Faced with a host of challenges and pressures, insurers have been driven to look for new ways to improve results in areas such as reducing claims leakage, improving underwriting performance, and generally reducing costs. Pressures include an economy that, while certainly in recovery mode, has been slower and weaker than hoped. Add to that investment income that is unlikely to ever mimic the strong, steady, sustained growth of the equities market in the mid-90s and early 2000s; premiums that are unlikely to fully recover anytime soon (thanks to lots of capacity and fewer exposures in the P/C market and decreased demand for certain life and annuity products); increasing competition for profitable niches; cost savings pressures, and the economic climate is not ideal.

Thanks to this less-than-ideal environment, many carriers have included as part of their strategies three key business goals. These goals include maintaining or improving their market position (sales/cross-sell/up-sell), retention (renewal), and efficiency.

Other emerging technology trends from outside the industry have a profound effect on carrier's IT strategies as well. Consumer expectations of companies' Web site capabilities, mobile apps, call centers, etc. are shaped not by competing insurers but rather by other industries, including banks, airlines, and investment firms. The efforts by other industries to make information more accessible to customers—while insurers have struggled to do the same with legacy systems—have resulted in increasingly obvious shortcomings for both consumers and agents. Since agents and consumers (and even employees) are consumers in their everyday lives, they have growing expectations of technology and the benefits that rapid advances in technology have introduced into other parts of their lives.

And while many carriers continue to focus on efficiency as a goal, perhaps it is no longer the right goal. Instead, as many carriers implement modern systems it may be the right time to begin to strive for proficiency rather than efficiency. But what's the difference?

Efficiency is quite different from proficiency. Efficiency is about things like automating current processes, reducing paper, moving to GUI and/ or browser interfaces, or producing more or better reports.

Proficiency, on the other hand, moves beyond this to include things like re-engineering and optimizing business processes through workflow and BPM, pushing customers to electronic processes, moving to browser interfaces optimized for productivity, and using business intelligence or predictive analytics. The payoff with proficiency can be sizable.

Becoming proficient, instead of just efficient, is a difficult task for carriers. The insurance industry is, and always has been, a conservative (and ironically risk averse) industry. Insurance IT has historically been rewarded for keeping the lights on and automating existing processes, not for enabling business process transformation or spearheading business process re-engineering efforts. Additionally, insurance technology was, for many decades, based on hard-coded systems that made such initiatives difficult and cost ineffective.

Most carriers fall into one of two categories: inefficient or efficient. Carriers that have streamlined their processes through their use of technology fall into the efficient category. Carriers that haven't streamlined their processes fall into the inefficient category. Only a small percentage of carriers have both implemented modern core systems and leveraged those systems to significantly improve their business processes to become proficient.

Though “newer” doesn't inherently mean “better,” modern systems generally offer significant benefits. Modern systems offer rules and tools. While licensing costs for rules- and tools-based systems are going up, the total cost of ownership is going down, as carriers are getting more control over implementation and integration efforts and costs. This leads to lower overall service costs both for implementation and in the long term for enhancements and maintenance. Rules also help to put control back in the hands of the business.

For many midsize and larger carriers, a hybrid approach to modern systems makes sense. It involves using as many worthwhile components as your primary vendor offers.

Service-oriented architecture not only enables a hybrid approach, but it can significantly reduce integration costs and create faster and more predictable implementations. Carriers are using service-oriented architectures to widely varying degrees, but a core systems replacement is a great opportunity to play catch-up on SOA.

While modern systems can offer value, modern core systems are of particular value. They are the heart and soul of the carrier, making it possible to quote, bind, and issue policies. Modern core systems offer speed-to-market for revenue growth and diversification (by adding key new products quickly). They promote profitability through better underwriting. They can reduce costs by automating new business and allowing for more agent and customer self-service. Finally, modern systems can improve service levels and retention, which is a huge boon to the bottom line.

But in a vendor marketplace increasingly filled with vendors touting “modern systems,” what do carriers need to look for in order to support an effort to become proficient? Let's start by looking at what drives the decision-making process—including business drivers and making the case for a core systems replacement—before examining what makes a system “truly modern.”

The business decision to replace a core system is driven by four major factors:

• Speed-to-market is the most frequently cited reason for implementing a new core system; insurers may want a system that allows for new product types and product modifications to enter the market more rapidly.

• Internal workflow is another major consideration, as changes, optimization, and integration with new data sources and internal systems are critical to enabling the business process transformation required to move from efficient to proficient, and to achieving true speed-to-market.

• Distributor and customer service needs also play a role, as movement toward e-business or improving process transparency (e.g., real-time pending application status) can drive the decision to replace a core system.

• Finally, data accessibility is critical, and a new system may be needed in order to achieve the analytics, reporting, and compliance goals that are crucial to achieving proficiency, while legacy systems may not support this type of accessibility.

While these are all key drivers in the decision to replace a core system, certain challenges remain inherent. For example, the lack of available metrics around current costs for processing business and an utter lack of quantification of opportunity costs can create a significant hurdle in building a business case. An inability to quantify potential benefits effectively and convincingly also challenges a business case, and is often a barrier as most carriers don't necessarily know what the benefits of the first new core system in 20 years will bring.

Two other major challenges exist as well. The history of core systems project risk may be necessary to overcome. With many projects ranging from the mid 1990s until around 2004 either failing or at least failing to impress (thanks to long project timelines coupled with a rapidly changing technology landscape and immature systems or mature but outdated systems), many carriers still believe the implementation success rate is low, which is no longer the case. Finally, to establish a strong business case, there must be a true partnership between IT and the business. Compelling metrics for business cases will come from business, not IT, while many of the long-term cost savings that are quantifiable will most likely come from IT, not the business.

Making the business case for these projects is not easy, but it's much less difficult than it was 5-10 years ago; reduced project risk and better systems with better results are making decisions easier. Today, some of the challenges surrounding the replacement of a core system have changed for the better. Through a recent history of successful deployments, better attention to contract terms (by vendors and carriers), and an agile or iterative approach to implementation, the risk accompanying these types of projects has been greatly reduced.

Additionally, the shift to true “business cases” rather than “IT cases” is a major difference in getting projects approved and keeping them on track. There also has been a generational shift, including both changes in IT staff and changes in user expectations as IT staffs now include a generation that has developed for nothing but a Web-enabled world and, as described earlier, users who have much higher expectations. Finally, systems today include rules/tools/configurability, accessible data, and workflow tools that inherently reduce risk and lead to better outcomes.

Understanding the vendor marketplace helps to explain why “truly modern” matters: in an incredibly crowded marketplace, being able to eliminate solutions that provide less value is a key to finding the right solution. The insurance software market is highly fragmented by target segments, including size, lines of business, distribution models, and functional components. There are more than 100 core-systems vendors in the U.S. alone.

This marketplace is comprised of a wide variety of core systems. Those that are “truly modern” have at least a majority of the following components or characteristics:

• Configurable rules engine

• Business process management (BPM) tools

• Configurable workflow (ideally with a visual tool for managing it)

• Essentially no code changes (less than 5-10 percent at implementation time; essentially zero thereafter, and all folded back into base code by the vendor)

• Model-driven architecture

• Modern codebase (Java, .NET, etc.)

• Platform and database independence

• Truly modern UI (Web 2.0 at a minimum)

A configurable rules engine allows for rapid changes to rates, underwriting rules, and much more with dramatically reduced time and cost for both development and (ideally automated) testing. Business process management (BPM) tools allow for automation, even outside the system. A visual, configurable workflow, in conjunction with BPM, makes managing, enhancing, and optimizing business processes far simpler than with hardcode. This is a critical factor to achieving proficiency.

One of the key benefits of “truly modern” is never getting off the upgrade path; the less customization—even when it is put back into base—the better. Model-driven architectures are beneficial for both their ability to minimize/eliminate code changes as well as the fact that while rules are great, code runs faster. Accordingly, generating code from models and rules is the most efficient, practical approach. A modern codebase (Java, .NET, etc.) is important to stay current with market skills and to keep your hiring options open. Platform/database independence prevents you from being locked into any particular technology. Finally, customers and agents expect a truly modern UI (web 2.0 at the minimum).

Once a decision is made to go with a truly modern solution, selecting the right system is a critical next step to avoiding what can become an “efficiency trap,” in which carriers trick themselves into avoiding proficiency. Often, when carriers decide to replace systems, they go through a detailed study to document their existing processes. Typically, the next step is to then create a detailed RFP using these documented processes. This is a path to an efficient system, one that automates existing processes, not to a proficient system.

Typically, a carrier will develop broad questions for an RFI based largely on the existing system and/or any future-state planning that's occurred. Then, the carrier will identify all potential options (utilize Google, trade publications, analyst reports, etc.) to compile an exhaustive list. Once the candidates are identified, the carrier sends a very broad RFI to each candidate to gather basic information from each. When the responses are received, the carrier will review them and determine the candidates for an RFP (based on unverified responses to broad and possibly incomplete questions). The carrier will then either develop an RFP based on existing efforts or pause the RFI/RFP process to do exhaustive requirements gathering, resulting in a set of RFP questions (typically based on the current state). Reference checks are then conducted. The carrier then scores the RFPs and selects a winner. Finally, the carrier can begin implementation, and often this approach fails.

In order to avoid searching for the system that can simply become the system you have today, choose an approach in which the RFP is actually avoided. Using a “just-in-time” requirements-gathering approach focuses on letting an iterative implementation allow interaction with the potential new system(s) help drive the requirements gathering. A process like this typically includes high-level requirements gathering, additional requirements gathering to help develop scripts to use for detailed vendor demos, and then the final candidates are selected.

The process often shrinks from 9-18 months to 3-9 months, with more accurate results. This process often requires the help of an outside expert (such as a consulting or analyst firm) that can bring a wealth of vendor knowledge to the table to make these timelines realistic.

While efficiency is certainly better than inefficiency, it leaves big potential gains on the table. By its nature, efficiency is not transformational. It can only provide incremental gains. While the goal of a core systems renovation project should be efficiency, the goal of a core systems replacement project should be proficiency.

So, what's a carrier to do to get from efficiency to proficiency? Where feasible, they should replace aging systems—especially core systems—with truly modern systems (using the recommended no-RFP approach) that allow greater flexibility in optimizing workflow and business processes, and then these business processes should be optimized. This is the most frequently missed step, as carriers lay all of the groundwork for proficiency, then use the tools they put in place to repave the cow path rather than build a new highway.

The selected system(s) should then be implemented using some variant of an agile or iterative approach that encourages starting with a vanilla implementation rather than detailed requirements. Insurers should then continuously and indefinitely review business processes even after implementation to make improvements. This means systems should not be customized, but rather, configured. If an insurer already has modern systems that were implemented on top of old business processes, it may be necessary to re-examine how the system was implemented and evaluate whether the system is flexible enough to support a change.

In short, changing systems is a critical step in moving from efficiency to proficiency, but the most critical step of all is changing the very mindset that efficiency is the goal.