We are only a month into the new year, so it’s too early to determine what type of year this will be for information technology professionals working in the insurance industry. One thing is certain, though, insurance carriers are relying on their IT departments more and more each year and that is evidenced by the increase in technology spending that several industry analysts have forecasted for this year.
These increases in IT investment bode well for insurers, particularly among carriers where the business side has come to understand—and embrace—the significance of IT enablement, according to Deb Smallwood, founder of Strategy Meets Action (SMA).
In its spending survey for 2012, SMA learned over one-third of insurers plan to make a significant investment in IT this year.
One reason for this increase in spending is insurers have developed confidence that their IT organization can deliver results, according to Smallwood. She adds that carriers also realize that a failure to invest in their own systems often means they quickly can fall behind their competition.
“It’s competitive differentiation,” she says.
Data, business intelligence, and analytics appear to be featured areas for investment in 2012, according to Smallwood,
“What we are finding is insurers are adding more lines of business or they are shifting focus—say from finance to underwriting or a different piece of underwriting,” says Smallwood. “We’re starting to see maturity around spending in those areas.”
Smallwood explains that insurers aren’t just making initial investments—many of them are re-investing in a project.
“We keep talking about the same initiatives, but [insurers] are either going deeper or to areas like risk evaluation, pricing, or a line of business that they never entered before,” she says. “They are taking their success stories and expanding them throughout the value chain.”
Gartner Research sees a continuing movement among p&c insurers toward policy system replacement in 2012 as the number of deals for core systems has increased each year for the past two years.
“Companies are facing legacy problems and the heritage of bad systems,” says Kimberly Harris-Ferrante, vice president and distinguished analyst for Gartner. “It’s not the majority, but it’s more and more each year. A lot of money is being invested in policy, pricing engines, rating engines, claims systems, and even billing systems. That’s definitely on the upswing.”
Harris-Ferrante credits part of this movement to the technology progression within the industry, particularly advancements made by vendors to offer free-standing policy or claims systems that allow carriers to purchase a single portion of the core, such as policy administration, and not have to buy billing and claims systems at the same time.
“Look at the progress carriers have made to go to one vendor and buy three different modules, implement them in separate years, and have a common integration with one single vendor,” she says. “It allows carriers to have the vision of a big replacement, but the ability to do it incrementally. All of that is coming from the maturity of the vendors themselves.”
Policy administration system replacement remains a top priority for insurers in 2012, particularly for large and midsize carriers, according to Matt Josefowicz. It is less of a priority for smaller carriers, though.
“That’s partly because small insurers have fewer systems and may not feel like they can afford a newer system,” says Josefowicz, partner and managing director in the insurance practice at Novarica.
For a small carrier there aren’t that many policy administration solutions available that aren’t a huge drain on a smaller budget.
“If you are a $50 million insurance company, you may have a total IT budget of $4 million,” says Josefowicz. “If you are going to try to replace a policy admin system, the cost might take up your total IT budget for the next two years.”
Smaller carriers instead tend to focus on issues that are more tactical; at least until their policy system issues become too pressing.
“If [smaller carriers] wait long enough, a more cost-effective SaaS option might rear its head with a lower total-cost-of-ownership,” says Josefowicz. “We’re already starting to see those kinds of options on the market.”
Ellen Carney, senior analyst with Forrester, believes the p&c industry finally is entering a hard market, which she maintains will have interesting implications for the industry.
“We’ll have to get a lot smarter about underwriting and the quality of our customers,” she says. “At the same time, as customers receive higher bills they are going to start shopping more.”
Carney also believes the customer base is changing and that means insurers need to look for different ways to attract customers, women, for instance.
“How are women going to buy insurance?” she asks. “In many respects women are opting to remain single and we see carriers looking at women in a variety of different lenses. The competitive landscape is getting interesting.”
Carney is optimistic because the industry has had five quarters of increasing profit.
“The volume of catastrophes the industry was able to handle and the hardening market are exploiting why the industry is feeling so optimistic,” she says.
On the life side, Smallwood sees investments in business process management and workflow as life insurers seek efficiencies in the front office, underwriting, and distribution connectivity.
“We’re seeing investments on the life side on new business underwriting, e-submissions, and illustrations,” she says. “The data for life continues to be aligning products for distribution to their customers. What products do customers buy and through what channel?”
On the p&c side, the number one investment area is core system replacement, according to Smallwood.
“It continues to be a top priority,” she says. “Some carriers have implemented one line and now they are implementing a second or they did a policy system upgrade earlier and now they are doing billing. We also see increased attention on rating engines, product configuration, and product management. Portals and agent connectivity, real-time download and upload remain top of mind as well.”
Smallwood maintains the most troubling challenge for 2012 involves project management, particularly the need to ensure the project management office has the right mix of business and technical analysts.
“We still see failed projects and it always seems to come down to the fundamentals,” she says.
A second area of concern for Smallwood is data integration. She maintains that some carriers don’t have the basic architecture in place to hone in on the integration and create a centralized data hub.
“We need to centralize the data integration,” she says.
Smallwood’s third concern is portfolio simplification.
“As we continue to invest in software, we need to remove the complexity from application and data portfolios and develop a plan to simplify the projects so we are unplugging some applications, not adding more,” she says.
Smallwood continues to see insurers cut corners and she feels data integration issues could arise from a lack of clarity or knowledge if there are insufficient resources available to correctly architect the integration.
“When you buy a core system, [the vendor] is going to help you connect,” she says. “That’s why enterprise solutions are taking hold vs. best-of-breed because they come pre-integrated. But even core systems have to interface with portals and front ends and they have to interface with the back end and the general ledger. We’ve just got to get smarter about it.”
Smallwood believes that what happens with portfolio simplification is carriers go with a plan to replace their legacy systems and when they start to implement policy admin the project becomes either too expensive to implement or they look at the cost justification for some of the other lines of business and they end up keeping their legacy system for certain lines of business.
“They go in with a plan to replace the legacy systems, but the plan sometimes fizzles,” says Smallwood. “It needs to be part of the strategy—both business and IT—to simplify. A simplification portfolio will help reduce costs.
Harris-Ferrante is fearful of the current trend toward vendor consolidation, which she believes is driven, at least partly, by insurance companies in their effort to deal with as few vendors as possible.
“My fear is we are moving to more of a collector model,” she says. “The vendor buys a complementary technology company and says they have one in this bucket and one in another bucket. The beauty of going with a single-vendor, best-of-breed model is if you buy multiple applications from a single vendor carriers are not just getting a discount for buying multiple products, but the technology is compatible with the same foundation, architecture, and data model.”
But Harris-Ferrante points out what sometimes happens is a vendor acquires a company and decides against making changes to the guts of the system they just bought because that would cause problems for existing users. But if a carrier buys two applications from a single vendor and the products don’t have the same technical foundation or data model, it means the carrier needs to have duplicate skill sets to maintain the products, they have to deal with two architectures, and also will need to make the data models work together.
“It’s not simple,” she says. “There’s no synthesis in the technology foundation with some of these applications. It might be better than dealing with two vendors from a vendor relationship management point of view, but from a technical integration, total-cost-of-ownership, and maintenance point of view, it’s not helping a lot.”
Another worry for Harris-Ferrante involves cybersecurity. As insurance companies become more digital, cybersecurity and risk management are not always top of mind for companies.
“Insurers are focusing on moving to digital, but not focusing on protection of the digital assets,” she says. “We need to move to all-electronic content—digital records and digital data and accessing it to portal technology for customers, partners and agents—but you have to make sure it is safe and secure.”
When there is a blunder and one of their competitors is on the news , companies want to know to keep that from happening to them, but up until then it’s what Harris-Ferrante refers to as, “ignorance is bliss. I fear we may have a big insurance problem with cybersecurity. Unfortunately it will be too late for the first person it happens to.”
Carriers will continue to march forward in 2012 with big initiatives—customer centricity, digitalization—but Harris-Ferrante also worries that insurers underestimate change management and the culture within their companies.
“They want to talk about the technology and the vendors, but not with how they are dealing with things like the call center and the skill sets of the people working there,” she says. “Is it going to be a low-pay, high-turnover job? Call center is an important channel, but many hire low-end people.”
Insurers forget how the culture of the company has to change to facilitate the experience that comes with using the new technology appropriately.
“It’s not just buying technology and voila you are modern and doing fancy things,” says Harris-Ferrante. “When you focus on how you are going to do things differently you have to be sure the employees, the culture, even the incentive and compensation are driving the behavior you want. Otherwise the technology won’t do anything for you. You can’t just wake up tomorrow and do something different. You have to deal with training, employee retention, change management, employee education. If you don’t take a strong look at the role of people and process, and change management from an organizational point of view, you can’t be successful.”
In its report on U.S. insurer IT budgets and projects for 2012, Novarica found many carriers rated their systems as being poor in quality. Josefowicz believes carriers are looking at where they can obtain the greatest improvements in these systems on a short-term basis, such as enhancements. Although such a plan may be considered less expensive, Josefowicz regards it as a risk management issue.
“It’s generally viewed as lower risk to enhance something that’s already in place rather than to go through the transition of replacing a system,” he says.
Josefowicz points out it is difficult to lump all insurers into a particular bag because the market is diverse in terms of the state of capabilities at different companies.
“Carriers may see different areas as core, but if you look at the business drivers—growth, operational effectiveness, competitive parity—and look at the business capabilities, which mostly are around speed-to-market, distributor service, and business intelligence, that’s how those goals translate to technology-enabled capabilities,” he says.
Josefowicz includes among those capabilities bringing new products to market faster, serving agents more effectively, using technology to improve the agent/underwriter relationship and speed of transaction, and leveraging internal and external data through better business intelligence.
When Novarica asked insurers to cite top project areas for 2012, analytics was one of the lowest rated on both the life & annuity side and the property & casualty side—no matter the size of the insurer.
“It’s not in the top three for most insurers because being able to implement a predictive analytics model depends on strong rating, policy processing, and transaction processing capabilities,” says Josefowicz. “But that doesn’t mean insurers aren’t doing analytics. I would hazard a guess it is a driver for policy administration projects that include rating and underwriting systems so the additional predictive models can be implemented. The need to support predictive analytics is one of the things that drive other larger projects.”
Josefowicz doesn’t like to make bold predictions about what lies ahead in insurance IT because he sees the industry dealing more with incremental change as opposed to massive change.
“I think the problems are well known, the challenges are established, and the solutions, in most cases, are understood,” he says. “People are engaged daily in the struggle. It’s not glamorous, but it’s absolutely necessary.”
Customer-centric projects will be a major area of focus for some insurers in 2012. The CRM era of the 1990s was universally panned, but Harris-Ferrante points out things have changed since then. To that end, a number of Gartner’s larger clients have begun strategic initiatives around customer experience management, she adds.
“The next wave of CRM or customer centricity involves looking at the experience customers can have,” she says. “It includes devices, transactions, multi-channel integration, changing the various processes that make them more customer-friendly, and asking the questions: What do customers want from us and do we have the right products they want to buy?”
Harris-Ferrante believes what is different today is carriers are looking inward to determine what customers want from their insurance company—products, processes, technology—experiences the carrier might be unable to offer today.
“How do [insurers] transform their company into something that is seen more positively by their customers?” she asks. “It’s a cultural transformation that I’ve never seen before.”
Harris-Ferrante believes this transformation arose from the traditional fear of customer turnover, but also the fears of stronger competitors, the ability to acquire new customers, and having the right products and prices for customers.
Some of these fears arose from the explosion in the social media world over the last 24 months, particularly the transparency and visibility of bad events. A decade ago, if a consumer had a bad claims experience, they might tell a few friends and family, but with the power of the Internet consumers can easily tell the whole world about their bad experience.
“There is a growing fear and recognition of the transparency of bad customer service,” says Harris-Ferrante. “Not just how it tarnishes the brand, but how it affects existing customers and new customers. We’ve been tracking social media as a referral source for a couple of years now. Friends and family recognition is stronger in power when selecting insurance products than even brand or broker/agent recommendations. That’s changing the playing field for companies.”
IT is injecting innovation into the business side with new ways of doing things and Carney believes such innovation is creating interest and activity around virtualization and cloud.
She described herself as “shocked and awed” by some of the inquiries Forrester has received from tier-one carriers looking to put things in the cloud that no one ever would have imagined.
“We need to catch up with what is going on in other industries,” she says. “This is the age of the customer and if we want to be competitive we have to manage our resources better than we have in the past and be smarter about it all.”
Many carriers already have business intelligence and predictive analytics in place, but Carney believes they are looking to spread usage broadly across the business.
“Carriers are looking at it more holistically,” she says. “If they can’t get the answer out of their system there is something fundamentally wrong and they could lose the business. We are seeing incredible interest right now in keeping customers loyal.”
Mobile apps aren’t multi-million dollar investments, explains Carney, so they can be on the market quickly.
“If you are a smaller carrier these could be easily implemented,” she says. “They are built and deployed without costing a lot of money to compete. Even smaller, single-state carriers are doing interesting stuff around mobile in order to compete. Mobile and social media are the kinds of spending initiatives happening outside of the IT organization. It doesn’t cost a lot and [the business units] can run it themselves.”
Harris-Ferrante also sees significant increases in mobility as carriers work with existing internal applications to make them mobile friendly or actually purchase new devices. “The world is becoming more mobile with agents and consumer-facing applications,” she says. “There’s a big hike in spending there.”
Smallwood remains enthusiastic about insurance IT.
“I think the combination of social media, mobile, cloud, data, and analytics are the right ingredients to transform the industry from a technology perspective,” she says. “It’s not one or the other, but a combination of all of them.”