The first step in understanding how a policy administration system gives an insurer a technology edge is to identify what kinds of value a policy administration system could provide. The best way to approach the kinds-of-value question is through Celent’s Prime Directive for insurance IT:
The mission of IT is…
• to enable business operations and strategies…
• that achieve corporate objectives.
• require strategies…
• and make demands on operations…
• that are supported by IT solutions and capabilities.
Figure A shows some of the corporate operating objectives and strategies that a policy administration system can enable. Corporate objectives fall into four broad categories: bigger (growth), leaner (efficiency), smarter (effectiveness), and faster (agility). The strategies are the means by which the objectives are accomplished.
WHAT TO LOOK FOR
A new policy administration system is, by and large, the largest single technology investment an insurer can make. There is no single best policy administration system for all insurers. There are a number of good choices for an insurer with almost any set of requirements.
As suggested by the Prime Directive, an insurer seeking a new policy administration system should begin the process by looking inward. Every insurer has business objectives and strategies relating directly or indirectly to new business and underwriting, distribution channels, and policy service. Each insurer also has its own technology application portfolio and infrastructure, technology strategy, and perhaps a roadmap. All of these factors should inform how and where an insurer begins to look for a new policy administration system.
Next, an insurer should seek to understand and weigh the capabilities of each vendor (as a long-term business partner) and each solution (technology, functionality, customer base, service quality, cost, implementation track record, and so on). Will the vendor relationship and the system’s capabilities and flexibility facilitate or hinder the achievement of the insurer’s strategic, operational, and technology strategies and objectives?
These considerations are the beginning of a longer process of understanding requirements, long lists, short lists, and due diligence.
WHAT VENDORS PROVIDE
Vendors are competing in a crowded marketplace. Although one rarely hears insurers or analysts lamenting a shortage of vendors or solutions—and new entrants keep appearing. For both incumbents and these new entrants, this means that no vendor should stand still—in terms of either the technical excellence of its system, or just as importantly, the quality of service it provides to insurers both before and after implementation.
There are any number of ways a vendor can differentiate its solution: usability, functionality, on-time and on-budget implementations, and high-quality, fairly-priced, post-implementation services.
WHAT IS A PA SYSTEM?
Surely everyone who is reading this knows what a policy administration system is, don’t they? Actually, in Celent’s experience this answer is no—not with any consistency from vendor to vendor, or from insurer to insurer, or from business to IT, or even from staff person to staff person.
The fundamental problem is boundaries: Does a policy administration system always include a rating engine, or a rules engine, or a portal, or even perhaps a billing and a claims system?
Part of the ambiguity comes from the increasing prevalence of end-to-end systems offered by many vendors; which typically include rating, policy administration, billing, claims, and whatever else might be in demand (think business intelligence and analytics). And part of the ambiguity comes from inconsistent terminology within an insurance company. When everyone on the business side talks about their policy administration system, everyone knows that they are talking a single “system” that provides rating, product definition, new business, and service functionality. On the other hand, in IT, that set of functions is delivered by multiple applications, perhaps only one of which is known as a policy administration system.
In one sense, the definition of a policy administration system is very simple: It is the system of record for all policies that an insurance company has written. At this most basic level, a policy administration system is a repository of policy-level data related to objects of insurance, coverages, limits, conditions, exclusions, duration of the policy, endorsements, and so forth. A permanent policy record is created at the time a policy is issued and includes the complete history of the policy through renewal, termination, cancellation, and/or reinstatement.
Celent recently published its biannual evaluation of commercial and personal policy administration systems in North America (this article draws on some of the concepts and content from those reports). We found it helpful to think about policy administration system boundaries by dividing features and functions into three groups: basic, advanced, and additional end-to-end components. Let’s look at each group in turn.
In actual practice, an insurer uses a policy administration system— either by itself or closely integrated with specific point solutions—to execute a number of core processes, and relies on several types of supporting capabilities, as shown in Figure B.
The core processes fall into three broad groups, each with subprocesses:
• Rate, using a separate rating engine/component
• Quick quote and quote
• Issue (including policy printing)
• Endorsements, including out-of-sequence endorsements
• Other changes to the policy, e.g. additional vehicles
• Cancellation, e.g. for non-payment of premiums
• Renew, with or without changes in terms and price
• Non-renewal, compliant with regulatory requirements
Supporting the core processes are several components: rules and workflow, forms and correspondence (more broadly, content management), reporting and business intelligence.
Rules and workflow: Designing, managing, and executing business rules (attached to products or processes) and workflow (person:person, person:system, system:system) during any activity or process. In a more modern policy administration system, rules (usually) and workflow (sometimes) will be externalized from the core code and from the presentation (UI) layer.
Forms and Correspondence (document management): creating, managing, and using a broad variety of documents, including policy content, forms, and correspondence.
Reporting and Business Intelligence
• Reporting: Designing, storing, and accessing reports ranging from simple lists, to multidimensional calculated variables. In general, reports are used to monitor activities by a user and by all levels of management.
• Business Intelligence (including basic analytics): Graphic and interactive presentation layer that shows patterns of relationship and causation which an insurer can use to improve such functions as pricing, underwriting, and claims.
A good, modern policy administration system will also provide many types of advanced functionality—beyond the basic functionality described above. This section highlights 12 categories of advanced functionality.
These 12 categories have been selected to be indicative of the breadth and types of advanced functionality for a given solution. They were not selected as a comprehensive or a “top 12” list. An insurer seeking its own new policy administration system might want to include many or all of these 12 types of functionality, but such an insurer should develop its own customized list.
• Underwriting desktop: a set of purpose-built screens, designed to provide underwriting with the information and data (e.g. submissions, loss history, prior claims, credit or insurance scores, etc.); as well as communication functionality (email, instant messaging, etc.) needed to process new business and renewal applications. The key concept is purpose-built to be an integrated and highly usable environment in which underwriters can do all or nearly all of their work.
• Ability to design and manage product-specific rules: using a provided rules design and management capability.
• Ability to design and manage product-specific forms: using a provided content management capability.
• Service desktop: broadly similar to the underwriting desk top; a set of purpose-built screens, designed to provide policy service staff to handle all or nearly all of policy service inquiries and transactions .
• Premium Accounting: creating a sub-ledger with premium written, premium earned, and related information.
• Statistical Reporting: the ability to create a properly formatted data set to report various policy-related information to bureaus and departments of insurance.
Supporting Components (used across new business, policy service, and renewal)
• Producer Portal: A portal provides a producer (or policyholder or prospect) an ability to upload submissions or other data, download policy and other information (e.g., billing or commission data), and to communicate via various forms of messaging. In general it provides an integrated purpose-built user environment.
• Workflow Management graphic design environment, with automated code generation: a dedicated environment for creating workflows (compared embedding workflow in screen design, sequence of questions and data fields, etc.). Code to actualize the specific workflow should be generated in the background without specific effort by the person creating the workflow.
• Business Rules Management Functionality: Design, store, manage, and execute—all externalized from the policy administration system’s core code.
• Party Management: a data repository for organizations and individuals related to any policy, including producers, applicants, insureds, and lien holders. It can be used for clearance, as well as providing data for commission calculations.
• Product Repository: a permanent record of product and lines-of-business specifications and valid dates for policies that have been sold in all states or provinces. Typically there are inheritance capabilities to support the development of new or modified products.
• Management Reporting Dashboard: a graphic environment for managers to view performance and metrics for individuals or units.
Celent has limited the definition of a policy admin system to include a set of core processes, sometimes with advanced functionality. But vendors do not necessarily limit their definitions of a policy system in the same way, and many have attempted to build out some or all of the end-to-end components that an insurer might need. Some insurers are just looking for a best-of-breed policy administration system to work with other core systems already installed, but other insurers may be looking for a vendor who can offer solutions for parts of their insurance operations.
Some of the additional end-to-end components defined here also are listed as basic or advanced functionality. This is not a contradiction. A vendor might bundle a component with their policy administration system (for example, a billing system), but also consider it (and also sell it as) a separate, stand-alone product. Alternatively, a vendor might provide a basic level of functionality in one area, but also have an upgraded, higher-cost product or an ISV partnership with a different vendor to provide an advanced solution (e.g., rating).
• Update service for ISO/AAIS/NCCI rates, rules, and forms: providing current versions of bureau-generated rates, rules, and forms for an insurer that uses such content for various lines. Updates are provided in formats that are compatible with the policy administration system’s product configuration and rating capabilities.
• Rating engine: a specialized type of rules engine which will return a rate given a required set of underwriting and policy variables.
• Billing: a system to create bills and handle collections from producers and usually from policyholders as well.
• Commission Management: a system to calculate, record and transmit information and data regarding commissions due to producers. Sometimes combined with a billing systems.
• Reinsurance Management: a system to record any reinsurance contract related to a policy or set of policy, and to manage the financial and reporting interactions with reinsurers and brokers.
• Claims Management: a system to record and transact all matters relating to a claims from first notice of loss through final settlement.
Donald Light is a senior analyst with Celent, a division of Oliver Wyman, Inc.