Shop Talk

An examination of the activity between insurers and technology vendors over the last eight quarters shows carriers are shoppingand deal making continues to grow.

Activity between insurance carriers and technology firms, particularly in the core processes, continues to grow, according to Craig Weber, senior analyst for Celent Communications and author of Insurance Software Deal Trends 2003-2004.

Its pretty clear from the overall volume trend deal activity has been rising and has been for the last eight quarters, Weber says. If anything, activity has accelerated somewhat, which maps pretty well with what weve been hearing anecdotally.

On both the life/health side and the property/casualty side, core systems continue to be a strong focus for insurers. Celent lists core areas as policy administration, claims solutions, underwriting systems, policyholder service portals, and actuarial, pricing, and product design. Weber believes the findings make sense given where the expense comes from for insurers and where efficiencies can be gained. There are select pockets of distribution and document management where carriers are interested in doing something, but a lot of activity stems from the core systems, he notes. The policy administration category is where we get the most questions and where most carriers seem to be suffering with legacy aftereffects.

In addition to core systems, Celent breaks the deals into three other categories: distribution, document management, and infrastructure and financial. Celent also divides insurers into five tiers: Tier one includes insurers with more than $10 billion in direct written premium (DWP); tier two is DWP between $1 billion and $9.9 billion; tier three is DWP of between $300 million and $999 million; tier four is DWP between $100 million and $299 million; and tier five is DWP of less than $100 million.

If you read the report you will see tier three through tier five carriers have been pretty active in deals, Weber points out. What that masks is the fact the tier one and tier two carrier deals are much larger. If MetLife puts a new policy administration in play, thats a giant win for the vendor. Some of the smaller deals are more plug-and-play, maybe a $500,000 project. Its a big deal for the vendor, but its not earth shaking in terms of the industry.

Twenty-seven percent of all deals studied in the report were made with tier five insurers. That makes sense given how companies are distributed by size, says Weber. There are lots of smaller players out there. They have the same needsadministering policies and moving toward next-generation technology. They probably are not able to customize and build robust functionality because they are justifying it across a smaller policy base.

The document management results are similar to what was reported one year ago, Weber indicates. It shows a lot of activity, he says. These generally are smaller deals, but they do signal a willingness by carriers to improve the look and feel of their documents. The difficult decision to unplug document production systems that have been in place for 30 years and still work could be an obstacle but apparently is not. It is a little surprising how many of those deals are out there because it means carriers are willing to consider unplugging systems that work today, Weber adds. Clearly they believe there is return on investment, both in terms of reduced maintenance and improving how they look to their customers.

One other noteworthy point from the study was the similar number of deals reported by life/health insurers and property/casualty insurers. Fifty-one percent of the deals were on the P&C side vs. 33 percent life and annuity and 16 percent health. There are certain similarities that cross the industry, says Weber. Its a paper-intensive industry and a service-intensive industry. In administering products, whether they are transactional commoditized products such as property/casualty or more involved complex products such as life products, the needs are very similarprocess an application, communicate effectively with agents and customers, and be able to provide service.

Weber is bullish about the future. I think, if anything, the growth may continue to accelerate because the quality of the tools available today is much higher than it was even five years ago, he says. There clearly is a benefit to be gained today that didnt exist five years ago. ROBERT REGIS HYLE