So, now that we will all soon have science fiction-like computing devices in our living rooms--not to mention the multitouch, gesture computing-enabled devices that pass for cell phones--surely the early systems that would have been prevalent in 1968 and even 1984 must be gone at long last! As we are all well aware, though, this is far from true. While there are is no hard data, there are most likely more than a thousand legacy policy administration systems in use by insurers today. However, at least the majority of core system purchases now are finally focused on modern systems.
As 2009 came to an end, the fear that dominated the economic landscape was giving way to mere doubt and even some optimism. Property/casualty insurers had a standout year among financial services firms, especially since 2009 was an extremely light hurricane season. Life/annuity writers got a strong reprieve as the financial markets had good--and, more importantly, steady--growth.
Certainly the economy and other factors have caused carriers to turn a critical eye toward expenses. But for a change, IT has not been the immediate target. Instead, IT is being looked at as a potentially valuable partner to help carriers maximize the strong potential the next several years likely will bring. Though few predict a strong recovery, many believe it will at least be a protracted one.
With turmoil comes opportunity, and insurers are well aware of this. With the strongest carriers starting to cannibalize the weakest carriers' books of business or even making small but tactical acquisitions, stronger carriers are scrambling to update their core systems to improve their ability to capitalize on the coming changes. This includes the ability to absorb quickly acquired books or to enter new lines of business opportunistically.
POLICY ADMINISTRATION DEFINED
Policy administration systems (PAS) are the core recordkeeping and processing systems for insurers. In addition to these core functions, PAS may include many of the other elements represented on the Novarica Insurance Core Systems Map (right).
Core Policy Admin System on the map most commonly includes recordkeeping, servicing, product logic, and regulatory reporting. The other elements shown in dark blue (underwriter workbench, rating engine, core claims, reinsurance management, and billing) are frequently considered part of the policy administration system, too. The distribution or front-end elements in yellow (distribution management/commissions, agent portal, and customer portal) also might be included. Some systems may include additional areas, as well.
LIFE/HEALTH/ANNUITY CORE SYSTEMS PROJECTIONS
On the life/health/annuity side, the next six to 12 months are expected to continue to be difficult as these insurers navigate reduced demand as well as slow-growing investment income, and health insurers face an uncertain political situation with healthcare reform all over the map. Last year was a very slow year for L/H/A core systems purchases, though many carriers went shopping. Novarica has seen an explosion in core systems selection projects in the latter part of 2009 and expects a significant recovery in late 2010 for buying these systems. This is reflected in L/H/A IT budget expectations, too, with half of the L/H/A respondents in our CIO survey indicating a budget increase for 2010 and only 30 percent expecting cuts.
While the costs and inflexibilities of legacy core systems were tolerated in boom times, in leaner times they are becoming a target. Life/health/annuity insurers are recognizing it's almost too late to start looking for a new system and are planning accordingly. With a typical selection process taking up to nine to 12 months, followed by a 12- to 18-month implementation, plus additional time to complete conversion efforts, by the time a system is implemented the recovery will be well under way.
As a result of these trends, the market for L/H/A core systems should improve in 2010 and return to a robust market by 2011, especially for policy administration systems. For carriers that don't have a strong growth driver, cost reduction efforts also may lead down the PAS path. Systems consolidation, lower TCO from rules- and tools-based systems, a need to migrate off legacy technologies, and other "traditional" business case elements still may play a role.
Overall, Novarica projects 2010 looks to be on track to show modest growth over the very bleak number of L/H/A PAS deals signed in 2009. It is difficult to predict a range with any kind of certainty as the timing of purchases will have a very significant impact; instead, we estimate across all segments of the market (small/medium/large), roughly 40 deals will be signed in 2010 and 2011 combined.
PROPERTY/CASUALTY CORE SYSTEMS PROJECTIONS
Unlike the L/H/A core systems market that suffered in 2008 and 2009, the P/C market experienced no such slowdown. With few P/C carriers postponing already planned projects and the P/C industry remaining highly competitive--and profitable--the market for P/C core systems has been strong and steady. Further fueling the volume of deals, P/C deals tend to be faster, less expensive implementations that frequently don't have a conversion component (instead utilizing a convert-at-renewal strategy), and they often involve far less historical data.
Additionally, there are quite a few more P/C carriers than there are life/health/annuity writers. Plus, P/C insurers tend to have considerably more customer and agent contact throughout the year than their L/H/A counterparts. All of these factors are driving carriers to look to modern systems with their Web 2.0 features, Web services, rules- and tools-based architectures, etc., to help them stay competitive. Accordingly, we estimate a continued pace of more than 100 deals per year, though with more than 50 PAS vendors in the market--and only a handful that sell more than five systems per year--we also expect significant vendor consolidation in the coming year(s).
VENDOR M&A
With such a fragmented market in P/C and comparatively low activity levels in L/H/A, it's no surprise vendors have been feeling the urge to merge (or to acquire or to be acquired). In recent years or even months, we've seen top players in L/H/A PAS AdminServer and NaviSys gobbled up by Oracle and Accenture, respectively. BPO and PAS provider McCamish just was bought by InfoSys, Peak PSI just was bought by Ebix, and portal/connectivity vendor AgencyPort was bought by PAS vendor Sword. This trend has shown no signs of slowing.
In fact, we expect the pace of M&A in the insurance technology marketplace to accelerate in 2010. This has different implications for insurers, acquirers, and targets. In our May 2008 Executive Brief, "What to Expect When You're Expecting (Your Insurance Technology Provider to Be Acquired)," we laid out the different scenarios based on different types of targets being acquired by different types of buyers.
Insurers should make sure they understand which category their ISV providers are in and who is likely to buy them or why. For example, acquisitions of a fast-growing vendor or a vendor with strong technology but a small customer base are likely to result in increased investment in the product by the acquirer, while acquisitions of stagnating product providers are likely to result in forced conversions or migrations.
Insurers should protect themselves as much as possible through contractual means, including demanding pricing, base-code escrow, and service-level guarantees that survive change of control.
Overall, we expect the consolidation trend that has been slowly becoming the norm in fragmented portions of the market to accelerate as vendors look to compete with what is quickly becoming a growing group of mega-vendors. At the same time, portions of the market still underserved will attract new innovators to keep those mega-vendors on their toes.
CHANGES IN SOLUTION OFFERINGS
Part of the recovery of the L/H/A PAS market and the continued strength of the P/C PAS market is the maturing of the crop of modern solutions and growing R&D budgets that come with them. With the original crop of modern systems between five and 10 years old, many of those solutions now are turning into fully functional, fully multiline/multiproduct solutions with five, 10, or more customers. These, along with newer solutions from larger or well-funded vendors, benefit from a growing base of customers to fund new R&D that further improves and matures these offerings.
New vendors continue to enter the market, despite an existing crop of more than 65 vendors across the P/C and L/H/A space. For each acquired vendor or simply those that don't survive, another vendor crops up, whether from Europe, Asia, Canada, or simply someone's garage. A few even have focused on underserved niches, such as Software as a Service (SaaS).
Additionally, several of the longtime familiar faces in the industry have shown their willingness to modernize, as well. A handful of larger vendors have modernized or are in the process of modernizing their solutions, and even some smaller vendors that have been dormant from a sales perspective for a while have done so, too. And with the new vendors entering the market and existing modern solutions rapidly finding strong market acceptance, modernizing isn't a choice, it's a necessity.
Another major shift in the market has been under way for a while but has been further cemented over the past 12 months. This trend is toward something Novarica calls the "Hybrid Approach," in which carriers are tending to purchase vendor solutions that best fit each of their needs (? la best of breed) but with a goal of buying as many components from one vendor as possible (? la full suites) without suboptimizing any one piece of the solution. That is to say, vendors with one or a few major components are perfectly acceptable (and, in some cases, preferable), but the concept of lowering risk and cost through preintegration and a single vendor isn't lost on carriers either.
ADDITIONAL MARKET DRIVERS
Especially in light of the credit crunch and shifts in capital/reserve requirements, major catastrophes that still are fresh in carriers' memories, and a still tight (and hardening) market for reinsurance, both primary insurers and reinsurers are looking for solutions that can handle ceding and assuming (though not necessarily in the same solution). Being able to identify quickly and accurately risks that are reinsured has become increasingly important.
An increase in the use of ISO lines and modified ISO lines of business also is fueling change in the P/C PAS market. As carriers constantly strive to improve the speed at which they can bring a product to market, they increasingly are turning to starting with an ISO-based product and then modifying it as needed. From a speed-to-market perspective, this helps with everything from regulatory approval to rating algorithms to forms design. As a result, a growing number of vendors are offering more robust ISO product availability, and some even are offering outsourced ISO content maintenance or other creative solutions to ISO rate maintenance.
On the L/H/A side of things, increased activity is being further driven by several key areas. Group life/employee benefits is bracing for a need to offer new products rapidly as payrolls decline but likely will improve in the second half of 2010 and as healthcare reform comes into focus. Annuities have undergone a shift from primarily variable two years ago to primarily fixed for the last 18 months and now are likely to shift back again, making product development and speed to market key drivers. As a result, product development tools (stand-alone or otherwise) are helping to drive the market toward modern solutions or at least toward modern add-ons to existing solutions.
BETTER SYSTEMS, EASIER CHOICES
Much has changed in the core systems space in the last few years. Indeed, carriers that shopped for a solution 10 or even five years ago and found nothing to their liking likely would be quite surprised by the quality of the playing field today. Gaps still remain in certain segments of the market, of course, and, of course, vendors will move in to fill those gaps.
There are a number of factors that continue to keep this market strong for P/C and will help return the market to positive growth for L/H/A. With all of these factors in mind, it is far less difficult to see why carriers are making the seemingly difficult decision to invest in core systems. These projects, which in most cases can cost millions of dollars, were until recently viewed as risky and expensive even in the good times. But with the changes of the last few years in both available solutions and carrier attitudes, they now are being considered even when times are not good. Indeed, when all of the facts are laid out, it suddenly seems as though the more difficult decision would be to not replace core systems in the near future.
Chad Hersh is a principal and lead core systems researcher in the insurance practice at Novarica (www.novarica.com), a research and advisory firm focused on insurance IT strategy.
