Coming Up Roses

Insurance IT 2006

Coming Up Roses

It's been an eventful and, at times, challenging year for the insurance industry, but senior IT executives at some of the leading and best-run carriers believe insurance IT is flourishing and will continue to do so in 2006. In a roundtable discussion, six leading IT executives offer their views on the direction their companies need to pursue, the tools that will help them get there, and how we all need to work together.

The insurance industry went through some tough times in 2005–everything from government investigations to un-precedented natural disasters–but one sign the industry is in good shape comes from speaking with leaders in insurance IT. When asked whether there is a single area the industry as a whole needs to focus on in 2006, not one of the executives taking part in our roundtable agreed with any of the others.

John Chu, senior vice president, e-business and technology at The Hartford, probably summed things up most effectively when he said insurers today are focused on how best to use all the information they possess in their different business areas to achieve competitive advantage.

Chu was one of six industry leaders interviewed for this roundtable discussion. Joining him were: Catherine S. Brune, senior vice president and CIO, Allstate Insurance; Barbara Koster, CIO, Prudential Financial; Lawrence E. Blakeman, vice president, application development, and CIO, MetLife Auto & Home; John Kellington, senior vice president and CTO, Ohio Casualty Group; and Charles Brooks, CIO, personal lines, Travelers, a member of St. Paul Travelers.

These industry experts explored some of the important issues facing insurers in the coming year and took a look back at what has been an interesting 12 months.

Tech Decisions: To what single area of the insurance business–claims, fraud, underwriting, rating, policy administration–do you believe the industry as a whole needs to pay closer attention in the coming year?

Brune: We continue to focus on all areas, since they're all critical to our industry. Claims, though, is something we all need to keep improving, making sure we continue to take advantage of emerging technologies that help us improve customer experience.

Blakeman: The property/casualty industry has been experiencing almost unheard-of combined ratios over the last several years–excluding catastrophe losses. While the combined ratios have been low, the catastrophe losses have been high. Taking a more granular look at exposures, running more catastrophe scenarios, and then adjusting the number and concentration of exposures will be something most of the P&C industry will be looking at.

Kellington: Underwriting, rating, and policy administration are tied closely together. There is a term in the industry called "micro-rating," which is a process to price a risk with greater granularity. The amount and quality of data that is needed to understand micro-rating will put a heavy emphasis on warehousing technologies, and the advanced rating schemes will place a heavy burden on many policy administration systems.

Chu: Each company is at a different stage in its systems evolution, so each one is engaged in different projects that will have different shelf life, and each establishes a different strategy to take on competitors. One may have created very sophisticated underwriting systems and now is paying attention to claims automation, while another is ahead in policy administration and now is tackling fraud detection. Overall, we're grappling with how to maintain, leverage, and use information for competitive advantage–it's just some of us today are more focused on claims, others on rating, and others on different needs.

Tech Decisions: Is there a technology tool you are keeping your eye on for its future positive effect on the insurance industry?

Blakeman: The SEMCI toolsets are the ones we are watching most closely. Agents constantly give us feedback that ease of doing business–including the ability to quote and access information from multiple carriers via their agency management systems–is extremely important to them. The promise of SEMCI has been talked about for many years, but it looks like that promise is coming closer to reality. The widespread use of the Internet as a delivery vehicle, the use of Web services, and the creation of standards such as XML and ACORD for data are coming together, providing a good foundation for SEMCI to become a key tool. While the future looks better for SEMCI finally to be a success, utilization still is low, and there currently are too many vendors promoting SEMCI solutions.

Chu: The Hartford is not looking at one tool but multiple tools. We've created an innovation lab that's focused on several emerging technologies that are likely to add new capabilities and efficiencies in our operations, including how we interact with various customers. A few of these technologies have strong potential to transform the way we do business, so we're very optimistic.

Koster: Prudential monitors a variety of technologies that have the potential to enhance the way we do business. Tools such as electronic ink/digital paper hold promise to ease and improve the electronic signature process. Communication technologies such as WiMAX expand the flexibility of mobile sales personnel to work with potential and existing customers. We believe the technologies that hold the greatest potential benefits to the insurance industry are Web services and service-oriented architecture (SOA). These technologies will better enable us to deliver flexible services to our customers and partners more rapidly. When combined with ACORD and other standards, SOA provides the technology for us to enhance our service delivery at a lower total cost of ownership.

Brune: Continuing advances in wireless are critical to getting real-time information into the hands of those who need it, whether for customer service or operations processes.

Kellington: It's not so much a tool but a concept that I believe will help our industry dramatically. IBM recently contributed its IAA process models, dictionary, and state diagrams to ACORD in an effort to help the industry standardize on business process, which could enable a standardized SOA for the industry. This could have a dramatic long-term effect on the capabilities of our industry, including the independent agent, the primary carrier, and the reinsurance market. An industrywide ACORD SOA could improve dramatically the efficiencies of our industry by providing a real-time processing environment for systems; this would limit the manual entry with which our industry currently is saddled.

Brooks: SOA and open source software.

Tech Decisions: What projects currently are being developed within your company, and what are the challenges to make them successful? Is a project management office a necessary part of the equation? How long should it take to achieve ROI on a project, and has that time frame changed in the recent past?

Koster: We have a broad portfolio of projects occurring across the enterprise at any given moment. These projects can include development of business-unit-specific applications, integration of new technologies or products, and development of new services. Similar to many organizations, our projects pose a variety of challenges. These might include tight time frames to take advantage of market opportunities, the need for enterprise or cross-business-unit collaboration, or implementation of new technology.

Our approach to project management offices reflects our overall business model, which places the responsibility for success with each business unit. As such, we have found project management offices within IT are an effective tool as long as they remain close to the work at hand. Regarding the time frame to achieve ROI, we have found while using the rule of "a project must pay back in X number of years" might be an effective starting point, it paints all projects with a brush that is too broad. Instead, we view projects from a portfolio perspective–some provide a fast payback, while others show a return after a period of years.

Blakeman: Some of the key project areas we are focused on are improving efficiency and growing our business. For example, imaging the 25 million Auto & Home claim documents we receive annually and using workflow capability to route those files to the right person at the right time drives efficiency gains and improves both flexibility and customer satisfaction. Several projects are under way to grow our business, such as making it easier for agents to do business with us by interfacing to their agency management systems and rewriting our legacy administrative systems to improve our flexibility and speed to market. The project management office is a tool that helps not only to report on the status of projects but also to provide an early warning signal of potential problems that, caught early enough, can be fixed.

Brune: Project management is absolutely necessary. From an IT perspective, our work on enterprise portfolio management helps by creating a dashboard view for IT and business leaders alike to monitor and track progress. It helps ensure various areas of the company and their work are aligned, eliminating redundancy and speeding up delivery time. Since most of our products end up touching our distribution organization, everything has to be coordinated. Without a project management office, that would be hard.

Chu: The Hartford has a large number of strategic projects going at any one time and concentrates on building and refining projects that bring us new capabilities for distribution, product management, and operations. Projects are put through a rigorous demand management process to make sure they add sufficient value and are built in accordance with our new architectural and capital-planning procedures. We also determine whether it makes sense to build or buy various components to a project. The time required to achieve ROI will vary depending on the size and scope of the project, but we've grown more sophisticated in measuring the impact of each project.

Kellington: We are working on many projects to improve the corporation's goal of profitable growth. The projects range from improved agency technology solutions to internal business process improvements for underwriting and claims. I would say a project management office is paramount to success for any organization. We've had our PMO in place since 2001, and the results have been terrific. We would like to see a positive ROI [for a project] within a year, but if the project is strategic in nature, we take that into consideration to extend the criteria.

Brooks: Broadly speaking, most of our projects are focused on two areas: removing speed barriers in delivering business value and rationalizing our architecture. When the business approaches us with an idea that requires a system to enable it, we want to be able to measure the time to delivery in days and weeks, not weeks and months or, worse, years. All of the latest buzzwords and technologies are being explored and/or implemented: SOA, J2EE, rules harvesting, data warehousing, wireless and mobile computing, etc. While we typically are early adopters of technologies, on select opportunities, we are willing to pilot leading-edge technologies. The primary challenges we face are skills and resources. Implementing new technology requires new skills, while many of our IT employees have spent their careers working on–and mastering–traditional legacy technology. We need to continue to assess our people and our partners' resources to ensure we have the right skills available at the right time.

As we crack open systems and have more projects developing on them at the same time, have more projects with dependencies across systems and even across strategic business unit lines, and accomplish all of this with more speed, the necessity of a project management office increases exponentially. Having a central coordination and control point only can help manage the complexity and speed and reduce the chance of loss of control. I don't think there is a magic answer to the time to achieve ROI, but with only a few exceptions, ROI should be achieved within 18 months and, desirably, within a year. I believe this has shortened by 25 percent to 50 percent over the last five years.

Tech Decisions: In what ways has your company improved IT-business alignment? Can this issue ever be solved, or does it need to be addressed every day?

Chu: The Hartford already has taken action to improve dramatically the alignment between technology and business, so that's not an issue for the company. Maintaining that alignment is an ongoing challenge, though. It's a bit like marriage, requiring communication, trust, and honesty, and like a marriage, it needs continuous commitment and work from both sides. The roles of the CIOs and their business partners are interdependent and require each to listen and learn and sometimes compromise. The lines have been blurred. This is a very exciting time.

Brune: A few years ago, we reorganized our IT organization and developed a new business-aligned enterprise IT strategy in which our business technology leaders report directly to business unit leaders. This helps all of us, both in IT and the business, to be more agile and integrated. We've eliminated redundancy and saved time and money. But everything, of course, constantly is changing, so we need to remain on top of this every day to ensure continued alignment.

Koster: Prudential has taken a multilevel approach to aligning IT with its business needs. Our application development teams are managed within each individual business unit across the enterprise. This ensures the IT work that most directly affects business performance is tied to the needs of each business. From a governance perspective, we employ a three-tiered approach using an IT governance committee, a CIO cabinet, and customer councils. Operating at a strategic level is our IT governance committee, which is headed by Prudential's CIO and comprised of senior business leaders. This group reviews broad technology issues that impact all of our businesses and approves major enterprise technology investments. At the next level is our CIO cabinet, which includes CIOs from each of our business units and senior IT members throughout the company who partner to develop enterprise-level architecture and technology solutions. And finally, we operate customer councils comprised of representatives from our business units and IT members who have a detailed understanding of technology topics. These groups are charged with solving specific issues that ultimately have a broad impact on the business.

Brooks: For the most part, IT-business alignment has improved substantially over the last one-and-a-half to three years. There are a number of reasons for this improvement, but two reasons stand out. First, the chasm that normally exists usually is caused when IT produces a string–or even just a couple–of under-scope, over-budget, and/or late systems projects. This causes distrust, resentment, and marginalization of the IT department as a "value destroyer" instead of a "value creator." We have had some success in the projects we have invested in recently, which helps the business side realize how important IT and IT systems are to its success. With "shiny and functional widgets" coming out of the factory, the business side focuses more on IT investment as it will want to leverage more of a value-creating asset. Second, many of our IT leaders have stepped out of the "IT sandbox" and begun to participate in business discussions as well as offer ideas in these discussions–ideas that go beyond IT. As we begin to show we understand the business and/or can enrich discussions, we are gaining seats at the business table we didn't have before. This proximity and frequent interaction have been powerful forces in increasing synergy, collaboration, and alignment between IT and business.

Blakeman: IT-business alignment is something that has to be worked on, nurtured, and constantly renewed. It is more than just aligning with and supporting the businesses' strategies, goals, and objectives. It is the daily interactions, the conversations, and the individual projects that reinforce and cement alignment. One of the changes we made this year to improve IT-business alignment at MetLife Auto & Home was the creation of a new project-prioritization process and IT steering committee. The IT steering committee is smaller and more focused, makes decisions faster (including saying no to projects), and has brought more rigor to business-case development and the prioritization of IT projects.

Kellington: Ohio Casualty has an IT steering committee made up of the chief operating officer, the division leaders, claims, and actuarial. The steering committee meets monthly to review major initiatives and set a priority for the major IT initiatives. We have gone to great strides to align our technology initiatives directly with the corporation's initiatives; the alignment is paramount to success in today's environment.

Tech Decisions: What is your biggest security concern–the thing that keeps you awake at night? Which is a bigger security threat: external hackers or internal employees?

Koster: We have a very strong information security program at Prudential. We are focused on protecting our computing environment as well as customer and employee information. We leverage state-of-the-art technologies and tools to help us secure the environment, implement the appropriate processes to minimize risk, and restrict access to sensitive and private information to a "need to know" basis.

Chu: Data security needs to be a concern for everyone, since data integrity could be compromised by employees, consumers, agents, business partners, and third parties. Our overarching security strategy is to educate employees about the importance of security and to make sure our data is protected in multiple ways. I can't speak beyond that.

Blakeman: The biggest security concern I have [focuses on whether] our information assets will be compromised. The examples from the past year of companies whose information was compromised in spite of standard security measures are scary; the impact to customers as well as to companies was greater than had been imagined. Although we have long been focused on security, looking at ways to further improve the security of our information assets will be a priority in the coming year. Statistics show internal employees are the biggest security threat. A lot of time is spent determining exactly which applications and data employees need to do their jobs and then providing precisely that access–no more and no less. We periodically recertify employee access, particularly when employees change roles, to ensure it continues to be appropriate.

Kellington: A changing regulatory environment and the compliance issues associated with the classification of unique data probably are my largest concerns. There is so much focus on external threats, but most issues probably are internally originated.

Tech Decisions: Are compliance issues–including Sarbanes-Oxley–being addressed adequately by IT and the business side? Are there ways to improve the processes? Is compliance handled as part of the organization, or is it a stand-alone issue?

Brune: We're fortunate in that [Allstate] is in really good shape–we have forward-thinking leaders who have allowed us to get in front of compliance issues before they became issues. Since everyone has a stake in the game, we adopted a holistic view of regulatory compliance. We developed our own compliance and control management system for our various IT divisions that has centralized metrics, but accountability still remains in the hands of our business technology areas. In addition to helping with compliance, many of these custom tools are used in other ways, which helps improve efficiency and save money.

Kellington: We are very fortunate at Ohio Casualty in that we spent quite a bit of effort standardizing our IT practices to align with CMMI [Capability Maturity Model Integration] and ITIL [Information Technology Infrastructure Library], so the Sarbanes-Oxley compliance measures were difficult but achievable. Our business processes also are highly standardized and controlled, so Ohio Casualty is positioned pretty well for these compliance issues. The process has smoothed out tremendously between 2004 and 2005. I believe it's a result of a better understanding of what is required to be in compliance. In 2004, most of the industry (including the audit firms) effectively was trying to understand the bounds of the Sarbanes-Oxley legislation. All our compliance issues are handled on an enterprisewide basis; this gives the regulatory compliance topics the necessary priority to achieve the results we expect.

Chu: We have an IT governance tool that allows us to record dates, events, and approvals for property/casualty IT work. Using the tool, we quickly can retrieve information and documentation upon demand of the internal or external auditors as part of the SOX control process. In addition, our litigation response team has developed a series of processes to help us expedite requests from The Hartford's legal team. These protocols allow us to mitigate the IT staffing required to fulfill these requests. Compliance issues are handled by both our IT and our business organizations in coordination with our legal and compliance functions. We have individual compliance functions for each line of business, and there is close coordination with the IT and business operations on all of those activities.

Blakeman: There has been a lot of positive and negative press about the impact of Sarbanes-Oxley over the last several years. Some of the good things about Sarbanes-Oxley for MetLife, Inc., are the number and size of "gray areas" in financial reporting and controls have been reduced and documentation requirements have been improved. Therefore, external auditors can give a report card on whether or not SOX issues are being addressed adequately. For MetLife, they have been. The effort to document SOX compliance has been more manual than we would like, so we are looking at ways to improve that process.

Koster: At Prudential, compliance is a key area of focus. The IT function works closely with the business areas to mitigate and resolve potential issues.

Tech Decisions: What is the current/ future attitude toward offshoring?

Brooks: Our current attitude toward sourcing is very positive. It is working very well for us now, and we plan to explore it further. We are looking at every investment as a transaction and assessing how it should be sourced. Some investments are sourced entirely internally. Some are offshore. Some are offshore resources onshore. Most are a mixture of two or more of the above. We plan to reduce fixed cost, reduce average cost per resource, increase flexibility of resource pools, and turn over resources and skills as quickly or as slowly as needed via sourcing partners.

Kellington: There really isn't a change here; offshoring has been an effective way to increase constrained resources in a cost-effective measure. We've been utilizing various firms throughout the years to augment our constrained staff; as workload increases or decreases, we adjust accordingly.

Blakeman: Global sourcing has been a part of our industry's IT staffing strategy for several years now and likely will continue to be. Using outsourced or offshore labor allows companies to respond to market needs for fewer or additional resources quickly and without impacting their U.S.-based employment levels.

Tech Decisions: Web initiatives–is the plan "steady as she goes," or do you foresee some new direction or heavier reliance on the Web (for producers or customers)?

Koster: The Internet still is growing in importance. We see increasing utilization and heavier reliance on the Web from our customers, our employees, our agents, our third-party sales channels, and other partners. We expect these trends to continue as younger generations–who are more demanding of technology–move through the work force. We are continuing to look at ways to expand our Web presence with more and richer information and with greater customization to the audience.

Brune: We've relied on the Web for helping us deliver information and services to our customers for several years now. We're going to continue enhancing these tools, including our award-winning Accessallstate.com site that has been recognized for allowing financial professionals to develop and manage easily and conveniently their business online.

Chu: We will continue to use the Web in every application. It's both a tool and a channel. We're always looking to leverage the power of the Web, so I'm sure our reliance on it will grow.

Brooks: Our "thicker" clients will get much "thinner," and everything that can go on the Web will. We will have a greater reliance on Web initiatives.

Kellington: Hopefully the industry will move more toward real-time [SEMCI] technology, which will connect an agent's system to a carrier's system. Ohio Casualty has implemented many solutions to smooth the processing inefficiencies of our independent agents. I just hope we can get a critical mass of carriers implementing policy transactions such as quoting or issuance. SEMCI capabilities definitely would improve the independent agents' workflow.

Blakeman: Web-based "thin client" applications have been a standard for several years now, and I don't see a change in that direction. The number of Web applications and their functionality will continue to grow as older legacy applications are replaced and retired.

Tech Decisions: In retrospect, 2005 has been a rough year for the insurance industry with the devastating hurricanes and the investigations conducted by the New York attorney general. How will the industry bounce back in 2006 to make it a better year?

Brune: Despite a record-breaking year for hurricanes, Allstate is well positioned for the future. To quote our chairman Ed Liddy, "Insurance is the oxygen of free enterprise." So, you can trust we'll all keep working to improve processes that help us deliver our products and services.

Kellington: I'm a firm believer the transparency issues that stemmed out of New York will help the industry in the long run. It may cause turmoil in a few firms in the short term, but in general, it's the right thing to do. I also believe this industry is the most efficient and effective mechanism to deal with the uncertainty of the future–it's why we are in business. As long as pricing remains rational, the industry will do fine in 2006.

Blakeman: The industry will bounce back by focusing on the fundamentals that drive the business. Good products, good underwriting, superior service, efficient operations, etc., drive industry results and will continue to do so. Information technology plays a key role in each of these areas–from automating manual tasks to using data mining tools to identify potential new profitable market niches.

Chu: Each year has its own challenges, and 2005 was no different. The key is to create sustainable capability that allows us to outperform the industry in good or bad cycles. It's all about how you distribute, manufacture, and fulfill your promises. That doesn't change.