The insurance industry has withstood hard markets and failingeconomies before. But one year ago, the attacks on America combinedwith market forces to create the greatest challenge this industryhas ever faced. There has been no magic formula for recovery, butsmart insurers are focusing on their systems to help them overcomehard times. Since September 11, insurers have become much morediligent about analyzing their claims history and much morediligent about understanding risk exposures, says Henry Schweppe,partner and lead of the financial services integrated analyticspractice at PwC Consulting. Weve seen an increase in interest onthe part of our clients to look at more sophisticatedanalytics.

While an emphasis on managing claims and risk exposures hasincreased since 9/11, the problems of the insurance industry cantbe pinned solely on the terrorist attacks. Dennis Chookaszian,retired president and CEO of Chicago-based CNA Insurance, thinksthe industrys woes go back to the last decade when the market washighly competitive. Companies had the product priced too low in thepast because they didnt understand some of the loss developmentthat would occur and, in part, because it was just competitivetrying to hold share, says Chookaszian. Companies had bad operatingresults, and they are now trying to regroup.

He feels the best way to regroup is through the IT department.Regrouping really means getting better systems, improvingunderwriting, all these kinds of things, he says. In many ways, itis not unlike the kinds of cycles you saw in the 70s and 80s whenthings got bad. People got their resources together, and thingsimproved.

Aligning Srategies

One way of improving those resources is to get the business sideand the technology team working together. Richard Connell, CIO ofSelective Insurance Group, located in Branchville, N.J., says, Wehave a process wherein we align our business strategy with ourtechnology initiatives. We look at our business strategy and say,What do we have to do from a technology standpoint to make some ofthat happen.

There is no mystery as to why executives turn to the ITdepartment. You look to systems for two things, Chookaszian says.One is cost reductiondo things better, faster, cheaperand thesecond is for better information so you can do more analyticalthings. Such analytics can assist in the evaluation and settlementof claims and underwriting selection. Those things can be driven bybetter information, he says.

The problem with getting better information is that manycompanies are heavily tied into their legacy systems, whichprevents them from investing in new systems. Its hard to change,Chookaszian notes. Its costly to get out of the old system, andoften it doesnt integrate well. There are solutions out there thatdo integrate with the legacy system and provide specialized servicein underwriting and claims.

Old systems often have secrets locked inside them that insurershave difficulty extracting. Having good programmers available totranslate the old COBOL systems of 30 years ago is imperativebecause often the code is not as well documented as it should be,Chookaszian observes.

Most of these systems were built around the idea of decisiontables, he says. Documentation ranged from terrific to terrible.Any competent programmer could sit down and read the code and tellyou what the decision rules are. Technology people understand thedecision rules well, but management might not know what to do aboutithow relevant are the rules, what do we do with them, how do wechange them.

Extending Data Usage

The older systems are complex and costly to run. The data beingentered in the older systems was designed to be used more formaintaining control of the policy, not for analytical purposes.That meant data had to be extracted from the system and put intodatabases where the information could be extended and analyticscould be performed.

Until insurers can replace those systems, Chookaszian believesmany carriers will be using a surround and connect system. Yousurround the mainframe with all these piece parts, he says.Ultimately, when you get enough of the pieces around the outsideifthey are built in the right technologyyou just get rid of thecentral core.

Selective developed its claims processing system through theacquisition of the software vendor, and after the project wascompleted the software company was sold. The system works onlaptops for the mobile claims force, and the data is downloadedinto a database and then moved to a claims data mart to give usersand managers analytical capabilities on top of the claimsinformation, Connell says. They can use the system to drill down intwo areasclaims productivity and the financial impact ofclaims.

Selectives claims service center is set up so that when itreceives the first notice of loss it can assign the claims to theproper adjuster.

This and all Selectives projects must follow a set of rulesdesigned to control expenses. IT represents a fairly sizeable costelement for the company, Connell says. All our business initiativesor IT initiatives are driven from a business case that has to showa particular return or it doesnt go forward. When we look at our ITinfrastructure, weve built service-level agreements and total costof ownership models for each of the elements within thatinfrastructuremainframe processors, Web servers, or applicationserversas a way of making sure we are spending money in the rightspot and doing it efficiently.

Information Is the Key

For P&C insurers, Chookaszian believes such tools can make atremendous difference. In the property industry, he mentions thework done by Marshall & Swift/Boeckh on the underwriting side.Its estimating systems can help insurers that have undervalued theproperty they are insuring. MS/B estimates that 73 percent of homeswhere its valuation products are not used are underinsured by up to35 percent. The MS/B estimating software updates the value ofproperty, allowing insurers to increase the premium to cover theincreased risk. Other software providers are doing similar workwith collision damage systems for auto repairs.

Information is the key to going forward, Chookaszian says.Insurers all have databases. The question is, are they usable andaccessible to the people who make decisions. First you have to havethe data. Then you have to have the tools. The tools are actuallyeasier to come by than getting the data set up right. A lot ofcompanies have the software that will allow you to do analysis.

Schweppe says even the best analysts cant do their job withoutthe proper data. Actuaries are the best statisticians in the world,with an endless appetite for data, he says. The challenge is how dothey get it, how do they aggregate it, understand it, and apply itto the business.

Todd Eyler, senior analyst with Forrester Research, says a newstudy by the research organization shows insurers are trailingother industries in the amount of money being spent on businessintelligence tools, which can be used to analyze claims andunderwriting data. Only 19 percent of insurance carriers will bebuying business intelligence software in the second half of 2002,compared to 24 percent for all other industries, Eyler says. Hebelieves the reason for this is insurers have been burned by datamining projects in the past. They tried to do too much at once, andit led to a lot of disappointment, he says.

Extracting data across the enterprise is a labor-intensive task.The data quality tends to be fairly low as far as accuracy andconsistency, Eyler says. It is a big investment in manual labor,and companies typically dont get good outcomes. If insurers aretrying to cleanse that data, he recommends they be more focused onthe types of data being extracted instead of trying to doeverything at once.

Eyler thinks that data mining is helpful in the claims processas far as detecting trends, but he would like to see it used formore reactive analysis. Insurers need to access the relevant datain real time so they can do real-time analysis to get ahead ofclaims trends, not be six months behind all the time, he says.

Peace of Mind

Getting clean data for the analysis is another problem, though(for more on the need for and benefits of clean data, see CleanSweep, p. 33). Its time consuming and expensive, but the costsavings are so significant, Chookaszian says. So is the piece ofmind in knowing that when you repair a body part on a particularvehicle you know its got the right price tag attached to it.Without those tools, an insurers expenses can go way up.

It all comes down to return on investment. In these post-9/11days, the letters ROI have become possibly the most criticalletters in an industry ripe with acronyms. Its probably the mostimportant thing insurers should be doing, Chookaszian says. Youshould be looking for ways to improve your results by dealing withthe appropriate partners who can do these types of things foryou.

Selective puts this into practice with a review of all vendorcontracts to make sure conditions of the deal are being met. SaysConnell: We have vendor management guidelines to make sure we aregetting bang for our buck from our vendors.

New Underwriting System Rolls Out in 2003

Life insurance underwriters often believe their skills border onbeing an art form, so its not surprising that many doubt theability of underwriting software to replace that talent. Theybelieve it is very difficult to translate what they do into onesand zeros, says Todd Eyler, senior analyst for Forrester Research.That is one reason he is impressed with the work being done byCincinnati-based Western & Southern Financial Group. Theyvecreated an expert underwriting application that has thousands ofbusiness rules encapsulated within it, Eyler says. When you thinkabout what that can do, it could be pretty powerful.

Jim Teeters, senior vice president insurance operations forWestern & Southern, is also excited about the system, developedwith software provider NaviSys, but he disputes the part aboutunderwriters being resistant to the change. It depends on how youposition it to your staff, he says. In fact, this is getting rid ofa lot of the routine stuff they have to do. Teeters says thecarrier believes that the combination of speed, accuracy, and broaddistribution of its products through the new system will improveits market position.

Western & Southern began looking at ways to improve itsunderwriting operations in 1999 but couldnt find what it needed. Ayear later, though, things had progressed to the point the carrierfelt it could work with NaviSys to develop an underwriting piecefor NaviSys FrontOffice system. We agreed to a joint developmentproject with them to get an underwriting system developed to ourspecifications, Teeters says, explaining that what was good aboutNaviSys was it had a Web-based, front-end application process builtright into the system. So we decided to combine two projectsanelectronic application project and an automated underwritingprojectinto what we call iNB (Intelligent New Business), saysTeeters.

The company focused on four specific needs. It wanted aWeb-based tool with a wide degree of access across the differentdistribution systems. It wanted something user-configurable, so wewouldnt have to go to programming every time we wanted to add aproduct or change a question, says Teeters. The company wanted aplatform where it could combine three separate departments into oneto concentrate on new business. And finally, it wanted to get ridof the paper. We wanted to completely eliminate paper out of thenew business process, he says.

The electronic application process quickly sped up the policyprocess. What once took 10 days then took seconds as the agententered the policy application from the field directly to the homeoffice. The company also adopted a PenPad system for electronicsignatures to be used in the field, although other sales channelswill require a different system that is currently underdevelopment.

Built into the questionnaire for applicants are underwritingquestions. If it is a clean application and all the answers are no,it doesnt take very long, Teeters says. But if they have a healthhistory, the system keeps drilling down into more underwritingquestions.

Some of the Western & Southern products have preferredclasses, so applicants can learn quickly (if information is laterverified by paramed tests) whether they are eligible for certainclassifications (and lower rates). That helps our placement ratioquite a bit because people wont be surprised by a policy comingback different from what they thought they were getting, Teeterssays.

When the policy is inside the system, it goes through a rulesengine with 15,000 rules. Teeters describes it as system-centricdesign because data is entered into the system that can flowthrough the rules rather than an image of a document. Even whenthere are image documents that kick the file out of the system,Teeters says underwriters review only that document, not the entirefile. On certain high-volume cases, though, one of the rules may bethat before the policy is issued, an underwriter reviews the entirefile.

Western & Southern is in the final testing stages of theproject with 100 of its agents going into production in October androlling it out in the first quarter of 2003. Says Teeters: Itsprobably the biggest system project weve done in the last 10years.