The Brains of the Operation

No matter what line of business an insurer operates in, the policy administration system keeps the lines of communication open. If carriers are going to take the huge step to replace or consolidate some of their many systems, today's solutions must be Web based and offer a better view of the policyholder's history.

By Robert Regis Hyle

Insurance carriers rarely can avoid the difficult decisions that come their way when the subject of policy administration systems arises. Do you opt for great architecture or business functionality? The latter usually winds up winning these debates, according to META Group vice president Todd Eyler, but not without plenty of discussion. "We're at a point now where companies are realizing the cost of always going for the functionality and not great architecture is starting to become too high," he says. "We're seeing a lot of discussion–but still not a lot of action–in the consolidation of systems."

Policy administration systems run through all lines of business. Life insurers don't use them the same way property/casualty insurers do–or the way annuity companies do, for that matter. But they all have many things in common: connectivity between the business side and the customers (whether those customers are policyholders or agents), a clear view of what business the policyholder is doing with the carrier, and the ability of the carrier to mine the data it has collected to help retain its customers and sell them even more policies.

The challenge most P&C companies face with regard to policy administration systems is most operate in legacy environments, Kimberly Harris, vice president and research director with Gartner, points out. "Many of their applications are internally built dinosaurs that have been sitting around for many years," she says. "It really is a challenge to begin replacing these systems. A lot of companies start to figure out there are problems with their systems, but because the systems are old and built in-house, they have trouble meeting their business requirements and the investment is too large to rip and replace." Though not without their share of challenges, the following insurers are able to tell a different story, each with a happy ending.

The Western United Story

On the technology side, the AdminServer policy administration system used by Western United Life Assurance has given the carrier a common Microsoft platform. "It is Web based and allows us to get [into the system] from anywhere," says George Hanrahan, vice president and CIO for Western United. "If we have remote agents, they can get at [the system] just as if they were right here [in the home office]. It also allows us to leverage our people. I have trained people in Microsoft products, and I can find trained people off the street, so it leverages a knowledge base. There still is some knowledge of the software itself you have to acquire, but for the most part, because of the rules-based engine, most of the maintenance can be done by the business analysts or by the business itself."

From the business side, because the system is Web based and browser based, users can get at it from anywhere. "[The system] does present a very good view of annuitants," notes Hanrahan. "It has all their information. It's a well-thought- out, well-put-together product. We looked at a significant amount [of products]. We went through [the vendors] fairly rapidly and came down to six. We made sit visits to five of them."

Western United previously used a different product, according to Hanrahan, which was not Web based. "It was a standard COBAL-based, nondatabase-type environment," he explains. "There was high overhead to maintain it. You have to staff significantly. Some changes were table based, but with most of them, you actually had to go into the code and change, based upon new regulations and compliance issues, things like that. There's a lot of overhead to that."

Western United doesn't do much cross-selling with its policyholders, Hanrahan adds. "We're a policy shop. We sell annuities and some minor life products. For the most part, all of our agents are independent," he says. "There is some cross-selling, but our niche is service–service to the agent and service to the client. In discussing this with a couple of companies that had this [AdminServer] product already, they significantly cut both their technical staff and their business people because of the ease of use. We had people who never had seen the system before who were able to get in there and use it. We put up a couple of policies for a test drive, and the people here were able to get around the screens, get through the products, and change things without any training at all."

Hanrahan believes the newer policy administration systems will have a long life for carriers. "I think the underpinnings and the architecture they are put together with today will make that possible," he says. "They have tables and rules-based engines the business analysts actually can get into without being a programmer. They are flexible enough to adapt to that."

The preliminary view of the project's ROI is it is going to make a lot of difference for the carrier just through ease of use, Hanrahan reports. "We're not at the stage yet where we can say we will have a reduction of staff, but I believe from the technical side, there will be a big difference because I can reuse some resources," he says. "You still have to have knowledge workers out there, but you can leverage a lot of the knowledge."

Eyler hears a lot of discussion about moving down to fewer systems. "Then [insurers] talk themselves out of that because the cost of doing data conversions and migrating to highly refined business logic onto another system is very expensive," he says. "From a hard-dollar perspective, the tail on the payback is fairly long compared with the huge outlay upfront to do the consolidation. Most companies are talking themselves out of doing that and trying to extend the life of those existing systems."

The OneBeacon Story

OneBeacon Insurance Group is a captive agency company, according to Arne Herenstein, vice president of application services. "Our [policy administration] system has to provide a high degree of ease for the agents. A lot of our business involves moving the administration of policies to their office." OneBeacon went looking for usability–the complete view of the customer so agents can look up all the records regarding the policyholder. The carrier wanted a system that worked quickly, easily, and delivered flexibility for product changes should the market shift and the carrier need to provide a different coverage to meet what the competition offers. In addition, OneBeacon required the ability to make market-demands changes–if the business decides to sell insurance in new locations, then getting another state added on quickly is essential. "Policy admin systems tend to be best when they can do the most amount of work with the fewest amount of keystrokes," asserts Herenstein.

OneBeacon doesn't do a lot of cross-selling between its personal and commercial lines, but Herenstein believes the carrier is in a better position to do such work. "We did [lead-creation work] last year for our commercial clients," he says. "We helped qualify leads based on the new information we were able to get in our database on the insureds we had. We could prequalify many of the businesses and turn them over to a telemarketing company to do some additional cold calling, and we were moving hot leads over to the agents." The leads were well received by the agents, he adds. "They were dispensed in a much more effective form rather than, 'Here is a list of restaurants that happen to be in your ZIP Code,'" he says.

Rating algorithms are one of the key factors on the OneBeacon personal lines side and soon to be on the commercial, as well. "[The rating algorithms] have become much more complex with the advent of what the business refers to as segmented programs that take the old preferred tier, standard tier, and substandard tier and break them up into literally hundreds of tiers," says Herenstein. "They are able to monitor the performance of every component of the business to determine whether the product is working as it's supposed to. Is it providing the coverages people need for the price they're willing to pay? Can we make money for that price and location for that particular segment? Part of the administration system we've recently deployed has a component that allows the underwriters to do that on a daily basis and cut up the data in pretty much any form they like by any characteristic of data we've collected in the course of the policy."

OneBeacon began installation of its Sapiens policy administration system with commercial lines at the beginning of 2002 and finished about a year later, notes Herenstein. The carrier started work on the personal lines toward the end of 2003, initiated deployment at the beginning of 2004, and currently is finishing the deployment of the product.

When OneBeacon was formed, the company was dealing with prior mergers. There were six or seven policy admin systems in commercial lines alone, says Herenstein. "The products were hard to keep track of," he reports. "It was very confusing for our field staff to figure out where to put [policies]. From the technology side, having six admin systems to support meant we had to do everything six times, so our support costs were way higher than they were going to be if we could rationalize this and get it down to as close to one platform as possible."

Conversion is a key issue when new policy administration systems are put in place, according to Harris. "Typically, it is very costly to move something," she says. "It's very expensive to buy a new system–you have the purchase price, the license, and the maintenance–but you also have the conversion. If you have a big block of business, it can be costly as far as staff time and system downtime. The metrics around where you are going to benefit are challenging. There also is the issue of asking the question, 'Is this system going to die?'"

OneBeacon was able to reduce the number to two remaining administration platforms–one for middle market policies and one for small business, small commercial, and personal lines policies. "That's clearly far more manageable for us than a half-dozen commercial [lines] plus three to four personal [lines]," Herenstein says. "That gives us a huge savings in support costs and ongoing maintenance costs, and we certainly can do things a lot faster. If we have a form change to make, we make it in one location and it's done instead of having to do the form in each [system] because each one used different tools to produce the forms or coverage."

OneBeacon is more accurate than it ever was before, claims Herenstein. "Service is much better because you can get your quote now in probably less than three minutes," he says. "We could turn it over to the insureds to do it themselves, but since we are an agency company, we don't do that unless the agent wants to do that. If you want to get copies of documents, it's not this great big nightmare that it used to be. If your bill is misplaced or if you need a copy of the policy, the agent can see it online and print it if necessary."

OneBeacon employed usability analysis and focus groups before it deployed the Sapiens system. "We had people in our field offices who gave us advice as to what it should do or shouldn't do," he says. "We had three or four sessions with CSRs, the people who actually are going to run this, prior to the completion of the user interface so we could adapt the system to the way that is natural for [the CSRs] to work. It uses English language, no more codes. Drop-downs are in English, and the system does code conversions for the users. It validates on the spot and does external reporting. It has nice features such as getting a quote without a full vehicle ID. We use the Build a VIN tool, which builds the vehicle ID number up until the specific vehicle you have. If you want to get a quote on a 1997 Toyota Camry, it will know what the vehicle ID number for rating purposes would be. So you can get your quote without copying tons of information.

The Nationwide Financial Story

Nationwide Financial has multiple ad-ministration systems for its annuities business, states Mike D'Ippolito, associate vice president, individual investment systems, at Nationwide. "What I support is our investment products, which are annuities for the most part," he says. "We have annuities on the accumulation side supported by one system, but the payout or income side is supported by another system. There are two different functions."

Nationwide uses the Vector Palm platform to run its accumulation side and AdminServer on the payout side. "Our company's approach is either to modernize or consolidate," explains D'Ippolito. "Our systems can't stay where they are today. To get competitive advantages and go where we want to go, our systems have to get more flexible. That means modernizing them or eliminating them and going to newer systems–consolidating multiple systems into one."

Consolidating systems is a huge issue on the life side, according to Eyler. Large life insurance companies typically have 12 to 15 different admin systems, he indicates, which create an enormous maintenance burden. A lot of the systems insurers use, he continues, are inherited through mergers. In addition, he observes, since the P&L statements for insurers often are broken down by business units, carriers purchase some systems that fit specific business needs. "Business requirements trump architectural requirements, so the central decision on architecture gets trumped if a system has good business requirements–business functionality for meeting a specific business need," he says.

The payout side is the smaller of the annuity business for Nationwide Financial. "We don't even have 100,000 payout annuities," says D'Ippolito. "On the accumulation side running on Palm, we have 1.2 million [policies]. Our payout business is an up-and-coming business."

The accumulation side is where the initial investments go, D'Ippolito explains. "[Customers] basically still are putting money in," he says. "They either bought a deferred annuity, making payments over the course of [the annuity's] investment life, or they pay for it upfront with a single premium. Then, when they are ready to take money out–when they've either hit maturity on their annuity or gone into a withdrawal stage–we switch them over to one of our payout products. If they choose, we flip them over to one of our payout annuities and they have a choice for how they want the payout to occur. The [payout] system has to have the same features the accumulation-side systems have."

The AdminServer system is completely Web based, D'Ippolito says. If a customer visits www.nationwide.com and connects to Nationwide Financial, there's a self-service center available where customers can do pretty much any function on their own they need to do for their contract–move money, get a balance, reallocate their balance, set up a withdrawal schedule–whatever the customer wants to do.

On the accumulation side, D'Ippolito notes Nationwide Financial took its Vector system and installed a new front end to extend the system to the Web. "It was a major undertaking about seven to eight years ago," he says. "Nationwide took a very aggressive approach on the Web. Most [competitors] said they were going to test the water and build some inquiry functions to get started. We went all out and built in a lot of functions right out of the gate. We paid for that because we were kind of a trailblazer. We made some mistakes, but we learned from them. We had to go back and do some things over, but we wanted to be quick to market. The technology definitely has changed and enabled the system to be a lot more componentized."

Visitors can go to the Nationwide Web site, and the broker can look up the client, D'Ippolito says. "We still don't have a total view of customers–they may have a home or auto policy–because Nationwide has a lot of different offerings," says D'Ippolito. "It's still a little segmented in that Nationwide Financial has its own Internet [site] and the property/casualty side [of Nationwide] has its own. We don't have that top-level look yet, but it is being worked on."

Web enablement has reduced costs for Nationwide. "By pushing out self-service, a lot of people can do these functions for themselves, which means we don't have people in the back office taking paper requests to make every change," explains D'Ippolito. "It has given us better service because people can go on the Web any time, anywhere."

Adapting to these changes has been a dramatic challenge for Nationwide's IT staff, according to D'Ippolito. "In the old days, you had a record-keeping system with its front end and a back office, and that's about it, so you kind of did business one way," he points out. "You had one system used by one finite set of users, meaning your call-center people who are working in your office. Now, you have that in addition to a Web front end where business can be transacted by anyone who could be on your Web site–millions of people. So, now we have to support doing business more than one way, 24 hours a day, and we have to have some reliability of performance that doesn't break down. You're one click away from your customer going to somebody else's site."

With such changes comes the need for more security. "Eight years ago, we didn't even have a security officer; now, we have a security office and officers," says D'Ippolito. "Anything we roll out has to pass [security's] test–how we authenticate users, our password strength. We employ people to hack into our systems so we can be sure they can't be broken. Things you never had to do before. Everything was inside your four walls: You knew who the users were, you knew who was using it at any time, you knew how many there were. There were very finite limitations on your system. Now, they're infinite, and it's much more of a challenge. As we build going forward, we are trying to build more commonly so, if our Web-based technology can perform these transactions, our internal users also can use that same functionality, and we don't have to build two different versions."

Leaders vs. Laggards

The companies that are leaders are treating the policy administration problem seriously, Eyler believes. "They are getting to the point where they are committed to pulling the trigger and taking the risk to do this," he says. "Most companies aren't, though, and I think those companies are going to be competitively disadvantaged. They won't have IT dollars to invest into transforming their businesses. All their IT dollars will be spent to keep the lights on. That's just not a very good place to be in."

Harris agrees companies fail to look long term. "You have the factor of whether they are thinking realistically enough about how much they are going to change," she says. "Companies are just not agile. They're not flexible."

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The Brains of the Operation

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