When you're planning a vacation, you know you'll be able to use your credit card to buy an Eiffel Tower souvenir in Paris, eat at your favorite churrascaria in S?o Paulo, or get cash from an ATM in Tokyo thanks to the use of global standards by banks and credit card companies.

Of course, compared with the data-intensive, multiparty insurance process, financial transactions are exceedingly simple. Additionally, the insurance needs of most consumers don't span multiple countries and seldom are as immediate as other financial priorities. Nevertheless, there is opportunity to be gained from global development and application of standards in insurance, whether applied to make domestic operations more efficient or utilized to do business with partners and customers across a country or around the world.

Insurers also realize, despite differences in geography, markets, and products, there are many similarities that exist in processes, data, and systems that benefit from the application of common standards. “Standards have value in improving the smooth operations of the marketplace,” says Steven Coles, chief information and business improvement officer at Allianz Australia Insurance Ltd. and chair of the ACORD Australian Advisory Committee.

“In particular, we see standards having value in heavily intermediated areas,” he adds. “It's why we've been an early adopter of ACORD standards and why the Australian market has looked at standards both through ACORD and other services as an enabler to make it easier to communicate.”

Standards development itself is an exercise in United Nations-type diplomacy, where colleagues and competitors come together on neutral turf within various standards-setting associations to collaborate.

(For a look at what ACORD is doing, check out the 2010 member directory published by Tech Decisions as well as this 2009 article.)

“We share the same problem most insurers have: We have very smart people on our staff, but we're limited to the number of individuals and skill sets on hand. We have to work together with other companies and pool our talents and resources,” says Bill Jenkins, CIO of Penn National and member of the Insurance Working Group of the international standards organization Object Management Group (OMG).

Insurers' interest in standards in 2010 also has been impacted by worldwide developments; in particular, the challenging global economy. “Insurers increasingly are looking at standards as a tool to assist in helping achieve operational efficiency and improved transaction processing, both of which are critical in markets where companies need to improve business performance and reduce costs,” says Kimberly Harris-Ferrante, vice president and distinguished analyst at Gartner Research.

“In 2009, the world drastically changed for insurance companies. The cost pressures drove companies to improve operational efficiency and to reduce cost, which drove companies to look under the covers at their core systems and identify ways they could reduce the cost of these systems by consolidating, modernizing, replatforming, or replacing systems,” she recalls. “Coupled with this, concerns about regulatory changes and increased need for improved financial reporting made insurers review the role of standards in helping with system-to-system interoperability, reporting accuracy and consistency, and improved operational intelligence.”

But it hasn't been completely smooth sailing in standards adoption for insurers. Deborah Smallwood, founder of SMA Strategy Meets Action, observes while cost pressures are increasing interest in standards on the part of IT, those same pressures are straining available budgets.

“Adopting and adhering to standards is a journey with initial high costs but with long-term benefits, which is very hard for insurers to embrace,” she says. “IT people understand and are able to capitalize on standards for XML messaging, but the whole IT environment does not have an enterprise set of standards because business executives don't get the business value. When IT says it wants a common data model and that's going to cost more money and more time, the business doesn't buy it.”

GOING GLOBAL

In the world of standards, messaging remains a top priority for insurers, according to Lloyd Chumbley, vice president of standards at ACORD. “There is a universal need of insurers around the exchange of data and for information to be shared in a consistent fashion. The specific driver of why it needs to be shared can be different by company, product, or process, but it's about trying to drive efficiency into the data exchange,” he says.

“Messaging standards really have gained momentum during the past few years as more insurers have adopted SOA,” Harris-Ferrante says. “As companies build and deploy services, standards will help significantly with reuse, reduced complexity, improved user experience.”

Chumbley breaks the global standards world into two categories. “Global international” involves using common standards for business that crosses international markets, such as intercompany and reinsurance transaction applications. “Domestic international” involves extending existing standards into additional countries or geographies or working with companies in individual countries to develop region-specific standards.

For ACORD, a key area of focus in the global international category has been the London market, which has been following a road map developed in the mid-2000s for standards development and adoption designed to speed and automate the market's historically slow back-office processes. The Lloyds Exchange marked a milestone in late 2009 with the first live two-way deal using the latest version of the ACORD standard, building on successful one-way exchanges done previously.

Global standards work also is being impacted by developments in financial and accounting standards and regulations, such as Solvency II and the planned convergence of IFRS (International Financial Reporting Standards) and GAAP. For example, Solvency II modeling and reporting requirements require consistent data quality and sound data definitions–and that comes back to standards.

“There needs to be more consistency in reporting and faster ability to generate corporate reports for multinational companies. New financial reporting tools and standards are needed to help with compliance,” says Harris-Ferrante.

SHARING STANDARDS

South Africa, Australia, and China currently are the most active domestic markets outside the U.S. for ACORD. “In South Africa, the main drivers for standards are new regulatory requirements,” Chumbley reports. “In Australia, it's about business efficiency. And in China, the driver is establishing a common definition of risk and coverages to gain a more universal understanding of the market.”

Over the past several years, ACORD members have worked to create the South African ACORD standard for exchange of risk detail between brokers and insurers. In October 2009, the Financial Intermediaries Association of South Africa became a member of ACORD, representing a significant win in support of the standard.

In Australia, Coles sees the drive for efficiency manifest itself in three key areas of standards development. “The market is focusing on messaging to develop a common way of communicating, establishing a consistency around process, and becoming more standardized on products that aren't efficiently delivered today,” he says. In August 2009, ACORD members in Australia officially adopted the ACORD Messaging Library (AML) data standard, making Australia one of the first markets to adopt and implement AML.

Allianz Australia's work with ACORD standards dates back to 2005 and began with internal transactions. “There are several reasons we were an early adopter,” Coles indicates. “First, we were in the process of integrating back-office systems, and ACORD standards enabled that objective. It was a sensible place to start, rather than starting with a blank sheet of paper. Second, we realized if we ultimately did want to use ACORD standards for messaging [with brokers], we first needed to get our own backyard in order.”

While Allianz Australia has aligned its efforts with ACORD, Coles notes, the company has extended the standard as necessary to achieve its internal integration and communication objectives. “We extracted the good stuff,” he says.

The objective for Allianz is to use ACORD standards to complement other messaging mechanisms that already are working effectively within the organization. For instance, Allianz Australia's interface with Ebix's Sunrise Exchange platform, which connects broker systems with insurers' rating platforms for online quoting, predates any work done with ACORD and performs well today, according to Coles.

“The real area where we've seen the value of standards in general has been in the 'many-to-many' transactional relationship–where brokers and insurers have many relationships among themselves,” he says.

“Within that area, there are two objectives organizations are targeting,” he notes. “One is ease of use–to make it easier for brokers to gain access to insurers and vice versa. The second is to take cost out of the equation, which is very important in the commoditized insurance market. So, the market has looked at standards as an enabler to make it easier for insurers to communicate. Credit transactions, basic functions such as providing claim management and inquiry to distribution partners–those are sensible to do in a common way rather than require brokers to deal with different systems.”

While there have been some immediate benefits, Allianz sees the value of ACORD standards as a long-term proposition. “In intermediary connectivity, while there are efficiencies to be gained by having one rather than two connection points, the real benefit will come when it's one rather than 22 or 122,” Coles predicts.

Allianz's long-term goal is to automate manual processes, particularly where there is a lot of paper or e-mail currently exchanged between underwriters and brokers.

In its standards adoption philosophy, Allianz sees the need to strike a balance. On one hand, the company does want to operate more efficiently, share information with brokers, and create standards around products and processes. On the other hand, Allianz doesn't want to end up losing market advantage.

“Standards improve the operations of the marketplace, but they come with a strategic risk, as well,” Coles asserts. “While we achieve positive results by taking costs out, if we try to drive too much standardization into a particular product set, there is a risk we remove the potential for differentiation around products and, ultimately, commoditize the product and only compete on price. We have to be careful through this journey.”

MORE THAN MESSAGING

Messaging is not the only objective behind global adoption of standards. “Companies are concerned about ensuring customer satisfaction and reducing attrition, which is driving greater focus on knowing the customer than ever before. As a result, the conversation around having accessible customer data in a consolidated 360-degree customer profile is a hot topic,” Harris-Ferrante says. “Data needs to be pulled from the source systems, either physically or logically, to create this profile and then compiled to know the breadth of relationship and product footprint with that customer. Using standards to manage customer data will help with these projects.”

Companies are expressing a strong interest in process standards. “If you're building a customer self-service function for change of address, you shouldn't have to build a new process for every back-end system; it should have commonality and share the same process across all product lines, systems, and channels. If you are measuring line-of-business productivity or retention rates, you should use the same metrics and processes to establish that measurement. Those are the other areas of standards being talked about today that are different from a few years ago,” she points out.

Business process standards are an area where insurers continue to lag other sectors of financial services, Smallwood observes. “What's interesting is when you look at business processes in areas such as banking, there are all kinds of measurements and metrics around everything from ATM machines to mortgage applications, where the industry sets standards in terms of time lines along with published benchmarks and regulatory oversight. That isn't the case in insurance,” she says.

“Insurers tend to think their internal business processing is unique, but it really isn't,” adds Smallwood. “For the most part, companies have realized receiving an application from an agent is not unique, and they all benefit from having a standard for that. When they look within other processes–underwriting, claims, financials–they don't look to see what's core or noncore or what's unique about them that gives them a competitive edge. They need to realize things such as how they perform customer services and how they define and price their product are what differentiate them–not how they process their product. Once they understand that, they'll be willing to help develop standards, adopt standards, and adhere to standards.”

The philosophy that insurance processes–such as coverage verification, policy number lookup, address verification, or claim history–can be standardized across products, lines, and geographies is the operating principle of OMG's Insurance Working Group. Using OMG's model-driven architecture process, the group is developing a standard reference model for the insurance industry, starting with P&C. Planned deliverables include a glossary of business terms and metadata, a conceptual data model representing business concepts, an attributed logical data model, and an XML representation of those models.

P&C carriers and service providers would utilize the information models toward development of business services to “better understand and automate their business processes and functions with the objective of continuous innovation and creating a more agile business environment,” according to OMG. Ultimately, the goal is to reuse or extend those models into domains other than P&C, such as life and reinsurance.

OMG also is able to capitalize on work done across multiple industries worldwide that interact with insurance and financial services. “Because OMG is both global and cross-sector, we are able to leverage models built in industries such as auto, retail, and healthcare. For instance, OMG was instrumental in helping healthcare develop its HL7 data interchange standard, and we've been discussing how to use the work done and common definitions in HL7 in building out our P&C models,” says Jenkins.

“The idea is, as we move forward, to leverage models in use anywhere and recognize the interconnectivity between industries. P&C insurance is uniquely positioned in this regard, which is why OMG is focused on leveraging interconnectivity across sectors,” he adds.

The first deliverable for U.S. P&C is slated for June, after which the Insurance Working Group will determine whether to expand that standard geographically or by line of business or whether to target other business processes.

“We will do this in an iterative fashion,” says Jenkins. “There has been a lot of interest generated from carriers and service providers outside P&C and outside the U.S. market in what we are doing. We definitely will consider that interest as we move forward to decide the best direction to go.”

Jenkins sees the work being done on process standards as a complement to gains that companies such as Penn National have been able to achieve in data standards, including in an SOA overhaul of its legacy policy administration systems. It also has gained value by adopting standards for messaging and data modeling.

“Like many companies, Penn National has been targeting data integration, conversion, and mastery programs, including data warehousing and business intelligence,” he says. “As we have done so, it became obvious we needed better management of the data. That requires a common data glossary and data modeling requirements,”
he explains.

“Our operating principle is to use standards wherever we can,” Jenkins stresses. “We want portability among systems.”

GLOBAL CHALLENGES

Interest in standards development and adoption across the globe will remain high, Harris-Ferrante suggests. “Based on our customer conversations, standards for data models, processes, and messaging will be top of mind for both life and P&C insurers. All three have an important role in allowing insurance organizations to improve their transaction processing, expose the processes and data externally with minimized risk, and improve risk management for improved compliance. Those benefits will continue to be understood among the forward-looking, aggressive companies focused on customer service improvement, compliance, and business model transformation over the next five years,” she says.

However, despite the high level of awareness by IT, not every company will follow the same adoption path. Harris-Ferrante breaks the market into three types of companies. “Innovative and leading-edge insurers that are investing in more strategic projects will be more aggressive in standards adoption, including enterprise governance for standards. More mainstream [companies] are applying standards tactically for short-term wins or a means to an end, such as online quoting or issue in P&C, customer self-service, or straight-through processing for a single product line,” she says.

However, there is a third group of companies that have failed to implement standards overall. “Unfortunately, because the majority of the IT budget goes to keeping the lights on and there is an appetite for short-term projects with fast ROI, there will be companies that lag the industry significantly in embracing standards,” continues Harris-Ferrante. “It's a question of how committed companies are to transforming their operations at the speed they will need, either due to external forces of regulatory change, consumer device use change, or growing and shifting needs of their agent and broker networks.”

Regardless of where in the world a company does business, Smallwood maintains the secret to success in standards adoption is the same. “IT needs to establish a positive and definitive payback, which will happen as the number of successful implementations with clear benefits increase,” she says. “Once you set up the framework for standards, the cost and time of implementing go down, you begin to be able to plug and play, business sees the benefits, and IT gets the buy-in it needs.”

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