From the February 2012 issue of Tech Decisions •Subscribe!

Picking Up the Pieces

So the calendar (at least the Gregorian one) has turned again and the chronological milometer has clicked from 2011 to 2012. In these purely arbitrary moments we get reflective and think big thoughts about the year past and the year ahead. We have our annual internal dialogue about things like weight loss (spontaneous combustion perhaps?) and self improvement goals (my favorite dwarf will no longer be Grumpy!).

My big thoughts, from the cosmic to the professional include: 1. I hope the Mayans are wrong; 2. (Assuming the planet survives), it is good to be in a stable and serious industry; 3. It’s good to be in IT, isn’t it?

If you are an insurance business person life in 2011 wasn’t so good. The P&C industry combined ratio through Q3, 2011 stood at 110 and the net profit at a measly $8 billion. Compared to 2011 the first number is up by about nine percentage points and the second is down by $24 billion.

As in any other year there were pockets of profit and pockets of loss, but more the latter than the former. For those small carriers that wrote property business in Joplin, Mo., and no longer exist it was a very tough year. For the industry in general it was a year driven by catastrophe losses (especially tornados), mixed investment results, minimal growth and (with the exception of the last couple of months of the year) flat prices.

Yet if you were an insurance IT person in 2011 life was pretty good. IT budgets were equal to or slightly better than the prior year. Major projects were started or continued in the areas of core legacy replacement, data analytics, and customer and agent portals.

Additional efforts were undertaken to investigate the cloud, mobile computing, and telematics, and to throw out Big Iron and bring in Big Data. Vendors continued to deliver better software and more projects were done using some flavor of agile implementation methodology; both steps in the right direction. The pressure to deliver was significant but in general IT departments were given the resources and tools to succeed.

So how does 2012 shape up for IT? Well mostly its good news, but not all.

Budgets

IT budgets appear to be either up slightly or holding steady in relation to 2011. Despite the ugly business results of 2011 companies are sticking with the multi-year technology push based on the realizations that technology can provide sustainable competitive differentiation (the upside) and as the expectations by business users, agent partners, and insurance customers continue to rise the existential threat of being left behind becomes more acute.

Core System Configurability

In an important sense the insurance IT world is becoming binary—consisting of those carriers that have “gone configurable” and those that have not. If your company has successfully made the plunge into highly-configurable core systems then several good trends will begin to emerge. A recent study by Strategy Meets Action estimates that one in four P&C insurers have made the move to modern, highly-configurable core systems. For those companies several positive and beneficial trends should begin to emerge.

Either maintenance workload will begin to fall significantly as a proportion of overall IT work effort, or maintenance throughput will rise. Ongoing maintenance and enhancement activity generated by rate changes, regulatory demands, product enhancements and demands for data will be easier to do and more quickly satisfied in these new environments.

This should result in one of three outcomes, each of which is of benefit to the carrier: an overall reduction in IT budgets over time; a shift of funding to more strategic and value-added projects; or an increase in the number of completed maintenance and enhancement requests creating richer system capabilities for internal users, agents, and insureds, leading to higher overall customer satisfaction.

Replacement projects will happen less often and healthy system life spans will increase. Technology comes in waves and highly-configurable software is merely the current one.

However, these new systems change the game to the extent that carriers will be capable of growing their systems to keep pace with the business for far longer than has been possible in the past.

The average number of years that a core system remains in production before being replaced should increase, again reducing project costs as a proportion of overall IT spend.

Projects will not so much start and stop as continue over time as dictated by business and regulatory triggers. Highly-configurable systems allow for continuous improvement where gradual and sustained evolution replaces stressful and exhausting legacy replacement projects. Today one of the biggest problems for legacy replacement is the pent-up demand from years of under-delivery caused largely by the strictures of legacy systems. These demands are driven by the justified view of business users that “if I don’t get it now, I never will.” This creates huge scope problems for replacement projects. The reality in the future will be that the completion of the replacement project will be the end of the beginning rather than the beginning of the end.

Insurance business innovation will both increase and accelerate. Twenty-five years ago dreamers in the insurance industry envisioned “product nurseries” where an insurance product could be quickly modeled, built and test marketed. This conception is no longer far from reality. Similarly workflows, underwriting guidelines, claim handling practices, and billing rules can be rapidly modified as needed.

Insurance legacy staffing in both IT and business operations will be reduced as will the threat of the much discussed “demographic bomb” that we face. Replace legacy systems and you can replace legacy staff (who in reality will be planning their retirement anyway).

On the operations side of the ledger the ability to both capture insurance knowledge in rules-based systems and attract younger employees using modern core systems should make a significant contribution to defusing the demographic bomb.

Finally, carriers will enjoy data-enriched environments with which to make better decisions. We tend to think that the job of core systems is transactions and that data is taken care of by warehouses and third-party data services. But this raises the question of where the warehouse gets its data from? Modern, highly-configurable systems support the storage of more data and support the ability to add data elements in ways that were not possible in the legacy world. These enhanced data stores will greatly improve the decision making abilities of carriers when combined with other data sources.

If even a portion of these trends begin to manifest themselves in 2012 we will begin to see an industry that divides along technology lines into the haves and have-nots.Carriers with modern, highly-configurable systems will become increasingly more efficient, capable, and responsive to markets and customers, while legacy-system carriers will find it increasingly difficult to compete. In other words technology will finally have created sustainable competitive advantages.

Expectations and Accountability

The fact companies continue to invest heavily in IT and that IT has an established seat at the table is mostly good news. The ability to influence and execute corporate strategy is a maturation step for IT and should be a source of pride, but it comes with heightened expectations and scrutiny.

IT has reached the boardroom. Little of significance now happens in an insurance company without a significant IT component so the opportunities to shine increase along with the opportunities to fail. Having poured millions of scarce dollars into IT initiatives companies want to know what they are getting for their money measured in terms of better customer service, speed to market, distribution support, differentiated pricing, better decision making, and reduced operating expense.

If IT wants to be treated like an important part of the business then it had best start thinking and talking like part of the business. The answer to the question “What did we get for our money?” is no longer “a new policy administration system.”

The answer must now be stated in measureable results, new capabilities and added potential that business people understand and appreciate. The old Dale Carnegie line “I’ve earned the right” used to be the cry for relevance from the IT people to the business people; now it is the demand from the business people to know what IT is doing and how.

The Vendor Market

Three trends were evident in the vendor market in 2011 which will continue to influence and complicate IT decisions in 2012. First, the vendor market continued to generally improve in terms of writing software, delivering implementation projects, and being a better business partner to insurance carriers.

This rising tide was generated by a few leading vendors that created an existential threat that the rest of the market had to respond to by upping their game. However, these leading vendors show every sign of leaving the competition behind and forming an elite group that can win a disproportionate percentage of core-system deals at the expense of the legacy vendors, many of whom are increasingly becoming marginalized.

Just in case it’s not obvious what you are looking for in this winners and losers game the winners are the ones with highly-configurable software, a track record of successful, agile-based implementations, and a rapidly growing base of satisfied reference clients.

But as in all markets, success and growth attract money and competition. In 2011 and already in 2012 we have seen significant acquisition activity, which in different ways will create uncertainty and disruption in the market for affected client companies.

Acquisition can be a fraught and risky business, especially when it results in the merger of companies with different cultures, specializations, and market focus. It would appear the acquisition targets in our market are not weak or failing, but are relatively vibrant and healthy. This should at least give pause for thought for any CIO considering a long-term relationship with one of the “winners” alluded to above.

There are dangers for both the haves and the have-nots in 2012. The have-nots may be left behind. The haves will be scrutinized and pressured and may find themselves saying hello to a new vendor that they did not select.

As the Chinese say, “May you live in interesting times.”

George Grieve is CEO for CastleBay Consulting. Previously a CIO and still an acting consultant, he has spent much of the past 25 years with property/casualty insurers, assisting them in the search, selection, negotiation, and implementation of mission-critical, core insurance processing systems. He can be reached at 210-887-6423.

The content of “Shop Talk” is the responsibility of the author. Views and opinions are those of the author and do not necessarily represent those of Tech Decisions.

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