Cindy Saccocia doesn't mince words when it comes to what she believes lies ahead for insurance IT and IT leaders in 2011.

“I believe the capabilities around cloud and specifically the ability to access computing power is going to be a significant transforming capability for the insurance market over the course of the next year,” says Saccocia, director for the U.S. insurance industry for Microsoft.

Insurance has a difficult regulatory reporting burden to comply with and a complex set of financial models, points out Saccocia.

“In order to lessen that compute load [CIOs] have to consider alternatives to get this information processed,” she says. “Where we see the vision going with some of the leading data modeling providers out there, designing that technical framework to give [carriers] the compute power they need is going to make a significant difference in their business.”

Global insurers have a heightened concern that the new Solvency II regulations in the European market are closing in on insurers.

“It's not lost on any of the U.S. based insurers that these regulatory and financial reform ideas are creating anxiety inside the organizations around issues such as access to information and how to better manage the unstructured business information they have,” says Saccocia. “But what it comes down to is the need for an insurance company to know and understand more about what's going on with their data and the exposed risks that they have.”

Solvency II and other regulatory structures for insurers in Europe are still evolving, points out Raj Sharma, a partner with Ernst & Young. That means American subsidiaries of European companies have to plan on how they will address the changes.

When it comes to U.S. regulatory requirements, the main impact on insurance companies is seen mostly among those that also operate as financial services companies, according to Sharma.

“For a lot of these organizations, IT is combined so they have to worry about the Frank-Dodd financial reform bill passed by congress earlier this year and other issues coming out of Washington,” says Sharma.

Changes in the regulatory environment–both domestically and globally–will intensify the focus among insurance carriers on risk management, according to Rod Travers, executive vice president of the Robert E. Nolan Co.

“The umbrella of compliance is huge,” he says. “It's something that impacts the systems and therefore the CIOs. They are going to be spending more of their time and their priorities addressing the impact–some of which is not even known.”

Travers believes IT people would rather focus on systems, but the importance of regulatory compliance usually trumps everything else when it comes to expending resources. Uncertainty about regulatory change is hardly new, though, which is why Travers feels the pressure on insurers will become more intense.

“I don't think [compliance] changes the role of the CIO for 2011, but it will take up a little more of their priorities and their resources are going to be focused on it,” he says.

But Travers doesn't believe the increased focus on compliance will hold back insurers from completing important initiatives.

“If that happens there is something else wrong,” notes Travers. “The IT function is not structured properly, they are under-resourced or they are not managing those resources effectively.”

Cloud Nine

Saccocia clearly is a fan of cloud computing for insurers.

“Cloud is one of the most compelling transformations available to the industry today,” she says.

Saccocia believes as insurers contemplate how to do more with less and better leverage their IT resources, they need to let go of some of their commodity-based services such as e-mail and migrate those services to the cloud.

“The capabilities are robust, they are secure, and we have good experience with substantial companies running in the cloud,” she says.

Travers admits to being a bit of a heretic when it comes to cloud computing.

“Conceptually, there is nothing new with the concept,” he says. “It's allowed us to put our systems and capabilities wherever we want and not have to worry about the infrastructure. But remote data centers have been around forever and outsourcing has been around forever. That's why I say cloud computing is a terrific marketing term but the concepts have been there a long time and are becoming more available to more companies.”

What the cloud does offer, though, is the capability to fulfill the promise of computing power being located wherever it makes the most sense, according to Travers. He attributes that to increased bandwidth, the ubiquity of the Internet, and the proliferation of standards.

The Heat Is On

The area of risk management is where heated discussion is taking place concerning the cloud, points out Saccocia. She feels it is critical for carriers to have computing power that fundamentally changes financial modeling through infinite, on-demand, marginal-cost resources.

“It's a way in which [carriers] can comply with government risk and compliance requirements and those time-to-market business strategies because when you get capabilities that allow you to burst into infinite computing power you can have jobs running parallel instead of in queues,” she says. “You don't have to have the level of predictability in usage that you need in the last few days of the month, for example.”

Even better, though, it comes with marginal cost–you only pay for what you use.

“When you go after cloud computing power it leaves zero imprint because many of your computing resources are in the cloud,” says Saccocia. “IT has to look at alternative resources in order for them to get their people working on those time-to-market needs and the differentiation capabilities in the marketplace.”

Some insurance companies have been better adopters, but those who resisted are coming to realize there is no reason to keep things in house or build the infrastructure yourself when you can rent it and do it more cheaply and securely.

Travers agrees with Saccocia that e-mail is an excellent example of a successful cloud service because there are providers that do a terrific job.

“The security and the business continuity [provided] is all there,” he says. “There's no need to build that infrastructure; you can rent it. You don't have to worry about upgrades; it's handled by someone else. You may not save a huge amount of money, but once you do [enter the cloud] you realize that's one thing off your plate that you don't have to worry about. You can put that energy into other business enablement issues that will have more competitive impact.”

Get Mobile

Mobile technology is another rising issue for carriers in part because the insurance market is diversifying.

“Being able to attract or serve a group in a way they want to be served is a competitive advantage,” says Travers. “All these variables–not just mobile–are putting demands on CIOs to figure out how to provide the right technologies for the broader array of service enablement needs. We've got an aging population so that changes the way they want to interact. We also have to serve the younger generations that are using mobile devices–and that's all they use–and they want to be served by those devices. The complexity of the way customers are being served is increasing.”

The key issue with mobility is the consumerization of IT, points out Saccocia.

“Workers now expect the employer is going to accommodate any smart phone they may have purchased for their personal use and are integrating them into the organization's network,” she says. “Also, the consumers want access to these applications and capabilities as well, so the insurance company can't really pick one platform to go with. Insurance companies are moving to be more nimble in that space.”

As far as mobile technology for agents, Travers explains there are various philosophies on whether to totally enable the agent and pour all your technology and support into them or do you provide 100 percent support at a company level and the agent or policyholder can avail themselves of it if they want?

“That issue will never be totally resolved,” says Travers. “But there has to be a strategy to deal with it.”

The questions insurers must deal with include: What are the right mobile technologies? What are the right service enablement technologies? What are the priorities?

Travers points out there may not be much of a demand for mobile apps for a life carrier because the transaction volume is limited, but he feels an auto carrier or a homeowner carrier has a need to provide some level of mobile service.

“Insurers need to service the diversified market and manage the channel and the technology that supports the channel so the customer has the best possible experience on their terms,” he says.

Build the IT Office

Sharma maintains the traditional IT department in insurance companies is operated in a silo. The issue for CIOs is to ensure there is governance in place where business has a say in what functions IT enables.

“Typically, we see the answer to every problem is a new technology solution,” he says. “Seldom do we see the IT strategy aligned with the business vision and the business strategy.”

Andy Edwardson, vice president of IT at Farmers Alliance Companies, believes IT needs to be transparent so the business side “understands what we do and it's ingrained in their basic processes.”

When Farmers Alliance initiates the selection process for a new software solution, for example, the business side leads the way, adds Edwardson.

Progressive carriers have the business side involved with the benefits cases associated with technology enablement.

“They have a say in how IT drives it, and they have a governance model that monitors the implementation of a particular project,” says Sharma. “We need to see that happening across the organization. The Office of Business IT, as we call it, is to see how we can get more alignment of business vision and needs and how IT is enabling that.”

Another question CIOs have to deal with is to determine what their actual role is. Depending on the company, Travers feels there are information officers and there are technologists.

“If it's the former, they have to become much more of a business person,” he says.

Some IT shops are in a maintenance mode, though, where the number one priority is keeping the lights on until something big changes–either they sell off a book of business or they get acquired. No one wants to be in that position, explains Travers, but there are companies in that situation.

“Companies are looking for a technologist who can keep the plant running,” he says.

A company on the hunt for acquisitions, though–whether expanding in terms of product diversity, geography, or market share–is a different story.

“If you are on the move as a company your CIO has to be a business person,” says Travers. “It has to be someone that came from the technology realm, but is a person who is asserting into the business area to charge the functional area and make them as smooth-running and as efficient as they can be with as much technology as can be provided.”

Travers feels IT has to be run as a business, but he points out there are aspects of IT that don't fit a normal business model. For example, when compliance and regulatory issues come up, those are costs and there is no traditional economic benefit that arises from them those are expenses.

“They are mandatory and they may be unfunded,” he says. “When you say run IT as a business you have to be aware of some of the realities CIOs face.”

Saccocia finds it remarkable that we are still having a discussion on business/IT alignment.

“Technology is a part of the fabric of everything we do and that convergence of the work life/home life balance indicates that it is very much about business and how people want to do business,” she says.

CIOs are looking at ways to take advantage of some of the new ways to do business, and Saccocia believes the ability to cut through the complexity of the business and not layer any more complexity is an intense business advantage.

Saccocia maintains the insurance industry is hiring CIOs who understand the business. Issues such as time to market, regulatory reform, and putting new products to market all require a CIO who understands more than networks and programming.

“They have to understand how to leverage what's in front of them and put the company on a path,” she says.

Business really doesn't always know what is possible until they get a vision of what they could do, explains Saccocia.

“Show [the business] the capabilities they could have and then the business can define strategies around that,” she says. “If you provide that computing platform that integrates all of your formats–the PC, the smart phone, and the cloud–I think that enables the business to make better decisions.”

Edwardson encourages the business side to bring ideas to IT.

“The business leaders come to us and say, 'We need to do X,' as opposed to us telling them what they need to do,” he says. “They come to IT to understand how a process or a product works.”

When carriers do infrastructure management, it is based on some industry standard or methodology, points out Sharma.

“We still see a lot of insurance companies sticking to their age-old adage of doing things their way,” he says. “Taking advantage of basic process improvements and standards and implementing them within your IT processes is a key. We find quite a few insurers not taking advantage of basic structures.”

Risk Management

Traditionally risk management for insurance companies has primarily been around the products, but Sharma feels as the world has evolved, companies need to worry about market risk and risk of capital–things that affect financial services.

“If you look from a risk perspective and the role of the CIO, how do you converge risk that has been individually managed as a function of finance or underwriting,” he says. “Emerging technology and what the CIO has to do to bring in the data and have a consistent view of all risk is quite a challenge for insurance companies.”

Where technology is old–such as with legacy systems–insurers need to re-examine the risks they are facing. For example, one of E&Y's customers is a life insurer whose core system runs on Assembler.

“It's a very large company, but only two people can maintain [the system],” says Sharma. “That's a huge risk–the institutional knowledge of their systems could be walking away.”

Sharma points out many companies have lagged in terms of outsourcing.

“Banks and others have gotten around that because they have invested in a knowledge transfer from low-cost providers who can understand their legacy platforms and the technical complexities around that,” he says. “That's not true from an insurance perspective. Insurance companies have done quite a bit of spending on the replacement of core systems–policy admin, claims, billing. Every large or small insurance company has that on their agenda. That is driven by the fact that a lot of institutional knowledge of legacy systems is walking away from the company.”

Sharma points out some carriers have done outsourcing around technology, but they need to look carefully at where they should house servers and where the infrastructure management should take place.

“The regulatory nature of how these companies and their IT conform to state-specific laws makes it quite difficult in terms of their ability to outsource data functions and IT functions,” he says. “We are seeing more trends around things like the claims value chain and not only from an IT perspective. IT plays a role because systems have to be flexible and adaptable to outsource functions outside the core area.”

Data, Intelligence and Analytics

Data issues, business intelligence and predictive analytics are lagging in insurance companies, Sharma points out, and CIOs must make sure the data is correct, which is done by core replacement of legacy systems.

“From all our experience and the CIOs we have been talking to, [data] is one of the top initiatives on their agenda,” he says.

Insurers need to get the data into a model where the various consumers of data–finance, actuarial, marketing–can do analysis on the data based on different audiences they need to cater to.

“When we talk about business intelligence it's not just the analytics,” says Sharma. “There are organizations that are unable to run basic operational metrics, especially large organizations that have grown by acquisition. For them, getting the right operational metrics–how a particular product is operating in a particular state–can be quite challenging.”

Travers feels the funding for data and predictive analytics projects needs to come from the business side.

“To the degree the CIO ought to have a seat at the table in terms of running the company, they should be pushing the analytics agenda as hard as they can,” says Travers. “It is a key differentiator and a key management tool.”

In the insurance market today, carriers can't go on living without analytics, particularly in areas such as price, risk selection, and finding hot spots in their company that are not performing well.

The CIOs role is to help the business people who need those analytics get them implemented and delivering value as soon as they can, but the champion has to be the business side.

“As the chief information officer–if they are living the role that title connotes–they should be championing [analytics] and getting across that it's not the technology,” says Travers. “The technology is remarkable, but it's the application of that technology and the analysis of that information that is the valuable piece. That's where the expertise and experience of the business people have to come through.” TD

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