In today's insurance market, which features a good economy and stable weather conditions, insurers tend to get more adventurous in terms of their risk-taking. Such daring can be costly if poor decisions are made, but in a world where the balance between risk and profits is particularly thin, technology often plays a key role in a carrier's decisions. As another year winds down, the market is one of several key issues insurance IT leaders are focusing on to stay sharp for 2008 and beyond.

Mike Sciol? is eyeing the insurance market carefully, particularly where standard insurers have been willing to enter spaces they typically avoided in a hard market. Despite such deviations, Sciol? claims it will not change the direction of the twin carriers he represents, Burlington Insurance Group and Guilford Specialty Group, as CIO. "We're a midsize company," he says. "Our budget dollars are held much closer to the vest than you find with a larger, standard-market company. In the E&S space, we try to manage our costs closely and do what we can to deliver more to the business with less."

Sciol? has learned that with a midsize company, employees are much closer to the revenue stream. "A lot of what we do has direct implications on revenue coming in the front door," he says.

The soft market increases competition and determines in which direction carriers need to head, points out Teri Shaffer, who works in the risk advisory services group for Ernst & Young. "The recurring mantra in insurance is to grow the business, reduce costs, and get a tighter relationship with the customer," she says.

Those are mantras heard in good times and in bad, but at a time when the market is challenged, Shaffer feels those goals have a greater emphasis–and IT plays a big role in accomplishing them. Because of that, she predicts IT departments will see some increases in their 2008 budgets, though nothing major.

The market continues to show indications there is downward rate pressure, according to Vivek Mehra, vice president global financial services and insurance for the Keane consulting group, and it's expected to continue globally. "Companies that have high expense and loss ratios are finding IT is not exactly helping the business," he says.

While insurance IT has been thought of more as a follower than an early adopter of best practices, Mehra has seen an increased interest in newer ideas such as agent portals and demand generation.

"[Insurers] now are looking to enhance the agent experience and take advantage of some of the Internet technology," he says. The focus on demand generation, he adds, indicates insurers have come to the opinion if they can't do anything about the market, they need to focus on growing the pie. "There is momentum, and they have cash to spend," he says. "Some of the larger players are getting sophisticated with process integration. But some of the smaller companies still are stuck with analysis paralysis. They are mired in more traditional issues, such as the quality and timeliness of data, for example. They are not mature enough to consider process automation."

When Deb Smallwood walked in the door at ICW Group as chief transformational officer, she examined the people, processes, and technology that were available. Nearly a year later, ICW has increased its IT head count by 50 percent, along with adding outside contractors.

The carrier also examined its processes and decided to partner with a project management firm. "We kicked off a system development life cycle and all the tools around that; we've also added governance, priority setting, budget, and project management disciplines," she says.

What's interesting for her has been the pace of change, which eventually had to be controlled. "IT had to back off a little," she says. "Part of it is the cost, but there is a whole dimension of business absorbing change and strategic initiatives."

Another factor she discovered is the implications such changes have on the carrier's combined ratios. "With large companies, if they spend $10 million on a system–even if they capitalize it to $2 million a year–with a $1 billion book of business, that's nothing. But you put that on a $100 million book of business, and that's two points on the combined ratio," she says.

Craig Lowenthal, CIO of NYMAGIC, doesn't believe the soft market will have a lingering effect on IT. "It certainly has an effect on the company as competitors have premium goals, so with prices flat or falling in a soft market, some [carriers] tend to start a bidding war or try to replace the business they are losing with business they normally wouldn't want to write," he says.

He claims his company won't fall into that trap, though. "Our gross premium probably is going to be pretty much flat compared to last year [in contrast to] what we felt it would be," he says. "We're concerned with profitability as opposed to premium growth. We're going to look for other profitable opportunities and not put our company at risk by writing poor business. If our technology can give us competitive advantage and a platform that would allow us to take on new lines of business easily, that's important."

Lowenthal joined NYMAGIC less than seven months ago and found a company that had not invested in IT to the level it needed and has headed in a different direction under Lowenthal. "If you have a more efficient technology platform, you are able to scale," he says. "Senior management has recognized this, and that's why they brought me on board. Is our current platform flexible and providing us a competitive advantage? Honestly, no. That's now my job to come in and change our strategic platform and bring us to that capability fairly quickly."

Hiring technology workers today to make those changes has become easier than it had been in the past two or three years, Lowenthal contends. "Something's changing," he says. "I'm able to get good people at reasonable rates, which was not the case the last few years."

One advantage Lowenthal points to for attracting people to NYMAGIC is the company's increased technology focus. "We're offering a great platform and strategy," he says. "Existing employees are excited to learn, too. There was a shift that started before I came on board to move to some of the newer technology platforms. Many of our staff who were COBOL/mainframe users now are experienced in Microsoft SQL and .NET technologies. We're going to extend that education."

One thing Sciol? has to consider is whether it is more cost-effective to develop technology tools in-house or purchase the tools on the software market. A factor that concerns him when buying software is the time involved from selection to implementation. "People can say what they want, but projects don't get done in six months," he says.

If a vendor talks about an 18- to 24-month implementation period, Sciol? wonders what the likelihood is the vendor will be acquired by another larger vendor during that time frame. "If you put in what I call a chassis system to run your business, and you have a lot of interfaces with information going in and coming out, an acquisition [of the vendor] has a tremendous impact on that system and makes the buy concept a lot less attractive these days," he says.

One of the areas insurers have to face is IT effectiveness, explains Mehra, which includes the ability to bring new products to market. He sees firms of all sizes with 20- and 30-year-old legacy technology they are unable to move away from completely. "It's expensive to migrate from older technology, but carriers are being forced to do so because some of the work force is retiring and [the old technology] is expensive to maintain," he says.

Mehra asserts being a good IT shop is a priority for carriers, along with alignment with the business side. He also sees a newfound openness to application outsourcing and BPO. "Funds that would never venture there before are coming around as an effective way to cut costs, especially in a down market," he says. "You might begin by taking out a small testing piece and graduate to some maintenance. A lot of people say they are developing a BPO strategy, but they need to embrace it. There are firms that have been doing near-shore work that are starting to get some cost reduction by moving it offshore. That's due to the market dynamics."

Sciol? is interested to see how things evolve in the standard market space in 2008. "The standard markets have been pretty aggressive, so we'll see when they decide their loss ratios are too much," he says. "It might not be next year, but it definitely will happen in the '09 or '10 period."

He also is interested to see how the small producer exists with larger producers going into 2008. "I think there will be a lot of acquisition in that space, so it will be interesting for us to deal with," he says.

From a technology perspective, Sciol? is concerned with some of the new entrants into the insurance vertical and how they will compete with the existing vendors in terms of agility. This includes the ability of the newer companies to develop quickly simpler tools as opposed to some of the larger organizations that have a deeper penetration into the customer market.

NYMAGIC is leveraging some of the newer technologies, such as Sharepoint, SRSS, and InfoPath, all from Microsoft. "We see Microsoft putting together a really great intranet/portal/collaborative environment," says Lowenthal. "Our company gets immediate benefit and efficiencies built in there."

An integrated platform is best for NYMAGIC, he believes. "Once our strategic platform begins to take shape, policy turnaround is going to be much quicker," he says. "It's going to result in significantly more accurate documents delivered to our partners and customers the first time they are delivered. It's also going to give us a competitive advantage when it comes to the program business we have and to the new business we seek. We're going to have choices for our managing general agents."

Smallwood contends technology has matured to a level where ICW can weave it into the fabric of its business operations. "IT is no longer a bottleneck, and the technology isn't a bottleneck," she proclaims. That has allowed the business side to understand ways to become more innovative and more agile and more operationally efficient.

"We are trying to recruit new people, and they don't want to work in manual operations," says Smallwood. "When you look at the implications of social networking and the capabilities out there and then look at the maturity of the technology, I get excited about the potential of the insurance industry to leapfrog."

The challenge for the business side will be to stop asking for billing systems, policy systems, or claims systems, continues Smallwood, and instead communicate the need for certain capabilities. "I get excited about the potential of the industry, although I think it will take a couple more years of education to take off," she says.

What excites Shaffer about the future is an appreciation of aligning IT with the business to make things better, whether through SOA, business process management, or workflow. "IT is going to add more value to the process and reduce cycle time," she says. "Companies have gone from two weeks to process a policy down to one day. There is so much excitement when the business sees how IT can add value to the bottom line."

One of Lowenthal's concerns for 2008 is the number of legacy-based solutions that remain on the market. "We looked at many policy administration systems, and we were surprised there still are products actively being sold that are COBOL based with front-end skins over them–kind of like lipstick on the pig," he says. "Why would anybody be buying that right now?"

A second issue is what he describes as "a hodgepodge of technology." He discovered vendor products that have pieces of COBOL, pieces using client/server technology, and pieces in newer Java and/or .NET. "The look and feel between components is not consistent," he says. "If I were one of the carriers purchasing that type of system, I'd be extremely concerned for the future health of that application and the effects it would have on my company."

Lowenthal also has concerns with the amount of e-mail being sent. "E-mail is a great tool if used appropriately," he says. "However, I think we see too many people using it back and forth with the person in the next office. No matter what, there is nothing like talking something out."

He claims he has seen 35 e-mails going back and forth on a single problem, and this then leads to users who become more preoccupied with cleaning out their Inbox than actually trying to resolve a business issue.

"This isn't limited to the insurance industry, but we need to do something from an IT perspective to bring [e-mail] down to an acceptable level," says Lowenthal.

What worries Mehra about the future is the lack of speed with which technology is being embraced within the insurance industry. "I think insurance, being what it is–very risk averse–means there is a lot of analysis before making even small changes," he says. "It continues to be my fear we will see a lot more people retiring with the Gen Y folks coming in. That will demand more sophisticated tools and technology, and companies are going to scramble to add scale and better experiences for the users."

There are many business entities vying for the IT investment dollars, but if the down market continues in 2008, Mehra contends the money is going to dry up. "We'll see a lot more smaller players consolidating or just bypassing the whole agent model and going direct to the customer," he says.

Another factor to consider is the retiring baby-boomer segment, and the implication that is going to have on policyholder expectations and the distribution channel is significant, points out Smallwood. "Vendors are having trouble even getting programmers to maintain the really old legacy code," she says. "A lot of the tools are in place. We as an industry can't move fast enough. It's almost like a perfect storm. What we need is capability around ease of use, underwriting automation, and precision pricing. The technology pieces become the easy part. Technology is black and white, but the key is linking them all together. We can't move fast enough automating and integrating technology into the fabric of the workplace."

What worries Shaffer is the results of Sarbanes-Oxley creating an emphasis around compliance and privacy. Some companies believe they have their compliance issues figured out and can move on to make the business better, but Shaffer disagrees. "Compliance programs aren't built out well," she says. "These are business problems, but it takes technology to make a compliance program work well, make sure security is embedded, and that the information is secure."

The bigger insurance players have a good grasp on the fundamentals of an IT shop, according to Mehra, such as rationalizing all their IT investments. He maintains they are less accomplished in the area of application layer and on the experience aspect–either direct to the customer or through agents. "In pockets, certain players have succeeded," he says. Keane works with a regional player in the Midwest that didn't have a very big IT budget, but it did have an excellent agent experience, including 84 percent of policy processing conducted in an automated fashion with no manual touch points. "You see pockets of excellence where the CIO is focused on improving the business for the end user," he says. "But for the most part, I think [carriers] have only just gotten a grasp on the infrastructure side and the licensing side. Some are starting to make inroads with data–cleansing, migration from legacy–that continues to burn a lot of budget from CIOs."

When Smallwood came to ICW, the CEO felt the synergy wasn't right between business and IT, which created conflicting goals. "What was clear was there was a huge gap, and the business was not clearly articulating its strategy," she says. "It was everything we write about and talk about–IT needs to be business driven."

What was uncovered was the problems centered around ease of use, precision pricing, and profitable growth. "Through true strategy sessions the truth came out," says Smallwood. Even though insurance giants are spending billions of dollars on IT capabilities, the midmarket players still have to compete against the giants. And they need to provide those capabilities, as well.

"When you look at the strategies and things in the marketplace, it doesn't matter what size you are," says Smallwood. "You need ease of use, straight-through processing, underwriting automation, predictive analytics, data warehousing, data marts, enterprise content management, and you have to have your core systems in place. ICW is a company that doesn't necessarily spend a lot on technology, so the ramp-up has been significant here."

Shaffer believes the insurance industry is no longer in the Dark Ages in terms of technology and is undergoing a transformation. "What we've seen in insurance is because [insurers have] had so many acquisitions and so many failures to invest in technology, they have found technology is not always in a good position to create a consolidated streamlined process," she says. "As [insurers] try to transform the business process, they are challenging the technology."

Some companies have taken the approach of choosing new applications, points out Shaffer, while others have taken the middleware approach by leveraging SOA to allow the information to improve the process instead of replacing legacy systems. "We're seeing both approaches," she says. "I'm not sure whether we are far enough down the path to judge which is the best direction, though."

Part of the problem has been the lack of a good link between business and technology, Shaffer remarks, and not understanding the value technology can bring to the business. IT was viewed as support or infrastructure requirements rather than something that could make the business run better. "Insurance is a complex business, so one shoe doesn't always fit all," she says. "The complexity has added to the problem, and trying to make a change can be costly."

Shaffer believes there are three categories–data, process, and enabling technologies–which require more emphasis for insurers. Data always has been a challenge because of acquisitions and legacy systems. She sees data issues as being the source of many compliance problems but also as blocking customer initiatives. "[Insurers] have data in so many different places, for them to get closer successfully to the customer, they have to harness the power of that customer data," she says.

Because insurance has been one of the early adopters of SOA, Shaffer contends carriers have gained better access to information. "The starting points are: Where is the customer information? What information do I have that I need to be able to access? And what are some of the interface applications I can create that will allow a common view of that information?" she says. "Part of the problem is a better understanding of how to mine the information."

More carriers are going to look at investing in their core legacy systems in 2008, anticipates Lowenthal.

"We're finally getting to the point where [due to] the combination of a diminishing COBOL labor force, aging and inflexible systems, and competitive necessity, companies are going to look to replace the COBOL back ends," he says.

Such a move by carriers could benefit vendors that have good back-end systems. "For the system vendors that have gone about it right, I think the next five years is going to be a boon for them," he predicts.

Many of the technologies that used to be buzzwords, such as SOA and BPM, are maturing. "There are some really good tools," affirms Mehra. "If used right, they can make a difference. Rich Internet technology is coming to the fore."

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