As interest in new policy administration solutions revs up, the issues driving carriers decisions are both evolving and increasing, according to industry research. With spending forecasts up, insurers are preparing to put the pedal to the metal in upgrading their systems.
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Although the actual purchasing of policy administration systems by life/health, annuities, and property/casualty insurers has been growing only slowly since last year, the interest level has surged. There has been a significant increase in leading indicators such as requests for information (RFIs). Why would carrierswhich have been avoiding these types of purchases for years, if not decadessuddenly take such a strong interest in policy administration systems? A number of factors have emerged, creating the perfect storm of business drivers for significant growth in policy admin system purchases.
While policy administration systems once referred to core policy processing systems that merely processed and maintained policies, todays policy administration systems can range from this traditional definition to fully integrated suites that are comprised of everything from product development tools to quoting, rating, billing, claims management, and more. These suites appear to be gaining in popularity among small and midsize carriers, where there are typically fewer systems to replace and the operational efficiencies gained are magnified by the companies smaller sizes. Additionally, at smaller carriers it is easier to move a single line of business at a time to a new suite, as opposed to one component at a time. Component replacement still is the most common approach at larger carriers, where the risk of replacing numerous components at once can be too much for most carriers to swallow.
The policy administration system market has changed dramatically in the last few years. While many systems continue to use legacy code to conduct core processing, the vast majority of vendors now offer at least a portion of their functionality via a Web browser interface. On the life/health and annuity sides, there are fewer vendors, and only a handful of those vendors provide truly modern systems in which platforms such as J2EE or .NET are used exclusively. Among property/casualty vendors, there are nearly 50 vendors and a larger pool of truly modern solutions.
Modern Minority
Since purchasing activity has been limited, these more modern solutions still make up a very small part of the overall installed base of policy administration systems. The most advanced sector of the market is annuities systems, while individual life systems seem to be the furthest behind. Property/casualty, group life, and group benefit insurers are in the middle of the pack, with many implementing at least components of the available modern systems. But rather than indicating a long-term trend, this is a reflection of early adoption patterns. Carriers selling annuities, for example, often are competing with more agile industries such as the banking industry. There still is a tremendous growth opportunity in the currently lagging sectors of the market.
As with insurance software in general, regulatory changes and the need to ensure compliance are major business drivers for admin systems today. For example, public companies need to meet Sarbanes-Oxley requirements, and having control over critical data ranging from billing to commissions has become a top priority. Being able to audit quickly and thoroughly commission payments in particular recently has become an area of great interest for insurers. For many carriers, having five or more policy admin systems integrated with multiple billing, commission, licensing, and contracting systems is the norm, meaning extracting the right data in a timely fashion can be difficult if not impossible. Modern open systems can help improve dramatically audit and reporting capabilities, particularly when those systems are tightly integrated and share data.
Another business driver affecting demand for policy admin systems, especially for carriers whose focus is life and/or annuities products, is the ability of modern systems to improve significantly the speed to market of new and innovative products. Some systems offer the ability to take a product through the entire product development life cyclefrom the initial product modeling and calculations to billing for that productin a tightly integrated solution. This integration also allows changes to a product to be made by business users and to cascade through a carriers systems with little or no help from IT. In short, product development time and IT costs associated with product development and admin system maintenance can be decreased.
A consistent driver for insurance IT projects has for many years been cost reduction. This has grown in importance as many insurance products have become commoditized, making price the only differentiator. Often, the reduced development and maintenance costs typical of a modern system combined with the relatively low price of new systems and comparatively simple integration of new policy admin systems with other carrier systems means a quick payback on these large projects. Building a new system from scratch is nearly impossible to cost-justify when a new system can be purchased for significantly less, even allowing for extensive customizations. More important, with some vendors selling pre-integrated suites that provide everything from quoting and rating to issuance and billing, at times it is difficult to cost-justify not replacing legacy admin systems and eliminating the associated maintenance expenses.
Win, Win, Win
Yet another major business driver is the need to deliver Web-based access to the three key stakeholderscustomers, agents, and/or internal staffto reduce costs and improve service. While providing Web-based access to all parties still is not universal across insurance carriers, it creates a win-win-win situation for producers, clients, and the carrier. Web-enabling legacy systems via wrappers or other solutions, although not always impossible, is not always cost effective, either.
The advantages of Web access for customers, producers, and carriers are intertwined. For example, producers benefit from proactive e-mail notifications about a policys status as it progresses through submission, underwriting, issuance, etc. They spend less time on the phone checking on policy status and more time selling. For the carrier, call volume and, therefore, call center expenses are reduced. Another example would be an address change that can be completed online quickly and easily by an end customer without wasting an agents time or internal carrier staff time. That agent can be notified of the change simultaneously in case he or she wants to follow up with the customer for sales or service reasons. Again, Web access provides a win-win situation.
An additional driver causing carriers to consider policy admin purchases is many companies, including insurers, are pushing for reduced costs by consolidating servers and software. By migrating numerous lines of business from multiple legacy systems onto a single flexible system, carriers often can save millions of dollars annually on the costs of mainframe hardware and software or on licenses and hardware for the numerous other servers and applications they may be using to run their administration suites. Even if, for example, a carrier has one admin system but each ancillary application (claims, billing, etc.) runs on its own hardware and has its own database license, operating system license, monitoring software license, etc., an integrated suite may unlock significant hidden savings.
One final driver for replacing policy administration systems is the need for carriers to update business processes, increasing their flexibility on an ongoing basis. This is a crucial step toward achieving the other benefits discussed in this article. Often, legacy policy administration systems have established business processes hard-coded into the core of the system, making the cost of introducing a new, potentially more effective business process prohibitive. Many of the more modern systems have business processes abstracted from core components, enabling easier changes to workflows or other processes in order to react to the shifting needs of an organization or the market.
Real Benefits
A number of insurers already are reaping the benefits of replacing their admin systems or components of their admin systems with modern offerings. While much has been written about savings achieved with new claims systems, for example, some components of policy administration receive very little attention. These areas, such as rating, billing, and even quoting, can provide opportunities for significant savings in conjunction with reengineering of the business processes and the technology behind them.
Electric Insurance Company (EIC), based in Beverly, Mass., with more than $300 million in direct written premium, wanted to reduce the time it needed to introduce new products. A personal lines insurer in all 50 states writing both directly and via independent agents, EIC also wanted to add flexibility to its existing lines to make itself more responsive on price and to allow for improved speed for underwriting products, changing products, etc. In the past, EICs pricing analysts created pricing spreadsheets that then had to be converted into COBOL programs by IT staff. In addition to increasing dramatically the propensity for errors, this meant a great deal of time and expense was being wasted on duplicate work.
EIC determined it did not want to replace its entire policy administration system but recognized it could achieve significant savings by updating its rating processes, which could be accomplished only by updating its technology, as well. EIC therefore chose both to wrap and extend its mainframe policy administration system to allow the system to leverage Web services and to replace its rating system with a modern system also leveraging Web services. The rating applicationV1STA RateMaker from Decision Research Corporation (Ho-nolulu, Hawaii)allows EICs pricing analysts to make pricing and underwriting changes directly, which are reflected immediately in the policy administration system with minimal effort required by IT.
So far, the results have been remarkable. EIC says it is saving 25 percent of the time required to bring a new state into production for some products and expects savings to be as much as 37 percent for other products. The time savings are magnified by the fact EIC can ramp up multiple states simultaneously. Even more impressive are the labor-cost savings. EIC has determined rolling out new products in states now takes 90 percent less IT time than before, resulting in significant savings.
With results like this becoming in-creasingly reported, carriers quickly are recognizing the value of replacing some or all of the components of their policy administration systems. Given the broad array of business drivers propelling carriers to consider policy administration purchases, along with the types of results already being seen at progressive carriers implementing these systems, Celent estimates for the life/ health and annuities market spending will experience moderate and steady growth, led by small and midsize carriers that tend to be able to best leverage the new solutions cost effectively.
Spending Growth
While pricing for the life and health and annuities solutions finally is firming up, it appears to be doing so at a relatively low price point. Celent estimates spending on life/health and annuities solutions will grow from an estimated $350 million for the five-year period of 2002 to 2006 to $439 million for the five-year period of 2004 to 2008, or an average of almost $18 million more per year. This average is based on strong, steady growth beginning in 2005 and starting to level in 2008.
For property/casualty solutions, the market already appears to have im-proved over the early part of the decade, when spending declined to nearly negligible levels. Given many carriers purchase separate solutions for personal and commercial lines and pricing has firmed at relatively higher levels, Celent estimates spending will climb from approximately $34 million in 2002 to more than $75 million in 2004, then grow rapidly to a peak of $275 million in annual spending by 2007 before starting to fall off as demand decreases due to saturation. Overall, spending over the five-year period from 2004 to 2008 could approach nearly $1 billion vs. just half that for the period from 2002 to 2006.
The estimates are for software and initial configuration, not including significant customization or conversion, which often can be incurred at a factor of two to 10 times the cost of the license and basic implementation. Carriers should be aware of this fact, and most vendors certainly will include the additional costs in their proposals.
Overall, the market seems ready to explode, as carriers recognize both the needs for and benefits from new administration systems and suites. The introduction of modern systems is like throwing gasoline on the fire, as new flexible systems are able to truly meet carriers needs with implementations lasting six to 18 months in many cases rather than three to five years as in the past. While some vendor consolidation in the form of mergers, acquisitions, and simply failures is inevitable, the survivors can look forward to helping quite a few carriers fix their oldest problems.
J2EE vs. .NET: Does It Matter Anymore?
For years now vendors and carriers alike have debated the benefits of J2EE vs. .NET. Many carriers have set up their IT architectures as predominantly J2EE, and others have set up as .NET shops, while many more simply have stayed with a heterogeneous environment. With Microsoft making significant efforts to convert insurance vendors and carriers, and with J2EE-friendly technologies such as Linux, Apache Tomcat, and other open-source applications gaining in popularity, what should carriers be doing now with regard to their architecture?
The answer to this question may be less relevant than ever before. Among policy administration systems vendors, about half of the newer systems are based on J2EE, most of the others are based on .NET, and a handful offer both as an option. In reality, with the advancement of integration technologies in the past five years, virtually any systems can be made to work and play reasonably well together, especially as standards emerge for insurance technology around XML (including ACORD XML).
Nevertheless, there still is a perfectly legitimate argument for selecting one technology or the other: Maintaining one skill set rather than two simply is more cost effective. And while Microsofts offerings certainly have become more focused on enterprise-class uses, some IT shops have lingering concerns over stability, scalability, and security. However, with the two technologies more compatible now than ever before, selecting truly best-of-breed systems rather than just best-of-your-breed is becoming a reality, making J2EE vs. .NET less of a debate about architecture and more of a debate about cost.
is a senior analyst in Celent Communications insurance practice. His previous experience includes serving as the eBusiness director at AIG American General as well as a background in IT and management consulting.
This article was adapted from Celents upcoming reports on policy administration systems.
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