Ward Group
With so many reports of insurance companies choosing new systems or service providers, it appears that companies are constantly engaging in major projects to improve their systems capabilities.
But how prevalent is new system activity at insurance carriers and what rationale is driving the decision to move forward with the investment?
Based on a study of property-casualty insurers conducted by Ward Group and observations of client activity, system replacement across the insurance industry is widespread. Only a small percentage of the companies that participated in the study--less than 10 percent--are not currently participating in a major system implementation project. Prior to the last three to five years, companies were heavily focused on policy administration system replacement rather than claims system development. Consequently, 71 percent of the companies are still in the process of completing a policy system replacement. More recently, companies have focused on claims with half the companies in the study indicating they are implementing new claims systems. About one third of the companies are developing a billing system. In particular, personal lines companies are replacing all of their systems at a greater rate than commercial lines companies.
New system projects remain a high priority item for insurance carriers. Many of these projects focus on driving out costs of other parts of the organizations in order to meet the ROI's promised. In fact, the number one reason for a new system was to improve the efficiency of the organization.
This can be a challenge for IT organizations when budgets are tight. While a new system will generally add expenses to the IT budget, the IT department does not control staffing or expense reductions needed in other business units in order to justify the investment once efficiencies are achieved.
The top four reasons for implementing new systems are:
? improving the efficiency of the organization
? the need for new technology
? supporting company growth strategy
? adding new functionality for users
A third of companies reported rationale for the new system as the inability to maintain the current system. Concern about supporting a legacy system is a factor when justifying system replacement.
The majority of companies plan for retirement of the replaced legacy systems, but there has not been the success with retirement as projected. Also, system retirement is generally not simultaneous with the implementation of a new system which will cause maintenance costs to increase.
It is clear that insurance companies are investing in new system development, but how are they developing the systems? Are the projects on budget? How effective is the project governance?
Prior to the last 10 -15 years, it was common for many insurance companies to custom develop their systems with internal resources. With many available vendors in the marketplace and the need to accelerate timelines, the trend has shifted towards buying systems versus building them internally. Only 28 percent of companies in the study indicated they are custom developing with internal resources. This trend was evident across all system types - policy administration, claims, billing and other.
One-third of new system development projects are in phase two with a product or location live on the new system. The other two-thirds of projects have significant milestones to achieve. This trend likely indicates the investment in new systems will not slow for three to five years since companies will need to continue to invest in these projects to get systems in production.
A surprising metrics was that 35 percent of companies reported that their new system project was over budget. Comparing this over-budget statistic to the fact that only one-third of projects are in phase two does not provide a favorable picture for expense management issues. Companies are more likely to be over budget as the project continues into multiple phases.
Project governance is an important topic for insurers, as the governance process ultimately dictates the success of the project (and potentially the success of the CIO). Over 90 percent of companies rated their governance process as either good or excellent and indicated that their governance process has improved over the past five years. There have been many initiatives focused on increasing communication to improve timelines, prioritization and improving the relationship between IT and the business units. Maintaining good or excellent governance can mean the difference between success and failure.
Insurance companies recognize the value of new technology to improve efficiency, support growth and provide customer service. Systems development continues in spite of the challenging implementation process and difficult economic conditions.
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Ward Group recently conducted a study of property-casualty insurers relating to 2010 Information Technology (IT) investments and system replacement activities. The purpose of this survey was to provide guidance on the status of IT spending trends for 2010 and the degree of new system implementation at property-casualty insurance companies. In addition, Ward Group identified key spending trends for major IT functions and specific initiatives that are being funded in 2010. Contact Leah Hollstegge at lhollstegge@wardinc.com for more information about the 2010 Information Technology Investment and Systems Replacement Study or purchase the complete study on-line at www.wardinc.com.
