachieve competitive advantage.

Chu was one of six industry leaders interviewed for thisroundtable discussion. Joining him were: Catherine S. Brune, seniorvice president and CIO, Allstate Insurance; Barbara Koster, CIO,Prudential Financial; Lawrence E. Blakeman, vice president,application development, and CIO, MetLife Auto & Home; JohnKellington, senior vice president and CTO, Ohio Casualty Group; andCharles Brooks, CIO, personal lines, Travelers, a member of St.Paul Travelers.

These industry experts explored some of the important issuesfacing insurers in the coming year and took a look back at what hasbeen an interesting 12 months.

Tech Decisions: To what single area of the insurancebusiness–claims, fraud, underwriting, rating, policyadministration–do you believe the industry as a whole needs to paycloser attention in the coming year?

Brune: We continue to focus on all areas, sincethey're all critical to our industry. Claims, though, is somethingwe all need to keep improving, making sure we continue to takeadvantage of emerging technologies that help us improve customerexperience.

Blakeman: The property/casualty industry hasbeen experiencing almost unheard-of combined ratios over the lastseveral years–excluding catastrophe losses. While the combinedratios have been low, the catastrophe losses have been high. Takinga more granular look at exposures, running more catastrophescenarios, and then adjusting the number and concentration ofexposures will be something most of the P&C industry will belooking at.

Kellington: Underwriting, rating, and policyadministration are tied closely together. There is a term in theindustry called "micro-rating," which is a process to price a riskwith greater granularity. The amount and quality of data that isneeded to understand micro-rating will put a heavy emphasis onwarehousing technologies, and the advanced rating schemes willplace a heavy burden on many policy administration systems.

Chu: Each company is at adifferent stage in its systems evolution, so each one is engaged indifferent projects that will have different shelf life, and eachestablishes a different strategy to take on competitors. One mayhave created very sophisticated underwriting systems and now ispaying attention to claims automation, while another is ahead inpolicy administration and now is tackling fraud detection. Overall,we're grappling with how to maintain, leverage, and use informationfor competitive advantage–it's just some of us today are morefocused on claims, others on rating, and others on differentneeds.

Tech Decisions: Is there a technology tool you are keeping youreye on for its future positive effect on the insuranceindustry?

Blakeman: The SEMCI toolsets are the ones weare watching most closely. Agents constantly give us feedback thatease of doing business–including the ability to quote and accessinformation from multiple carriers via their agency managementsystems–is extremely important to them. The promise of SEMCI hasbeen talked about for many years, but it looks like that promise iscoming closer to reality. The widespread use of the Internet as adelivery vehicle, the use of Web services, and the creation ofstandards such as XML and ACORD for data are coming together,providing a good foundation for SEMCI to become a key tool. Whilethe future looks better for SEMCI finally to be a success,utilization still is low, and there currently are too many vendorspromoting SEMCI solutions.

Chu: The Hartford is not looking at one toolbut multiple tools. We've created an innovation lab that's focusedon several emerging technologies that are likely to add newcapabilities and efficiencies in our operations, including how weinteract with various customers. A few of these technologies havestrong potential to transform the way we do business, so we're veryoptimistic.

Koster: Prudential monitors a variety oftechnologies that have the potential to enhance the way we dobusiness. Tools such as electronic ink/digital paper hold promiseto ease and improve the electronic signature process. Communicationtechnologies such as WiMAX expand the flexibility of mobile salespersonnel to work with potential and existing customers. We believethe technologies that hold the greatest potential benefits to theinsurance industry are Web services and service-orientedarchitecture (SOA). These technologies will better enable us todeliver flexible services to our customers and partners morerapidly. When combined with ACORD and other standards, SOA providesthe technology for us to enhance our service delivery at a lowertotal cost of ownership.

Brune: Continuing advances in wireless arecritical to getting real-time information into the hands of thosewho need it, whether for customer service or operationsprocesses.

Kellington: It's not so much a tool but aconcept that I believe will help our industry dramatically. IBMrecently contributed its IAA process models, dictionary, and statediagrams to ACORD in an effort to help the industry standardize onbusiness process, which could enable a standardized SOA for theindustry. This could have a dramatic long-term effect on thecapabilities of our industry, including the independent agent, theprimary carrier, and the reinsurance market. An industrywide ACORDSOA could improve dramatically the efficiencies of our industry byproviding a real-time processing environment for systems; thiswould limit the manual entry with which our industry currently issaddled.

Brooks: SOA and open source software.

Tech Decisions: What projects currently are being developedwithin your company, and what are the challenges to make themsuccessful? Is a project management office a necessary part of theequation? How long should it take to achieve ROI on a project, andhas that time frame changed in the recent past?

Koster: We have a broad portfolio of projectsoccurring across the enterprise at any given moment. These projectscan include development of business-unit-specific applications,integration of new technologies or products, and development of newservices. Similar to many organizations, our projects pose avariety of challenges. These might include tight time frames totake advantage of market opportunities, the need for enterprise orcross-business-unit collaboration, or implementation of newtechnology.

Our approach to project management offices reflects our overallbusiness model, which places the responsibility for success witheach business unit. As such, we have found project managementoffices within IT are an effective tool as long as they remainclose to the work at hand. Regarding the time frame to achieve ROI,we have found while using the rule of "a project must pay back in Xnumber of years" might be an effective starting point, it paintsall projects with a brush that is too broad. Instead, we viewprojects from a portfolio perspective–some provide a fast payback,while others show a return after a period of years.

Blakeman: Some of the key project areas we arefocused on are improving efficiency and growing our business. Forexample, imaging the 25 million Auto & Home claim documents wereceive annually and using workflow capability to route those filesto the right person at the right time drives efficiency gains andimproves both flexibility and customer satisfaction. Severalprojects are under way to grow our business, such as making iteasier for agents to do business with us by interfacing to theiragency management systems and rewriting our legacy administrativesystems to improve our flexibility and speed to market. The projectmanagement office is a tool that helps not only to report on thestatus of projects but also to provide an early warning signal ofpotential problems that, caught early enough, can be fixed.

Brune: Project management is absolutelynecessary. From an IT perspective, our work on enterprise portfoliomanagement helps by creating a dashboard view for IT and businessleaders alike to monitor and track progress. It helps ensurevarious areas of the company and their work are aligned,eliminating redundancy and speeding up delivery time. Since most ofour products end up touching our distribution organization,everything has to be coordinated. Without a project managementoffice, that would be hard.

Chu: The Hartford has a large number ofstrategic projects going at any one time and concentrates onbuilding and refining projects that bring us new capabilities fordistribution, product management, and operations. Projects are putthrough a rigorous demand management process to make sure they addsufficient value and are built in accordance with our newarchitectural and capital-planning procedures. We also determinewhether it makes sense to build or buy various components to aproject. The time required to achieve ROI will vary depending onthe size and scope of the project, but we've grown moresophisticated in measuring the impact of each project.

Kellington: We are working on many projects toimprove the corporation's goal of profitable growth. The projectsrange from improved agency technology solutions to internalbusiness process improvements for underwriting and claims. I wouldsay a project management office is paramount to success for anyorganization. We've had our PMO in place since 2001, and theresults have been terrific. We would like to see a positive ROI[for a project] within a year, but if the project is strategic innature, we take that into consideration to extend the criteria.

Brooks: Broadly speaking, most of our projectsare focused on two areas: removing speed barriers in deliveringbusiness value and rationalizing our architecture. When thebusiness approaches us with an idea that requires a system toenable it, we want to be able to measure the time to delivery indays and weeks, not weeks and months or, worse, years. All of thelatest buzzwords and technologies are being explored and/orimplemented: SOA, J2EE, rules harvesting, data warehousing,wireless and mobile computing, etc. While we typically are earlyadopters of technologies, on select opportunities, we are willingto pilot leading-edge technologies. The primary challenges we faceare skills and resources. Implementing new technology requires newskills, while many of our IT employees have spent their careersworking on–and mastering–traditional legacy technology. We need tocontinue to assess our people and our partners' resources to ensurewe have the right skills available at the right time.

As we crack open systems and have more projects developing onthem at the same time, have more projects with dependencies acrosssystems and even across strategic business unit lines, andaccomplish all of this with more speed, the necessity of a projectmanagement office increases exponentially. Having a centralcoordination and control point only can help manage the complexityand speed and reduce the chance of loss of control. I don't thinkthere is a magic answer to the time to achieve ROI, but with only afew exceptions, ROI should be achieved within 18 months and,desirably, within a year. I believe this has shortened by 25percent to 50 percent over the last five years.

Tech Decisions: In what ways has your company improvedIT-business alignment? Can this issue ever be solved, or does itneed to be addressed every day?

Chu: The Hartford already has taken action toimprove dramatically the alignment between technology and business,so that's not an issue for the company. Maintaining that alignmentis an ongoing challenge, though. It's a bit like marriage,requiring communication, trust, and honesty, and like a marriage,it needs continuous commitment and work from both sides. The rolesof the CIOs and their business partners are interdependent andrequire each to listen and learn and sometimes compromise. Thelines have been blurred. This is a very exciting time.

Brune: A few years ago, we reorganized our ITorganization and developed a new business-aligned enterprise ITstrategy in which our business technology leaders report directlyto business unit leaders. This helps all of us, both in IT and thebusiness, to be more agile and integrated. We've eliminatedredundancy and saved time and money. But everything, of course,constantly is changing, so we need to remain on top of this everyday to ensure continued alignment.

Koster: Prudential has taken a multilevelapproach to aligning IT with its business needs. Our applicationdevelopment teams are managed within each individual business unitacross the enterprise. This ensures the IT work that most directlyaffects business performance is tied to the needs of each business.From a governance perspective, we employ a three-tiered approachusing an IT governance committee, a CIO cabinet, and customercouncils. Operating at a strategic level is our IT governancecommittee, which is headed by Prudential's CIO and comprised ofsenior business leaders. This group reviews broad technology issuesthat impact all of our businesses and approves major enterprisetechnology investments. At the next level is our CIO cabinet, whichincludes CIOs from each of our business units and senior IT membersthroughout the company who partner to develop enterprise-levelarchitecture and technology solutions. And finally, we operatecustomer councils comprised of representatives from our businessunits and IT members who have a detailed understanding oftechnology topics. These groups are charged with solving specificissues that ultimately have a broad impact on the business.

Brooks: For the most part, IT-businessalignment has improved substantially over the last one-and-a-halfto three years. There are a number of reasons for this improvement,but two reasons stand out. First, the chasm that normally existsusually is caused when IT produces a string–or even just acouple–of under-scope, over-budget, and/or late systems projects.This causes distrust, resentment, and marginalization of the ITdepartment as a "value destroyer" instead of a "value creator." Wehave had some success in the projects we have invested in recently,which helps the business side realize how important IT and ITsystems are to its success. With "shiny and functional widgets"coming out of the factory, the business side focuses more on ITinvestment as it will want to leverage more of a value-creatingasset. Second, many of our IT leaders have stepped out of the "ITsandbox" and begun to participate in business discussions as wellas offer ideas in these discussions–ideas that go beyond IT. As webegin to show we understand the business and/or can enrichdiscussions, we are gaining seats at the business table we didn'thave before. This proximity and frequent interaction have beenpowerful forces in increasing synergy, collaboration, and alignmentbetween IT and business.

Blakeman: IT-business alignment is somethingthat has to be worked on, nurtured, and constantly renewed. It ismore than just aligning with and supporting the businesses'strategies, goals, and objectives. It is the daily interactions,the conversations, and the individual projects that reinforce andcement alignment. One of the changes we made this year to improveIT-business alignment at MetLife Auto & Home was the creationof a new project-prioritization process and IT steering committee.The IT steering committee is smaller and more focused, makesdecisions faster (including saying no to projects), and has broughtmore rigor to business-case development and the prioritization ofIT projects.

Kellington: Ohio Casualty has an IT steeringcommittee made up of the chief operating officer, the divisionleaders, claims, and actuarial. The steering committee meetsmonthly to review major initiatives and set a priority for themajor IT initiatives. We have gone to great strides to align ourtechnology initiatives directly with the corporation's initiatives;the alignment is paramount to success in today's environment.

Tech Decisions: What is your biggest security concern–the thingthat keeps you awake at night? Which is a bigger security threat:external hackers or internal employees?

Koster: We have a very strong informationsecurity program at Prudential. We are focused on protecting ourcomputing environment as well as customer and employee information.We leverage state-of-the-art technologies and tools to help ussecure the environment, implement the appropriate processes tominimize risk, and restrict access to sensitive and privateinformation to a "need to know" basis.

Chu: Data security needs to bea concern for everyone, since data integrity could be compromisedby employees, consumers, agents, business partners, and thirdparties. Our overarching security strategy is to educate employeesabout the importance of security and to make sure our data isprotected in multiple ways. I can't speak beyond that.

Blakeman: The biggest security concern I have[focuses on whether] our information assets will be compromised.The examples from the past year of companies whose information wascompromised in spite of standard security measures are scary; theimpact to customers as well as to companies was greater than hadbeen imagined. Although we have long been focused on security,looking at ways to further improve the security of our informationassets will be a priority in the coming year. Statistics showinternal employees are the biggest security threat. A lot of timeis spent determining exactly which applications and data employeesneed to do their jobs and then providing precisely that access–nomore and no less. We periodically recertify employee access,particularly when employees change roles, to ensure it continues tobe appropriate.

Kellington: A changing regulatory environmentand the compliance issues associated with the classification ofunique data probably are my largest concerns. There is so muchfocus on external threats, but most issues probably are internallyoriginated.

Tech Decisions: Are compliance issues–includingSarbanes-Oxley–being addressed adequately by IT and the businessside? Are there ways to improve the processes? Is compliancehandled as part of the organization, or is it a stand-aloneissue?

Brune: We're fortunate in that [Allstate] is inreally good shape–we have forward-thinking leaders who have allowedus to get in front of compliance issues before they became issues.Since everyone has a stake in the game, we adopted a holistic viewof regulatory compliance. We developed our own compliance andcontrol management system for our various IT divisions that hascentralized metrics, but accountability still remains in the handsof our business technology areas. In addition to helping withcompliance, many of these custom tools are used in other ways,which helps improve efficiency and save money.

Kellington: We are very fortunate at OhioCasualty in that we spent quite a bit of effort standardizing ourIT practices to align with CMMI [Capability Maturity ModelIntegration] and ITIL [Information Technology InfrastructureLibrary], so the Sarbanes-Oxley compliance measures were difficultbut achievable. Our business processes also are highly standardizedand controlled, so Ohio Casualty is positioned pretty well forthese compliance issues. The process has smoothed out tremendouslybetween 2004 and 2005. I believe it's a result of a betterunderstanding of what is required to be in compliance. In 2004,most of the industry (including the audit firms) effectively wastrying to understand the bounds of the Sarbanes-Oxley legislation.All our compliance issues are handled on an enterprisewide basis;this gives the regulatory compliance topics the necessary priorityto achieve the results we expect.

Chu: We have an IT governancetool that allows us to record dates, events, and approvals forproperty/casualty IT work. Using the tool, we quickly can retrieveinformation and documentation upon demand of the internal orexternal auditors as part of the SOX control process. In addition,our litigation response team has developed a series of processes tohelp us expedite requests from The Hartford's legal team. Theseprotocols allow us to mitigate the IT staffing required to fulfillthese requests. Compliance issues are handled by both our IT andour business organizations in coordination with our legal andcompliance functions. We have individual compliance functions foreach line of business, and there is close coordination with the ITand business operations on all of those activities.

Blakeman: There has been a lot of positive andnegative press about the impact of Sarbanes-Oxley over the lastseveral years. Some of the good things about Sarbanes-Oxley forMetLife, Inc., are the number and size of "gray areas" in financialreporting and controls have been reduced and documentationrequirements have been improved. Therefore, external auditors cangive a report card on whether or not SOX issues are being addressedadequately. For MetLife, they have been. The effort to document SOXcompliance has been more manual than we would like, so we arelooking at ways to improve that process.

Koster: At Prudential, compliance is a key areaof focus. The IT function works closely with the business areas tomitigate and resolve potential issues.

Tech Decisions: What is the current/ future attitude towardoffshoring?

Brooks: Our current attitude toward sourcing isvery positive. It is working very well for us now, and we plan toexplore it further. We are looking at every investment as atransaction and assessing how it should be sourced. Someinvestments are sourced entirely internally. Some are offshore.Some are offshore resources onshore. Most are a mixture of two ormore of the above. We plan to reduce fixed cost, reduce averagecost per resource, increase flexibility of resource pools, and turnover resources and skills as quickly or as slowly as needed viasourcing partners.

Kellington: There really isn't a change here;offshoring has been an effective way to increase constrainedresources in a cost-effective measure. We've been utilizing variousfirms throughout the years to augment our constrained staff; asworkload increases or decreases, we adjust accordingly.

Blakeman: Global sourcing has been a part ofour industry's IT staffing strategy for several years now andlikely will continue to be. Using outsourced or offshore laborallows companies to respond to market needs for fewer or additionalresources quickly and without impacting their U.S.-based employmentlevels.

Tech Decisions: Web initiatives–is the plan "steady as shegoes," or do you foresee some new direction or heavier reliance onthe Web (for producers or customers)?

Koster: The Internet still is growing inimportance. We see increasing utilization and heavier reliance onthe Web from our customers, our employees, our agents, ourthird-party sales channels, and other partners. We expect thesetrends to continue as younger generations–who are more demanding oftechnology–move through the work force. We are continuing to lookat ways to expand our Web presence with more and richer informationand with greater customization to the audience.

Brune: We've relied on the Web for helping usdeliver information and services to our customers for several yearsnow. We're going to continue enhancing these tools, including ouraward-winning Accessallstate.com site that has been recognized forallowing financial professionals to develop and manage easily andconveniently their business online.

Chu: We will continue to usethe Web in every application. It's both a tool and a channel. We'realways looking to leverage the power of the Web, so I'm sure ourreliance on it will grow.

Brooks: Our "thicker" clients will get much"thinner," and everything that can go on the Web will. We will havea greater reliance on Web initiatives.

Kellington: Hopefully the industry will movemore toward real-time [SEMCI] technology, which will connect anagent's system to a carrier's system. Ohio Casualty has implementedmany solutions to smooth the processing inefficiencies of ourindependent agents. I just hope we can get a critical mass ofcarriers implementing policy transactions such as quoting orissuance. SEMCI capabilities definitely would improve theindependent agents' workflow.

Blakeman: Web-based "thin client" applicationshave been a standard for several years now, and I don't see achange in that direction. The number of Web applications and theirfunctionality will continue to grow as older legacy applicationsare replaced and retired.

Tech Decisions: In retrospect, 2005 has been a rough year forthe insurance industry with the devastating hurricanes and theinvestigations conducted by the New York attorney general. How willthe industry bounce back in 2006 to make it a better year?

Brune: Despite a record-breaking year forhurricanes, Allstate is well positioned for the future. To quoteour chairman Ed Liddy, "Insurance is the oxygen of freeenterprise." So, you can trust we'll all keep working to improveprocesses that help us deliver our products and services.

Kellington: I'm a firm believer thetransparency issues that stemmed out of New York will help theindustry in the long run. It may cause turmoil in a few firms inthe short term, but in general, it's the right thing to do. I alsobelieve this industry is the most efficient and effective mechanismto deal with the uncertainty of the future–it's why we are inbusiness. As long as pricing remains rational, the industry will dofine in 2006.

Blakeman: The industry will bounce back byfocusing on the fundamentals that drive the business. Goodproducts, good underwriting, superior service, efficientoperations, etc., drive industry results and will continue to doso. Information technology plays a key role in each of theseareas–from automating manual tasks to using data mining tools toidentify potential new profitable market niches.

Chu: Each year has its ownchallenges, and 2005 was no different. The key is to createsustainable capability that allows us to outperform the industry ingood or bad cycles. It's all about how you distribute, manufacture,and fulfill your promises. That doesn't change.