The insurance industry in theU.S.has evolved significantly. One of the major reasons for the industry’s tremendous evolution and growth is that theU.S.is one of the most litigious countries in the world. But rapid growth hasn’t helped companies tackle the three biggest challenges facing the industry today.
The first is regulation and compliance. Regulation at the state level has spurred the creation of a number of small insurance companies specific to particular states. When these companies want to grow, the only option they have is to expand into other states and compete by eating into each other’s business rather than growing because there is an increased demand in the marketplace.
The second challenge is that the products being introduced by insurance companies are market-specific or even targeted to groups and communities that they are trying to service. This combined with state regulations, is making product innovation harder to achieve. In a recent Limra report, theU.S.was considered third best in product innovation behindAustraliaand theUK. However, many countries are moving toward menu-driven insurance plans, in which consumers choose the coverage they need across life, health, and p&c, and insurance companies price the premium rather than sell specific products.
The third challenge is the sheer number of insurance companies that have grown due to regulations and policies. There are over 2500 insurance companies in theU.S.and mergers and acquisitions across the industry are causing significant integration issues for carriers. Compare that with two of the fastest growing economies in the world,IndiaandChina, each of which has less than 50 insurance companies and almost four times the population
Unfortunately, insurance companies have never been able to address the above three challenges successfully. The issue that affects them the most is their inability to properly and efficiently integrate companies that they either merged with or acquired. They continue to operate as separate entities, with the exception of financial reporting.
Because they have never addressed business integration, the IT function supporting the business has continued to operate on multiple systems. Regulation has further contributed to this chaos, as each time they tried to do any product innovation it meant they did it in a different system.
It is impossible to find an insurance company that has one IT application for each of its functions. The worst affected are the core insurance functions for policy administration, claims, and distribution management. Further, it did not help that insurance companies also had siloed operations, with life division, annuities division, personal lines and commercial lines—all operating as separate businesses—replicating many of their core functions. For example, an insurance company I recently spoke with has $6 billion in net written premiums and 16 policy systems. What’s surprising is that they were spending almost $70 million just to maintain these systems every year.
It is a fact that IT costs are significant and for most companies make up three to five percent of their premiums. To add to it, they are only growing with the advent of the social network world. The best way to measure that is to compare the IT budget with the operating margin that does not include investment income.
After this analysis is completed, insurance companies will realize that outsourcing the IT function and aligning the company’s technology investments to SLAs that drive their business, will help them in launching new products faster. It would also allow insurers to invest in new channels; expand to new geographies for growth; and bring down their IT and operational costs by at least 15 to 20 percent year-on-year.
Over time, insurance companies have invested in significant IT assets and it is now time to monetize them and turn IT divisions into profit centers.
A simple but fitting example is the work NIIT Technologies did for a couple of its clients. For one customer that was spending almost $15 million in IT and operations and was close to filing for bankruptcy, NIIT was able to create a partnership model that helped save 30 percent of their costs, save over 130 jobs and most importantly helped them monetize their IT investment in addition to creating a revenue stream for the future from their IT investments.
On a different engagement with a large p&c company that was trying to implement a third-party policy administration system that had already overrun both budget and time, NIIT was able to bring down their additional cost of finishing the project by almost 30 percent while committing to firm deadlines and SLAs that would bring down the expected timeline to complete the project by almost half.
The mantra for insurance companies should be this: Your IT should be a profit center and enable you to be an insurance company that utilizes technology and not a technology company that happens to sell insurance. The best way to ensure that is to monetize assets and put together appropriate go-to market models.