Short of going through a merger or an acquisition, the biggestchallenge hanging over business units and a CIO's desk is policyadministration. So, making the right decisions in this "once in acareer" project is imperative not only for the company but for theprofessional well-being of the CIOs and other technology leaders incharge of the selection. The policy administration system is theheart of the insurance company. These systems contain all of acarrier's knowledge. "It shouldn't be a surprise it is [acarrier's] biggest investment and the biggest priority for thecompany," says Kimberly Harris-Ferrante, research vice president inthe insurance practice at Gartner.

There are two categories of potential issues insurers face witholder administration systems, according to Mark Cyphert, principalwith Deloitte Consulting. One is the legacy concept of havingundocumented business rules and logic and ineffectual codeconstructs in data stores. So, going through any sort ofchange–even something as simple as adding a new product–becomesinefficient and cost prohibitive. The other consideration is theoverall complexity of the carrier's environment and the risks thataccompany that environment.

One driver for policy administration system replacement isconsolidation. "Companies that have acquired but not necessarilyintegrated blocks of business have an ongoing cost to maintain thesystems or perhaps pay a license fee as well as maintain a skillset across multiple systems," says Cyphert.

Commercial lines insurer GuideOne Insurance enhanced its oldersystems, retrofitted them, and reengineered them to satisfy thecarrier's needs, reports Mike Schneider, director of systemsimplementation. GuideOne complemented its policy administrationsystems by utilizing a third-party for rating. "We really had threesystems supporting the commercial platform we were looking tostreamline," he says. "It now will be one all-encompassing toolthat can be extended out to our agents, which was one of ourgoals."

The nice thing about the Insurity solution purchased by thecarrier, Schneider believes, is GuideOne views it as an evolution."Our agents are accustomed to doing some of that front-line entryvia the tool we had in place," he says. "This new tool withInsurity will be a more robust and enhanced tool that will providemore feature functionality down to our agents."

A second reason carriers turn to new solutions is inflexibility."There are things that appear relatively straightforward to anagent or to the marketing department–a tweak to the plan code or anew commission structure, something that appears relativelystraightforward," Cyphert notes. "But you have a legacy system thatcan't process the business, and it will take IT 16 months and $10million to make and test that change."

There also is a need to understand the operating environment andwhat processes and systems are doing, especially in today'senvironment of more regulatory scrutiny. The set of initiativesthat have gone on around Sarbanes-Oxley or for compliance opened upa lot of organizations eyes to see the number of controls,deficiencies, or overall inconsistencies in the way their systemsoperate, according to Cyphert. "Sometimes it is a lack ofpredictability," he says. "One way insurance companies make moneyis setting aside reserves based on projections for the coming year,and sometimes the complexities inherent in legacy administrationsystems skew the results. Some companies repeatedly have beenunable to project their claims, new business, and the like and havemade up for it with workarounds."

Darwin Professional Underwriters, a specialty lines carrier, isonly a little more than two-and-a-half years old. In the summer of2003, it started out on the RFP process. "We had a pretty good ideaon what we needed, and we were able to put together a prettydetailed RFP we brought out to a bunch of different vendors," saysBob Asensio, Darwin's CIO. "First of all, it had to be a completesystem. It had to support things such as rating, policy issuance,letter generation, producer management. Second, it needed to bevery configurable." Asensio believes the ability to configure wasthe key benefit that got Darwin to the solution it purchased fromOneShield. "It gave us the ability to control our own destiny," hesays. "I looked at it as they were supplying the blocking andtackling for a system that did certain basic things and then,working with them, we were able to add customized work flows,products, and whatever we needed."

Darwin has been able to extend the system, Asensio reports. "Notonly do we use it internally, but we have partners logging inexternally," he says. "[Partners] have a different view and adifferent work flow." The carrier also has added value to thesystem by automatically underwriting certain lines of business.

"In my previous experience [with Chubb], I was responsible forhome-grown systems, so you run into limitations and dead ends,"says Asensio. "When we went through this process, we did everythingwe could to make sure there were few dead ends."

GuideOne is a customized niche insurer, and the Insurity baseplatform wouldn't have supported the carrier off the shelf,resulting in a delay in putting new business on the system untilthe vendor builds customization for the carrier. In addition,GuideOne has a whole host of infrastructure issues to address, aswell. "One of the many reasons this is a long-tailed project is wehave dozens of different interfaces in order to satisfy all ourbusiness requirements," says Schneider.

One of the biggest changes today is the options available tocompanies. "Companies are starting to change what their choices arefor policy administration," Harris-Ferrante says. "It used to becompanies were thinking about buy, build, or outsource–those werethe three choices you had. A lot of companies now are looking atthe different alternatives and broadening some of these options."Such options include installing components rather than the entiresystem or adding different alternatives on top of the currentsystem, which could improve the policy system without changing it."We've seen companies start looking more and more at the option ofadding things on top of the system–BPM, work flow, and differenttypes of supplemental systems you can add on top without replacingwhat you already have," says Harris-Ferrante. "Companies are takinga variety of approaches to their policy system vs. the big-bangapproach."

Gartner recently researched both life and property/casualtycarriers on whether they were going to replace their policyadministration systems, go with components, or do nothing. "What wefind is somewhere around 27 percent [of life insurers] say theywant to replace the whole policy admin system, compared with 50percent looking at componentization–a specific piece of policyadmin but not the big bang," says Harris-Ferrante.

As for the most troubling piece of the system for life insurancecompanies, the claims component is the most problematic followed bythe rating/quoting part. "The investment in the claimsfunctionality by life insurance technology providers in the lastfew years has been pretty low," states Harris-Ferrante. Manytechnology providers have overlooked the necessary advancement inbusiness requirements, such as managing the life insurance process,while doing more around fraud, she contends. "Under life insurance,it's not just life–you have disability, long-term care, or criticalillness types of insurance that have more complicated steps in theclaims process than the traditional term life product," she adds."Life insurance companies are saying we need more data managementand work flow, more steps than what some of the vendors haveoffered. They don't feel the claims technology has matured at therate they would like."

On the P&C side, Gartner found 27 percent say completereplacement of the suite is preferred compared with 32 percent whosay components are the way to go. The part that is most problematicfor the P&C companies, Harris-Ferrante asserts, is rating andquoting. She believes companies also are looking to do thingsaround new product development, getting products to market faster,and being more accurate in their pricing. "A lot of the traditionalways [carriers] did pricing and quoting have changed," saysHarris-Ferrante. "They are trying new concepts, but the technologyhasn't matured at the rate they would like." The second problempiece is underwriting, which Harris-Ferrante points out is anextension on the movement toward pricing and new productdevelopment.

Any insurer taking a big-bang approach to policy administrationmust have more commitment, more detailed assessment, and more workdone upfront to figure out what to do. Harris-Ferrante advisesproject management and long-term commitment are two of thechallenges to be addressed. "With large projects, people get offtrack and can't stay with the project timeline because it is solong and involved," she says. When you get to componentization andparts, the challenges are more around integration, compatibility,the technology, and how you turn off some of the functionality andintegrate it with the best-of-breed approach, she adds.

New strategies are being developed. "It used to be if you didbest of breed, you did the one-off approach, whereas if you did thesuite, you had one vendor but multiple technologies from that samevendor behind you," explains Harris-Ferrante. Today, there is amiddle alternative where there is a best-of-breed consortium thatlooks like a suite, but it's a suite with different vendors behindit giving carriers specialized technology vs. the one vendor/onesystem approach.

Asensio indicates his company's business is called "specialtylines" for a reason. "There are more challenges," he says. "Thereare no real ISO or ACORD standards at this point [for specialtylines]. Everything is unique." The specialty industry is limited alittle in that the agency systems don't have a lot of connectivityoptions. Carriers have been forced to do a lot of home-growndevelopment themselves. "What we've been able do here are somethings other companies would never attempt," he continues.Underwriters have always maintained their work is an art and not ascience. "We don't do [automatic underwriting] for everything, butwe've been able to turn it into somewhat of a science and been ableto implement that into our tool set," says Asensio.

"The options are getting better," agrees Harris-Ferrante."Insurance companies have better options today than they've everhad. [Policy administration is] definitely an emerging market andan emerging model where there aren't any proven safe alternativesright now. Everything, to a certain degree, has some risk. It'sjust a question of what risk a company is taking. And to be honest,it's how much money they have in the pocketbook."

Cyphert doesn't believe finding the right solution is adifficult task for insurance carriers. "There is a bit of atried-and-true approach that will minimize risk around implementingnew technology, and that is making sure you select one that isgoing to meet as many of your business and technology requirementsas possible upfront," he says. Some issues are obvious, he pointsout, such as going with a solutions provider that is financiallysecure and has a strong set of references. "You don't want to be ascience project," he adds.

Cyphert also notes there is no substitute for going through duediligence. "Organizations that align with a technology vendor firstand then figure out how to fit that solution to their problem arethe ones riding the biggest risk," he says. "It's more importantfor a company to take a strategic view of the strengths andweaknesses of its current administration platforms. By that I meanspan five years, not last quarter's problem."

He advises carriers think through all the alternatives, such as:Do you have to replace the whole system with a new administrationsystem, or are there other solutions, such as a portal, amiddleware layer, or a new repository, which are going to solve thebigger part of the problem and be viable for five years out? "Onceyou make the strategic decision around what type of conceptualsolution you want to apply, I think that's the time [to move],"says Cyphert.

The questions that arise when discussing legacy systems arewhether they are working or not and why you think that, accordingto Harris-Ferrante. "What is the breaking point, and how do youmeasure it?" she asks. There are IT and business breaking points.On the IT side, it comes down to whether the system is going tocontinue to run, and do you have the resources to support it. "Alot of companies face massive skill-set problems because thetechnology is so old they can't support it, which leads a lot ofcompanies to another huge issue–relying on third-party outsourcersto come in and provide the IT skills to run the system," shesays.

The IT issues are easier to quantify, Harris-Ferrante believes.What is more difficult is looking at the business issues and askingquestions such as: Does the system meet the business unit'srequirements today? Do the business users know where they want tobe in, say, three years from now? Will this policy system supportthe functionality they are going to need? Can they create newproducts and get them in the market in a competitive fashion? Canthey get the data out of the system they need for compliance andreporting? "Those types of questions are harder for insurancecompanies to get their arms around because the business strategiesaren't in place," she says. "[Carriers] haven't sat down andfigured out where they want to be in five years. From a technicalside, we have people who will have a conversation about legacy, andhalf of them will say legacy is old and needs to go, and the otherhalf will say it's reliable and works every day. Business peopleare starting to say the system will not support what they need itto do, so it needs to be more of the business requirements thatdrive the large replacement projects, particularly those projectsthat are more strategic."

GuideOne began looking at new systems about two years ago,Schneider reports. The effort started out as more of aninvestigation to see what the marketplace held rather than a searchfor a specific tool. "Most companies do this on a regular basis,just to stay abreast on what's going on from a technologyperspective in the marketplace," says Schneider. "We found somepretty exciting things compared with what our structure lookedlike."

GuideOne did an initial presentation to the carrier's executiveteam to present the business case. Once that was done, the carrierhad momentum behind the project, and it was able to go through theformal RFI process in which some 20 vendors were screened down toone.

"I think [the market] is very good for shoppers these days,"says Schneider. "Of the 20 [vendors], there were a fair number thateither were new entrants into the market or foreign interests thatwere trying to get a domestic presence." While the solutionGuideOne will be going to from Insurity is one that currently isnot deployed, it is the next generation. "[Insurity] demonstratedits willingness to invest in the future to make its solutionattractive to us," he says. "Insurity has got a large client baseof significant tier-one companies. When it boiled down to three orfour, it got down to new entrants/foreign entrants against what Icall a proven vendor with a solid history."

In a market with a problem as big as administration platforms,Cyphert is surprised carriers don't have more options. "There tendsto be two classes of solutions providers–on one side, the guys whohave been around forever with relatively old architectures," hesays. "They've built upon business logic to try to make thesolution more flexible in today's technology environment, butthere's a lot of baggage there. You are bringing some of thedeficiencies from the past as well as having the company kind ofhamstrung by the legacy customers hanging on that they need tocontinue to support."

The other option is vendors that say they are going to buildthis thing right, put it on a scalable open architecture, anddevelop business-rules depositories and anywhere/any time access."The problem [with these vendors] is they are not tested and theirfunctionality tends to be very basic," says Cyphert. "They arelooking for a partner in an insurance company to help them buildout their solution."

Cyphert admits the market doesn't fully make sense to him, buthe sees a brighter future. "There are a couple of solutions capableof doing a full replacement of an administration platform that arelooking very good," he concludes, "so I guess I can take anoptimistic view and say there is some change occurring in whatsolution providers are offering."