Taking care of business. For insurance companies, taking care ofbusiness means acquiring, servicing, and keeping policyholders. Itmeans making it as easy as possible for policyholders andintermediaries–whether they are career agents, independent agents,insurance brokers, or others–to conduct their transactions with thefirm. It means having the requisite information available toregulators on a timely basis. It means that because policyadministration systems (PAS) support those functions, PAS are acritical part of the portfolio of systems enabling insurancecompanies to take care of business.

However, a significant number of insurers are using PAS that areat least 20, 30, or even 40 years old. These PAS were developed anddeployed for another era of insurance commerce–a time period thatgenerally could be characterized as slower; with simpler products,less demanding clients, known competitors, a relativelystraightforward relationship between the insurer's home office andits distribution channels, and regulators moving with the rhythm ofthe market.

That time period is gone, assuming it ever existed. Are the PASkeeping pace–or more to the point, are insurance companies able tokeep pace in this dynamic marketplace with their PAS? If we couldlook inside the heads of the insurance people who support theirfirms' PAS, we would hope they continually are asking questionssuch as:

o If we don't invest in significant upgrades, how much longerwill our PAS last, given the product and service changes we expectfrom the business side of the house? (Yes, the technology staffshould be concerned about the business implications of theiractions or inactions.)

o Have we passed the point where we can continue to manageeffectively and efficiently all of our PAS and still meet ourexpense targets (and let's be honest, far too many insurancecompanies have far, far too many PAS)?

o Should we outsource the PAS technology support?

We'd also expect there are some business executives, preferablyworking closely with their IT counterparts, asking questions suchas:

o Will we lose business to our competitors because we cannotmeet distribution channel and policyholder expectations with ourcurrent PAS?

o Is our current system able to help us get products to marketfaster? Does our current system comply with all laws andregulations in every jurisdiction we do or want to do businessin?

o Should we consider outsourcing the policy administrationbusiness functionality itself along with the technologysupport?

To answer or at least help to begin to answer those questions,we have put together this modest buyer's guide to the brave newworld of policy administration systems.

The late Senator Everett Dirksen of Illinois, referring toaccelerated federal spending, was reputed to have remarked: "Amillion here and a million there, and pretty soon you're talkingreal money." Some sources have updated this quote to reflectbillions rather than millions, but regardless of the metric,Dirksen's point still comes through loud and clear. Insurancecompanies are spending real money on their policy administrationsystems. Financial Insights, an IDC Company, estimates insurersspent a combined $5.6 billion on their life and property/casualtyPAS in 2005 and are projected to spend a combined $8.5 billion onthese PAS in 2010, representing a very healthy five-year compoundannual growth rate of 8.8 percent (see Figure 1).

This projection will have to be adjusted downward if insurersdecide to spend more on PAS information technology outsourcing (ITOor, for some people, ASP) or on PAS business process outsourcing(BPO). There are more and more outsourcing providers, particularlyBPO providers, that believe insurance companies will look to themto maintain and enhance the PAS insurers need to competeprofitably. Time will tell. But if PAS really are at the heart ofan insurance company's operations, are the risks of outsourcing thebusiness functionality really worth it?

Whether looking for a software solution for their in-house PASor to an ITO or BPO technology provider, insurers will find thetechnology firms supporting PAS business functionality tend to fallinto three camps:

o After: These technology firms could be called traditionalists.Their PA software or outsourcing supports the activities only afterthe decision has been made to issue the policy. Their systems dosupport issuing the policy and also activities such as, but notlimited to, policy information updates; interacting with anybilling systems or possibly having the billing functionality withinthe PA system; endorsements; out-of-sequence (OOS) transactions;cancellations; reissues; paying commissions; premium accounting;financial reporting; compliance reporting; P&C renewals; lifepolicy terminations, including cancellation, lapse, death claim orpayout; and reinsurance.

o Before and after: These technology firms combine support forwhat some might consider business-acquisition activities whilealso, of course, supporting the activities after the decision hasbeen made to issue a policy. The business-acquisition functionsthese technology firms support include rating, quoting, salesillustrations (for life insurers), underwriting, and binding. Theyalso support policy issuance and the usual set of functions afterthe policy is issued.

o Before and after and so much more: These technology firmscould be thought of as super-sizers. They have greatly extended thefunctional footprint of PAS. Their PAS not only offer support forthe "before and after" policy administration functions but alsosupport activities such as product development, customerrelationship management (CRM) support, and notifying policyholdersof new products.

Before packing up their marshmallows for toasting, insurers needto think through their business models, including how they go tomarket, how they compete, the level of service they want to provideto policyholders and intermediaries, and what products they will beintroducing in the near future. To help insurers better decide ontheir course of action, they need to keep in mind what makestoday's PAS different from those of the past and what will make thePAS of five years from now different from what is on the markettoday.

What is being offered today by technology firms providing PASproducts and services that differentiates today from yesterday?There are five capabilities–externalization, flexibility, ease ofuse, streamlining, and real-time access–which together add up togetting products to market faster while also providing betterinformation more quickly to stakeholders impacted by PAS (seeFigure 2, p. A17).

o Externalization: Rules engines and calculation capabilitiesextracted from the PAS logic enabling insurance companies todevelop whatever simple or complex products they need, whether forasset protection (this includes both P&C and L&H) or forasset accumulation (i.e., a combined health savings account andannuity product).

o Flexibility: Product configurable components, productcustomization, and product modeling capabilities enablingunderwriters, actuaries, and others involved in product developmentboth to attain a more comprehensive understanding of the financialimplications of new products faster and to get the productsthemselves to market faster.

o Ease of use: Web portals providing a common look-and-feelonline interface enabling home office and distribution channelpersonnel to have a common view of the policy life cycle as well asinformation flows into and out of policies, whether because ofoperational needs of the insurer, requests by policyholders orintermediaries, or complying with financial and regulatoryrequirements.

o Streamlining: This is all about creating interoperabilitywithin PAS functionality, which quickly is becoming a criticalbasis of competition if insurers want to get to market faster andalso support information queries against their PAS. Technologyfirms are enabling interoperability through the use of industrystandards such as ACORD and technology standards such as XML, .NET,and J2EE. The technology firms also are including workflow andbusiness process management capabilities to further accelerate PASfunctionality streamlining.

o Real-time access: By combining the four capabilities above,several technology firms are enabling stakeholders within the homeoffice or in the field with real-time or near-real-time access toPAS functionality on a 24/7 basis. Real-time access dramaticallyincreases the pressure on insurers to provide a secure environment,allowing access to only those people who should have access to thePAS or its subprocesses and ensuring the privacy ofpolicyholder–and intermediary–information.

Insurance companies also will find most technology firms inthese three camps are leveraging the above capabilities to offermore Web services within the PAS spectrum of businessfunctionality. When it comes to these pieces of businessfunctionality, insurers must remain cognizant of the granularity ofthe Web services they need now and in the future. Insurers have tothink through the integration implications within PAS and acrossthe other operational systems that are attendant with the use ofany PAS Web service.

Five years from now, the future of PAS will look like a mix oftoday's capabilities, the natural extensions of those capabilities,and a few wrinkles that might not be readily apparent just movingalong a straight path from today. The watchwords of five years fromnow will be customization, security, stakeholder-centricity, andagility.

o Customization: This will play out for both people and businessfunctionality. In five years, technology firms will enablerole-based access to PAS. The military calls it "need to know."Insurers will be able to determine specific pieces of PASfunctionality and data they want to authorize to specific peopleregardless of where those people are in the insurance value chains.Customization also will apply to business components, as Webservices will both multiply like rabbits and simultaneously becomemore detailed. Technology firms will provide more robust rulesengines and BPM capabilities to combine or disaggregate PASfunctionality–and other operational process functionality–to issueand service policies.

o Security: The two interdependent pillars of operational changeand industry structure change will lead to insurers and regulatorsdemanding technology firms offer a more secure environment. Theoperational changes include customization of the functionality thatonly specific people can access, customization of the componentsthemselves, and increased real-time processing of policyapplications including data flows from or to PAS from otheroperational processes. Industry structure changes will emerge asmore insurers become manufacturers and their distribution channelsbecome more responsible for using the PAS functionality. Eveninsurers that have a mix of tied agencies and independent agencieswill push out PAS functionality to both types of channels.

o Stakeholder-centricity: There always has been a need forinsurers to have a comprehensive 360-degree view of theirpolicyholders. The PAS of the near-term future will enable insurersto be able to do what they always should have been doing even ifthe available tools weren't the easiest to use. Tomorrow's PAS willenable insurers to know all the products and services theirpolicyholders own; when they purchased, changed, or terminatedproducts; and all the intermediaries involved from the sellingagent to the servicing agent.

These PAS will enable insurers to track all the queries andother transactions policyholders conduct with the firm as well aswhen a query began, from which touch-point (i.e., mail, e-mail,telephone, Internet, fax), why the policyholder contacted theinsurer, the resolution of those transactions, and how long it tookto satisfy the policyholder transactions. Knowing all about eachpolicyholder is crucial, but so is knowing all about everydistribution channel. Future PAS will enable insurers also to havea comprehensive 360-degree view of their various intermediariesfrom tied agents to independent agents and insurance brokers towholesalers such as banks or investment firms.

o Agility: Leading insurers will be conducting increasingly moreof their business acquisition and policy administration in realtime. Insurers wanting to keep the PAS in-house will findtechnology firms that support electronic signatures andstraight-through processing for activities from the policyapplication process in the field to the collection and analysis ofdata for the underwriters, regardless of their location, to bindingthe policy. Increasingly for both personal lines property/casualtyand the small to midsize commercial property/casualty market,"underwriters" actually will be predictive analytic systems ormodeling bots.

Some of these future PAS will improve the productivity ofcustomer service staff and customer retention by finding the datacustomer service staff must access to resolve quickly policyholderqueries and other transactions. Technology firms will accomplishthis through the use of meta-data management, taxonomies and searchengines, and text mining. This will happen only if insurers alreadyhave or work with the technology firms to agree on data definitionsand processes to clean existing data and ensure the cleanliness ofpolicy transaction data from new policyholders. Insurers will cometo expect these same capabilities discussed above from their ITO orBPO providers.

It goes without saying every technology firm–whether a newcompany or one that has been around for a while–has the "latest andgreatest" set of PAS capabilities to offer insurance companies.Every technology firm claims it has the systems and skills to helpinsurers cut costs by streamlining processes or improving workflow,or grow revenue by introducing new products faster or providingworld-class customer service to policyholders and intermediaries.It's often very easy to get drunk drinking the Kool-Aid from atechnology firm that knows how to market and sell its wares. Toguard against that particular state of inebriation, insurers haveto know what they want their PAS to accomplish today, know whatthey want their PAS to accomplish in the future, and develop arational, objective methodology to determine when the technologyfirm claims are real. This methodology should encompass vendorselection, product implementation, and tracking of ongoingpost-production issues.

Here is a partial list of claims of features technology firmssay they have in the PAS area, which they believe differentiatesthem from their competitors (obviously, insurers will find morethan one technology firm with these capabilities or products):

o Many flavors of architectures. Reference, open, looselycoupled, and service-oriented are all available. Referencearchitectures go beyond the technology side of the house to includemeta-plans and best practices for both the business and technologyareas of the insurance company.

o Pieces and platforms. Technology firms with these productsclaim to offer insurers the ability to choose from a collection ofcomponents that together comprise PAS or opt for an end-to-endplatform having all the necessary functionality. One technologyfirm provides a Web-based platform with a data model, workflow, andenterprise address book that together offer a single methodologyfor configuration, integration, conversion, and system upgrade.

o Models and rules. Modeling tools increasingly will be used bybusiness staff–underwriters or actuaries and perhaps evenmarketers–to design and develop insurance products. Externalizationof rules will become commonplace, and rules discovery capabilitieswill become a competitive necessity for both insurers and thetechnology firms wanting to succeed in the PAS space.

o Multiplicity. As insurers operate in more than one country oreven with more than one distribution channel, technology firms willfind offering "multiplicity" is table stakes. Multiplicity meanssupporting some mix of multiple languages, multiple currencies,multiple jurisdictions, and multiple distribution channels.

o Rapid Integration. Integration really is one of the key issuesthe insurer's technology staff must be concerned with to ensure thesmooth operation of its PAS. Whether the insurer is using packagedsoftware, pursuing Web services, outsourcing some or all of thetechnology support, implementing on-demand Web-based software, orincluding some mix of any of these efforts, it will need tointegrate the various pieces of PAS functionality together and withthe other systems that help the company take care of business.

It's impossible to stress enough what technology firms offer toinsurers is secondary, at best. What matters is:

o The strategy the insurance company has in place to persistprofitably over the decades to come. The insurer might have decidedbeing a product manufacturer is the way to go or perhaps to becustomer focused. The insurer might have decided to be totallyvertically integrated and to own all the marketing, distribution,and product functionality.

o The insurer's business model, including how it goes to market,distributes its products, services its policyholders andintermediaries, and develops products.

o When and how the insurer wants to improve or replace itscurrent PAS.

o How fast the insurer feels it needs to react to the pressuresof the marketplace whether from policyholders, intermediaries,regulators, or shareholders, if applicable.

Technology firms do exist with a current PAS portfolio andseemingly solid plans for the future to support whatever objectivesinsurers might have to better compete today and in the future. Theconstant challenges insurers have to meet are determining whichtechnology firms to choose, why, and how best to manage therelationship to ensure optimal results.