Policy administration system replacement remains a top priority for insurers in 2012, particularly for large and midsize carriers, according to Matt Josefowicz. It is less of a priority for smaller carriers, though.

"That's partly because small insurers have fewer systems and may not feel like they can afford a newer system," says Josefowicz, partner and managing director in the insurance practice at Novarica.

For a small carrier there aren't that many policy administration solutions available that aren't a huge drain on a smaller carrier's budget.

"If you are a $50 million insurance company, you may have a total IT budget of $4 million," says Josefowicz. "If you are going to try to replace a policy admin system, the cost might take up your total IT budget for the next two years."

Smaller carriers instead tend to focus on issues that are more tactical; at least until their policy system issues become too pressing.

"If [smaller carriers] wait long enough, a more cost-effective SaaS option might rear its head with a lower total cost of ownership," says Josefowicz. "We're already starting to see those kinds of options on the market."

In its report onU.S.insurer IT budgets and projects for 2012, Novarica found many carriers rated their systems as being poor in quality. Josefowicz believes carriers in turn are looking at where they can obtain the greatest improvements in these systems on a short-term basis, such as enhancements. Although such a plan may be considered less expensive, Josefowicz regards it as a risk management issue.

"It's generally viewed as lower risk to enhance something that's already in place rather than to go through the transition of replacing a system," he says.

Josefowicz points out it is difficult to lump all insurers into a particular bag because the marketplace is diverse in terms of the state of capabilities at different insurers.

"Carriers may see different areas as core, but if you look at the business drivers—growth, operational effectiveness, competitive parity—and look at the business capabilities, which mostly are around speed-to-market, distributor service, and business intelligence, that's how those goals translate to technology-enabled capabilities," he says.

Josefowicz includes among those capabilities bringing new products to market faster, serving agents more effectively, using technology to improve the agent/underwriter relationship and speed of transaction, and leveraging internal and external data through better business intelligence.

When Novarica asked insurers to cite their top project areas for 2012, predictive analytics was one of the lowest rated on both the life & annuity side and the property & casualty side—no matter the size of the insurer.

"It's not in the top three for most insurers because being able to implement a predictive analytics model depends on strong rating, policy processing, and transaction processing capabilities," says Josefowicz. "But that doesn't mean insurers aren't doing analytics. I would hazard a guess it is a driver for policy administration projects that include rating and underwriting systems so the additional predictive models can be implemented. The need to support predictive analytics is one of the things that drive other larger projects."

Josefowicz doesn't like to make bold predictions about what lies ahead in insurance IT because he sees the industry dealing more with incremental change as opposed to massive change.

"I think the problems are well known, the challenges are established, and the solutions, in most cases, are understood," he says. "People are engaged daily in the struggle. It's not glamorous, but it's absolutely necessary."

He believes that helps to explain why issues such as social media and mobile technology grabbed so much attention in 2011.

"Those pieces of technology are not necessarily expensive. A lot of what is going on in those areas relates to leveraging investments that were made for real-time Web," says Josefowicz. "On the other hand, having a an inflexible administration system, rating engine, agent portal, or claims environment that doesn't allow you to do new things is going to hold you back from being able to leverage the value of mobile and social media."

Special Reports /

Not All Carriers Worry About Replacing Core Systems

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