Its been a tough few years for the insurance industry in general and IT departments specifically. But as 2003 fades into 2004, the promise of a somewhat brighter future lies ahead. IT leaders have been swallowing budget cuts in recent years and have been forced to find better ways of doing the work while reducing costs. Examples of these skills have come from Web services projects, where insurers found ways to get some new-age value out of old-school legacy systems, and the management of the insurers software portfolio, where new uses of older assets have extended the life and the investment carriers have made in technology.
As we close out another year, Tech Decisions asked three insurance IT leaders to assess the tools, tactics, and cost management that will be needed to make IT departments more productive and the enterprise more cost efficient. Responding to our queries were Srinivas Koushik, enterprise chief technology officer for Nationwide; Michael Connly, chief information officer of The St. Paul Companies; and Jane Koppenheffer, chief information officer for Penn National Insurance. Their views on what lies ahead for their companies and their industry offer insight into where insurance technology is now, where it is heading, and how it will get there.
Tools
Tech Decisions: Which areas do you see taking prominence in insurance IT shops in the coming year: infrastructure, integration, front-end systems, claims, underwriting, other areas? Why?
Connly: The Web services concept is a big part of what I see gaining prominence. When I talk to people around the industry, I think a lot of people are on a similar path, where theyve built, essentially, Web front ends. They are in the process of integrating more and more to other processes and systems. Were certainly doing a great deal of that. Were continuing ongoing investments in agency technologytechnology to provide more and better information to our agents along with more interactivity. From what I hear, a lot of other companies are using a similar strategy. Also, a few companies are taking on major policy administration projects, although I dont see a lot of that. I think the expense and the risk are what people are concerned about there.
Koushik: Our plans call for continuous improvement in all of these areas while making significant advancements in a few of them. Integration within our enterprise and with our business partners is a key focus area. This will allow us to streamline operations and contain costs. Our front-end systems, sales, and servicing systems will evolve significantly to take advantage of current technological advances.
Koppenheffer: We think it is important to make continuing investments in each of the areas so we consistently can meet business needs both now and into the future. Beyond the areas listed, we continue to make security a priority. A few years ago, we found we were spending a much higher percentage of our IT budget on maintenance than the industry as a whole. If we did not make the commitment to ongoing investment in each of the areas, the cost of maintenance would continue to rise and would limit spending on new initiatives that much more. With the support of our entire executive management team, weve been able to bring the percentages of new initiatives and maintenance back in line and are well positioned for incremental improvements.
Tech Decisions: Are you planning any Web initiatives, and if so, what kinds?
Koushik: Our key solutions are being redesigned to take advantage of Web technologies. While this does not mean all of our applications will be available over a browser, it does mean these systems are being built on a standardized Web architecture and infrastructure. Some of the key solutions include sales and servicing, claims intake, claims handling, etc.
Tech Decisions: Do Web services factor into your plans to upgrade your systems?
Koushik: Web services and associated technologies play a critical role in enabling our services-oriented enterprise architecture, which is built on the principles of federation, loose coupling, and open technologies.
Connly: More and more, with the advent of Web technology and the ability to componentize the systems you haveincluding legacy systemsWeb enablement is a huge benefit to the effectiveness of those systems.
Tech Decisions: Do you see your IT department increasing, decreasing, or maintaining the amount of outsourcing you do?
Koushik: We plan to maintain the current amount of outsourcing we have. This is because over the next 18 months our focus will be on the rapid development of several strategic business solutions that will require a close partnership with our business sponsors. Increasing the amount of IT outsourcing introduces key delays and potential disconnects in the solution delivery life cycle.
Tactics
Tech Decisions: Do you need to build a business case for IT initiatives, or do you need to build an IT case for business initiatives?
Connly: We dont have a one-size-fits-all process for doing business cases. It depends on the specific discipline that is involved. We certainly do cost-benefit analyses (CBA) on a lot of our work. Obviously, there is work for which CBA simply is not relevant. The best cases are ones where youre not doing a cost-benefit analysis of the IT project alone, rather you do a cost-benefit analysis of the business project, and IT just happens to be a component.
Koushik: Every significant IT project within the enterprise has to build a business case that includes the Total Cost of Ownership of the solution and an ROI calculation that includes an Economic Value Analysis (EVA). While we do not have to build an IT case for business initiatives, every initiative includes a serious look at how IT can enable business innovation.
Tech Decisions: Are consolidation and simplification of your systems part of your plans for the coming year?
Koushik: Absolutely. Consolidation and simplification are at the core of our IT plans for this year. These initiatives will help drive down the operating costs of our current environment by reducing maintenance costs. They also help enable increased synergies across the companies within our enterprise.
Koppenheffer: Consolidation and simplification are key components of our long-term IT strategy. We talk in terms of the need to improve system effectiveness and availability for our core applications. Consolidation and simplification are two of the ways we are going to be able to meet those long-term objectives. Our plan for application upgrades will address the simplification of systems. Consolidation remains a challenge as many of the packages we have bought do not play well together and have required a more extensive infrastructure than we would have liked. It requires careful analysis and planning to consolidate such systems successfully, and in 2004, we will continue our work on that front.
Connly: Thats a pretty significant part of our plans. Were in the process of consolidating several account management systems into a single account management system. Were pretty far along in that project. In fact, were nearing completion. Weve been in the process of consolidating our various forms of loss-reporting systems into one loss-reporting environment. As were consolidating and simplifying, were also trying to be mindful about doing so with compatible frameworks so we can provide a more seamless integration experience.
Tech Decisions: Where does an improved distribution system fit in with your strategy?
Koushik: We are focused on delivering an improved distribution system for our exclusive and independent agents. These systems provide comprehensive capabilities for sales and servicing.
Connly: Were very happy with the outcome of the small commercial project we did earlier this year. Well continue to invest in ways that make it easier for our agents to get information from us. That comes in a variety of waysyour own Web site and what you do with other organizations.
Tech Decisions: How important is it for IT leadership to be involved in business planning for the future?
Connly: I certainly am an adviser to the business unit leaders. Im involved in a number of processes in terms of providing them input from a technical standpoint.
Koushik: IT plays a significant role in the business planning process.
Tech Decisions: Does IT portfolio management fit into your companys strategy? Explain.
Connly: We are engaging in portfolio management activities. Were looking at a combination of extending, replacing, and componentizing our application portfolio, using Web services concepts. Web services is a phrase that is a little ill-defined. Its a phrase that can create more confusion than help when you use it. But, clearly, well be looking at more Web services concepts and integrating our set of applications. Weve been fairly successful at beginning to reduce the amount of duplication in our applications environment.
Koushik: IT portfolio management helps us understand our current workload better. This helps us prioritize and line up projects that provide competitive advantage and significant business value to the enterprise.
Tech Decisions: Where does project management fit into your IT strategy?
Connly: We dont use a specific project office concept. We did that for a while, but we actually devolved it because the project office was getting a little heavy. We do place a strong emphasis on common project management. Were rolling out some enhancements to the way we manage processes to make sure every appropriate IT disciplinefrom infrastructure to security to application architecture to data qualitygets the appropriate level of visibility and authority within a project to make sure were adhering to the standards weve chosen as a company. Were going to be using some service process optimization tools in conjunction with that.
Tech Decisions: Does your company have an enterprisewide view of IT?
Koppenheffer: Our company most certainly has an enterprisewide view of IT. We view IT as a limited resource that has to be allocated across the organization in the most effective way possible. Fortunately, we have a process that has worked very well for us. Our executive management team annually prioritizes and approves the large strategic IT initiatives ($100,000 or more and six months or more of effort) for the entire company. We then have a cross-functional team (CFT) made up of key divisional representatives that prioritizes resources for our planned (smaller than strategic) projects across the company as well as the bulk resources necessary to maintain our infrastructure and current systems. We have seen great benefit in having new technologies (such as imaging) piloted in one division and then using the lessons learned to have even better success in the subsequent divisions. I feel very fortunate Penn National Insurances business leaders understand the importance of an enterprisewide view of IT.
Connly: IT obviously is a very critical part of our business, and it receives attention and support from the highest levels of the organization. We really try to emphasize commonality in practices, commonality in technologies, and effective sharing of development investments.
Koushik: Yes. We currently have an enterprisewide view of IT where we optimize IT resources (people, systems, infrastructure) across the enterprise.
Cost Management
Tech Decisions: What are the top areas where you see technology saving insurers money in 2004?
Koushik: We plan to save money in 2004 through infrastructure standardization and consolidation, efficient solution delivery, and aggressive cost management with our suppliers.
Connly: We strive to provide the appropriate level of auto-mation for every task we have. Whether this is enhanced automation in claims or additional automation around policy administration, I think with most insurers there still is room to add automation where you can build a business case to do it. A lot of that traditional automation work is still there. In addition, we have some interest in seeing what can be done to solve the unstructured data problemthe hordes of data that are locked away in Word documents, PDFs, and other places where there is no structure to the data but where you would like to get to it. This is not an area of large investment, but its certainly something were looking to do new and interesting things with. And there is the continuing evolution of having things be electronichaving more things available on an electronic basis over time and the continuing displacement of the dependency on paper.
Koppenheffer: Here at Penn National Insurance, were seeing savings from both an infrastructure and an application perspective. For example, the investment weve made in VPN and telecommunications improvements have allowed us to move our substantial number of teleworkers (approximately nine percent of our work force) from very expensive ISDN connections ($1,000-plus per month per worker) to either cable modem or DSL connections (about $100 per month per worker). We are beginning to see real productivity improvements from the new policy processing and claims systems we have begun implementing in the past few years, particularly in combination with the imaging and workflow system we have integrated with those transactional systems.
Tech Decisions: Head count is the largest IT expense. Do you see yourself increasing, decreasing, or maintaining it?
Koppenheffer: We will have a very minor increase in head count next year. We need to add one person to manage the operational environment of the new ERP package we are putting into production the beginning of 2004, and we need one other person to help manage our client-server environment as we continue to grow that infrastructure.
Tech Decisions: Insurance IT focuses on distributional effectiveness or reducing operational costs. In terms of rough percentages, how would you divide up your focus for the coming year(s)?
Koushik: Distribution effectiveness is 25 percent. Operational efficiencies is 75 percent.
Koppenheffer: As we work with the business to prioritize our efforts, we tend to focus on overall business benefits as opposed to one aspect or the other. Ive found in our most recent strategic projects, such as imaging, a new claims system, and a new policy processing system, that each one will help improve distributional effectiveness and reduce operational costs. Since we are committed to the independent insurance agency system, any time we improve our distributional effectiveness, we feel we ultimately will help to control or reduce our operational costs.
Tech Decisions: Can IT departments continue to be productive while being pressured to cut expenses?
Connly: Im fortunate to have tremendous business partners who understand the value of IT. I divide IT into three disciplines. One of them is infrastructure, which is about meeting the service levels youve chosen while optimizing costs. Second is collaboration, which is how we engage with our customers to help solve their business problems using technology. The third area is software engineering, which I look at as using industry standard practices in order to improve the predictability, choose the quality, and improve the productivity of our software development projects. Within the context of that, a lot of what weve been doing is finding ways to fund more work and more of what our customers really valuethe development projects to help the company become more effective and competitive.
Tech Decisions: Will ROI become even more important in the future for IT initiatives?
Connly: The most important thing, whenever possible, is to think in terms of the ROI of the business project and the business benefits that come from the use of IT.
Koushik: ROI will become even more important in the future where there are many initiatives competing for a relatively constant capital budget.
St. Pauls Merger With Travelers
At presstime and just after the interview included here, The St. Paul Companies announced it would merge its operations with Travelers Property Casualty Corp. This will create the nations second-largest commercial insurer, which will be known as The St. Paul Travelers Companies. The combined company will be a leading provider of property/casualty insurance products distributed through independent agents and brokers. It is expected to have total assets of $107 billion, shareholders equity of $20 billion, total capital of $26 billion, and net written premiums of $20 billion.
The St. Paul Travelers Companies will remain a Minnesota corporation and have its corporate headquarters in Saint Paul. The specialty insurance lines, which will be known as St. Paul Specialty, also will be based in Saint Paul. The St. Pauls international business will continue to be based in London. The combined companys commercial lines and personal lines business will be consolidated under the Travelers
brand and based in Hartford, Conn.
According to Matt Josefowicz, manager of the insurance group at Celent Communications, the greatest challenge facing the new company will be merging operations and technology in a way that will let the new company take full advantage of its new scale. He adds the company will need to deploy technology to manage enterprise risk across its newly combined book of business. (For more on the technological impact of mergers, see Model Behavior, )
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