Insurance companies are finding themselves faced with increasedpressures due to new regulatory requirements, more-demandingcustomers, and the competitive imperative to innovate and launchnew products. Those fundamental challenges are intensified becauseof capital constraints and the need to control costs. When costpressures mount, technology and operationsimprovement/transformation projects frequently are the first to beeliminated.

And yet we are seeing large-scale investment trends among both property/casualty and lifeinsurance companies in the areas of operational efficiency andrevenue optimization/cost reduction. The strategic initiativessupporting these investments often are focused on makingimprovements to insurers' core operations, including claimsmanagement, billing, policy administration, and incentivecompensation management, to increase the speed to market of theirproducts. Customer data management and analysis strategies also arebecoming mainstream.

And what insurers are finding, once they have accomplished asignificant portion of their operations transformation, is theefficiencies derived and the other qualitative benefits deliveredare helping to fuel and support the successful completion of thetransformation project right away.

Of course, though, to many in the industry, the mere mention of“transformation” causes a shudder. Failed implementationprojects at high-profile organizations have given rise to theview transformation projects are too expensive and risky. Yet manyinsurers have been forced to face up to the limits of their agingsystems. A strong case could be made the insurance industry hasreached a tipping point where the predominant thinking shiftsirreconcilably from “transforming is too risky” to “nottransforming is too risky.”

Significant advances in new core technologies andinsurance-specific technology packages and components have provideda lower-risk path to transformation. The industry is beginning torecognize more broadly the full extent of the efficiency andproductivity gains these new software solutions can makepossible.

Brief History

Historically, transformation initiatives have not fared well inthe insurance industry. The number of high-profile projects thatwent overbudget and dragged on for years seemed to outweigh thenumber of successes. The industry watched closely as a few earlyadopters of operations transformations struggled, and theprevailing wisdom was transformation projects were “black holes.”Given this, senior executives often are quick to point to theimplementation horror stories when presented with proposals tomodernize operations or upgrade systems.

As recently as six to eight years ago, transformation was indeedrisky. Even the most confident and forward-looking insurersstruggled to optimize core operational systems. But looking deeper,one can see why past projects failed so spectacularly and how thosefailures might have been avoided. Poor scoping, planning andexecution, immature technology solutions, and a lack of strategicalignment between the business and information technology were theprimary causes. Many organizations leaped into implementationwithout sufficient due diligence or internal discovery tounderstand fully their business requirements, the impact of the newsystem on their current systems and people, or anticipating theirfuture business needs. Unfortunately, failure to plan properly fora transformation remains a common impediment to successfulimplementation today.

Why Transform . . . Now?

Today, insurers that seek new or upgraded systems as a means tooperational improvement face much lower overall risk and a veryattractive value proposition. That goes a long way towardexplaining the recent and substantial increase in transformationinvestments by both global carriers and midsize national andregional players. There is a sense in the industry thattransformation's time has come, thanks to the convergence ofseveral market trends and drivers:

o Regulatory changes: New or updated regulations oftennecessitate changes to systems so insurers can capture and verifyrelevant customer information, financial data, and processcontrols. In many cases, insurers must gather and submit requiredinformation through a manual effort, a costly and error-proneapproach. Eliminating the risk of fines–the amounts of which havebeen increasing–and streamlining compliance are two tangiblecomponents of the transformation business case. Some insurers facea choice of either paying fines or investing in new systems so theycan produce the data they need.

o Aging systems: The problem of aging systems reaches beyondregulatory compliance. In fact, at many insurers, key systems havereached the end of their life span. Yet many insurers no longerattempt to change their billing systems because it is toodifficult, time-consuming, or expensive.

Part of the challenge comes from fragmented IT portfolios. Thelinks and integration among claims, billing, and CRM systems, forinstance, are very tenuous. The lack of a single source of reliabledata compounds the problem. When systems can't be modified and dataintegrated, innovation is inhibited and new-product developmentbecomes much more time-consuming. Similarly, productivity andefficiency go down as staff and processes must work around thelimits and gaps in the systems.

o More-demanding customers: The more-empowered customers alsoare a force for transformation. Accustomed to using sophisticatedbanking and retail Web sites, and in some cases, using them ontheir phones, they now expect insurers to deliver similarlystreamlined processes, integrated data streams, and personalizedinformation. It wasn't necessary for insurers to be early adoptersin e-commerce, but baseline consumer expectations have risen beyondthe reach of old patchwork systems.

o Rising broker and agent expectations: Like a more demandingcustomer base, brokers and agents also expect easier access todata, smoother connectivity to insurers' systems, and a more robustinterface with the company. Here again, aging systems often can'tmeet even the minimum standard. In fact, most enterprise-incentivemanagement system implementations are missing approximately 90percent of the value that can be derived because they focus only onimmediate sales problems.

In return for investments in broker-facing systems, insurersshould look beyond tactical benefits and take into account thegreater potential strategic value. The desired outcome is anenhanced enterprise-incentive management system that can producemore-accurate sales forecasting, improved channel management, andgreater influence over sales behaviors.

o Technology advancements: The insurance-specific softwarepackages have matured considerably in the last few years. Thankslargely to advances in open-source technology, service-orientedarchitecture, and cloud computing, today's packaged solutions froma wide range of vendors are more robust and rich in features butalso less complex and easier to configure than their predecessors.Advanced tools for predictive modeling and leakage analysis inclaims, for instance, can be added to a consolidated claimsplatform.

Today's platforms and applications also are much morecost-effective when compared with yesterday's systems, which oftenrequired mass customization and expensive maintenance and supportcontracts. Still, the onus is on insurers to evaluate and selecttechnology very carefully within the context of their strategic andoperational needs.

These market trends and drivers are serving as catalysts for theincreased transformation activity in nearly all sectors of theinsurance market. Those benefits are measured in competitivelycritical areas, such as operational cost reductions, lower errorrates and reductions in claims leakage, gains in work-forceproductivity, greater process efficiency, and higher customersatisfaction rates. That's why, for many insurers, the questionisn't when or what to transform but rather how to transform.

In the Beginning

In starting a transformation journey, insurers are well servedby addressing the all-important “how” question. They should beasking themselves about the specific steps to take as they moveforward. As a best practice, those steps include:

o Defining a clear strategic road map that incorporates bothnear-term milestones and longer-term destinations.

o Building an objective business case and model for return oninvestment.

o Evaluating current and planned requirements for the futureprocess or system against industry-leading practices.

o Picking the right technology based on specific business goalsand optimal processes.

o Shaping an effective implementation methodology.

It's easy to see how this series of steps makes transformationless a leap of faith and more like strategic evolution. Once thesteps are in place, the following leading practices can help enactsuccessful transformation initiatives:

o Look before leaping right to requirements. Once the decisionhas been made to invest in new systems, there often is a sense ofurgency to leap straight into the definition of functionalrequirements. This undue haste is a common cause of projectfailure. Discovery–and specifically, defining businessrequirements–must come first. It is absolutely necessary to buildan objective business case and establish the long-term goals oftransformation.

Long before choosing technology or deciding which area totransform first, insurers should arm themselves with hard dataabout existing operations and identify gaps as they find them.Further, they should seek reliable benchmarking data for theindustry as a whole. This data can be difficult to find, which maybe why so few insurers seek it out.

o Sequence strategically: Clients often ask which area orfunction to transform first when a full operations replacementinitiative is being considered. The answer usually is billing orclaims because these are, relatively speaking, the most easilyaddressed and least complex. Further, addressing these areas firstcan help build momentum and increase organizational appetite forchange by delivering quantifiable value in a relatively brief timeframe. Payback cycles of less than a year and, in some cases, ofsix to nine months are reasonable and proven targets.

o Plan to move quickly: Insurance executives may be surprisedwhen first presented with high-level time lines that show newclaims or billing systems launching within eight to 10 months. Weencourage insurers to identify functions and processes in whichtransformation can yield tangible benefits within one year, thoughpayback cycles will vary according to project scope (e.g., will thenew system support a single line of business or multiple policytypes across the enterprise?).

It also is critical to “stick with the script.” Once the projectscope is confirmed for the current phase of work, do not allowscope creep to derail the time line. The best-run projects staywithin the parameters agreed upon at inception and defer necessarychanges to a subsequent phase. Proper diligence into thedevelopment of the project/phase scope helps to reduce the risk ofscope surprises.

o Integration: One of the key reasons these projects arechallenging is the effort associated with integrating the newoperations system into the insurer's current technology ecosystem.Insurers should exercise careful thought and planning when definingthe integration architecture that is best suited to theirenterprise. Upfront integration workshops and proof of technologyand proof of concepts of the key parts of the solutions go a longway toward avoiding surprises.

o Data conversion: Perhaps the biggest culprit in projectoverruns is underestimating the effort to convert legacy data ontothe new operations platform. Think before you assume. We are seeinga growing number of insurers undertaking enterprisewide datamanagement initiatives to alleviate problems with data redundancyand data quality issues resulting in high cost of ownership. Wealso are seeing rising numbers of insurers not converting theirlegacy data but instead handling new business on the new platformand letting the old business run off on the old system–often aone-year transition period.

Fundamentally, the cost and risks associated with convertinglegacy data need to be carefully evaluated and aligned with otherenterprisewide data initiatives against the costs of maintainingthe current system(s) in parallel. Unless your current platform ishighly unstable or poorly performing, we suggest letting the legacydata run off on the current platform and then be appropriatelyarchived.

o Don't forget the people: An underappreciated element insuccessful transformation efforts is change management. Too oftendismissed as a soft “nice-to-have,” executive sponsorship,training, knowledge transfer, and documentation can mean thedifference between mediocre and
outstanding ROI.

These steps are necessary because transformation can bedisruptive to an organization as a whole and to teams and toindividuals in particular. Personnel may be attached to the oldways of doing business even if they were inefficient. Consider thatat small or midsize insurers, transformation often means replacingspreadsheet-based processes with fully automated workflows. It'seasy to see how employees might resist if they don't understand theneed for the change.

The good news is change management yields a number of importantbenefits. By reducing resistance, effective change management canspeed end-user adoption and shorten payback cycles. Morestrategically, a transformation facilitated by these actions canhelp insurers mitigate the risks they face from lost institutionalknowledge and an aging work force.

Recent history demonstrates insurers of all sizes are capable ofgreatly improving operations with new systems and redesignedprocesses. Further, the benefits are tangible, significant, andattainable within relatively brief time frames.

While the business case is solid, it's important to recognizethe broader strategic benefits that accrue to insurers.Results-driven transformation can enable an organizational shifttoward greater agility, cross-functional collaboration, andcustomer-centricity. These are desirable qualities for any companyin any industry and in all types of economic climates. Certainly,they will be the hallmarks of tomorrow's insurance leaders, andthat's why the time has come for transformation in theindustry.

David Connolly and Raj Sharma are principals in the financialservices office of Ernst & Young LLP and are based in PaloAlto, Calif. Connolly can be reached at [email protected] or650-849-4710. Sharma can be reached at [email protected] or650-849-4711.

The content of “Inside Track” is the responsibility of eachcolumn's authors. The views and opinions are those of the authorsand do not necessarily represent those of Tech Decisions.