In its annual insurance CIO survey report published last January, Celent predicted 2005 would be "the year of policy admin." While the high volume of policy administration requests for information (RFI) and deals we've seen over the year confirm this prediction, the trend shows no signs of abating in 2006. Policy admin continues to be a top initiative for insurers moving into 2006, second only to continued improvements in distribution and e-business.
In the past year, carriers have continued to focus on the same business drivers as they have in recent years. Vendors of policy administration systems (PAS), however, seem to have done a better job at rolling out features that help carriers address these business drivers. Here's a look at carriers' current needs–from speed-to-market requirements to the new regulatory challenges–and, more important, what vendors are doing to address them.
Since the Sarbanes-Oxley Act passed in 2002–and even more so since Eliot Spitzer began investigating contingent commissions paid to brokers–terms such as transparency have become as commonplace in insurers' vocabularies as old, familiar terms such as compliance. A failure to comply used to mean big fines; now, it can mean jail time for public company CEOs. While few carriers call regulatory and compliance challenges their number-one priority, few place it below their top three.
With all of the changes to the regulatory and compliance environment in the last few years, carriers have had to give thought to whether their systems are capable of dealing with the increased pace of change. As Sarbanes-Oxley standards trickle down to nonpublic companies thanks to a court ruling that implies all companies will be held to the higher standards of conduct in the court's eyes, the need for flexible systems that can enable rather than hinder business process changes is critical.
These concerns have joined with the pressing business drivers that were already creating significant demand increases for modern, flexible policy administration systems. The recent surge in purchasing activity has been fueled by vendors' realization they need to provide systems that meet carriers' constantly evolving needs.
Some vendors have come a long way toward automating the many menial tasks involved with regulatory and compliance activities. Both PAS vendors and other software providers have added critical capabilities for managing various links of the regulatory and compliance chains. For example, ensuring all key steps are followed throughout the sales and service life cycle–and producing an audit trail–has become a relatively common feature of modern systems, especially within PAS.
Business rules engines (BRE) and business process management (BPM) capabilities now are found in some PAS offerings, while interest in third-party bolt-ons of such software has soared. The same is true of document management and even enterprise content management solutions, both for built-in and bolt-on systems. These capabilities allow carriers to track every person involved in a process, along with every piece of paper (virtual or otherwise) and every transaction in far more detail than previously was possible and with little effort. Such systems also help to better meet records retention requirements.
Another feature of PAS offerings vendors are fortifying is commission management. After the Spitzer investigations into contingent commissions, carriers increasingly are aware they may need to be able to account for whom they pay, how much they pay them, and for what. More important, they need to be able to do so quickly and accurately.
While cost containment is not the all-dominating concern it was several years ago, it continues to be a top-three issue for most insurers, especially larger ones. In Celent's recent survey of insurance CIOs, more than half of large company CIOs and nearly half of midsize company CIOs considered cost containment or reduction one of their top priorities. Considering IT budgets generally are on the rise, this seems to indicate they are trying to do more with less. Savvy CIOs recognize more and more insurance projects are becoming commoditized and margins are likely to shrink as a result. This, when combined with somewhat less impressive investment returns than in previous years, means reducing operational costs will stay a top priority for quite a while.
Modern PAS projects, while expensive, can go a long way toward helping to achieve long-term cost savings. They do this in a number of different ways. First, anything that helps reduce or eliminate dependency on the mainframe can lead to significant potential cost savings, since much of the software that keeps the mainframe up and running is quite expensive to license, even if the mainframe itself is fully depreciated. Second, often there is significant business process reengineering that goes along with PAS projects, leading to more streamlined, more efficient processes. Third, modern architectures typically are componentized and modular with greater reusability. This results in a lower total cost of ownership.
Vendors have taken extra steps to help carriers reduce costs by switching to modern admin systems. In some cases, they have created preintegrated suites that minimize not only upfront costs but also the cost of maintaining integration points. Use of open standards–especially the use of ACORD XML–by many vendors is helping to drive down integration costs by allowing disparate systems to share data more easily. Another major contributor to lower total cost of ownership is the option to use commodity hardware with many vendors' systems. Often, clusters of Windows or Linux servers are considerably less expensive to maintain than their legacy predecessors.
Not surprisingly, in the survey the only goal that rivaled cost reduction was revenue growth and related initiatives. In the world of policy administration, this important goal is addressed largely through improvements in speed to market and product flexibility. According to a 2004 Celent study, products that get to market quickly typically generate more revenue and greater profits as shown in the figures.
Policy administration systems help to achieve faster product development cycle times in a number of important ways. First, if a product development tool is available as part of a suite or as a preintegrated add-on, it may be a considerably faster tool for developing products than existing methods. Second, the integration almost certainly means much less involvement by IT staff to take the product from concept to rollout.
Equally important is the flexibility of both the core systems and any preintegrated product development tools to handle an incredibly broad array of products. This presents enormous potential cost savings, since currently many carriers rely on multiple systems for their myriad products, dramatically increasing the costs of maintenance, hardware, software, staff, etc. By providing one platform for all new products–and perhaps even migrating existing systems to them–modern PAS offerings again can help lower costs but at the same time generate additional revenue by making it possible to produce some new products that would not have been cost-effective otherwise. This results in entirely incremental revenue. Vendors are no longer competing solely on cost but on total cost of ownership, as well.
BPM and BRE aren't just for compliance, of course. At many carriers, business process improvement is hampered by systems that have business processes hard coded or, worse, that aren't even documented. When a carrier wants or needs to change a process to make it more efficient to meet compliance regulations or simply to allow a new product to be rolled out, business processes that are hard coded can be cost-prohibitive or impossible to change. As a result, many improvements never are considered or are scrapped after a brief attempt to implement them.
When carriers have BPM or BRE tools to help allow business users to create and maintain business rules, they have the flexibility to change the business processes that rely on those rules far more easily than when IT needs to get involved. This, in turn, makes them far more likely to update business processes on a regular basis, thereby minimizing expenses and improving compliance with ever-changing regulations.
Some vendors of policy administration systems are partnering with business rules engine vendors to provide BRE capabilities within PAS offerings. Others are including their own business rules engines or basing their entire systems on business rules engines. A few vendors have begun to offer BPM partnerships, and even fewer are including their own BPM capabilities. However, a clear trend toward PAS vendors offering BPM capabilities (on their own or via partnerships) is emerging, while BRE capabilities are becoming the norm rather than the exception.
Despite the best efforts of vendors and the best intentions of carriers, having multiple admin systems still is quite common. Decades of acquisitions, divestitures, reorganizations, and generally siloed operations have resulted at many carriers in a PAS environment that often includes numerous different admin systems. The maintenance costs of such environments can range from uncomfortably high to downright crushing, with some carriers spending 80 percent or more of their budgets on maintenance rather than new projects. Though not the norm, Celent research shows more than 20 percent of carriers spend at least that much, with some spending as much as 90 percent on maintenance.
These figures paint a bleak picture of the efficiency of legacy-bound carriers. Those carriers that have gone through significant consolidation or integration projects and that have modernized their core systems report spending as little as 25 percent of their budget on maintenance costs. The difference is startling and is a testament to the value of undertaking a PAS replacement project to shift to a platform for consolidation.
Increasingly, PAS vendors are doing their part to remedy this situation by offering systems that can be used as consolidation platforms. This is a result of some vendors making their systems more flexible, more scalable, and with the ability to handle a broader array of products than before. By doing so, they create systems that can be used to replace decades' worth of systems, often on commodity hardware that's also cheaper to maintain.
In 2006, it seems almost unfathomable that at a minimum some carriers might not be able to offer policy information to customers online or perhaps supply a quote for certain types of policies. However, there still are some carriers–and not just small ones–that have very limited presence on the Web. A relatively small number of carriers (with the exception of personal auto and homeowners carriers) provide online binding of policies.
Although this is often a conscious choice on the part of the carrier for business reasons, in many cases carrier technology is the culprit. An array of limitations ranging from batch processing to a lack of e-signature capabilities keep most carriers from offering online binding of new policies. Carriers with a strong online presence have a competitive advantage with a growing base of prospects that expect to be able to conduct business online.
PAS vendors have moved to provide more and more Web capabilities "out of the box" over the last few years. Newer systems have been built from the ground up to support the Web, while older systems are being retrofitted to the extent they can be. Some are offering straight-through processing, some are at least supporting e-signature capabilities, and many more are at least providing agent and end customer portals as a standard part of their offerings. Given the cost savings associated with Web capabilities, vendors' enthusiasm in this area comes as no surprise.
The last year has been an eventful one for the industry. Rapidly changing regulations, investigations by Spitzer and the SEC, and enough natural disasters to make any property/casualty insurer nervous have served as a reminder the insurance industry's greatest enemy remains the unknown. The best defense IT can provide against the unknown is a flexible, nimble architecture that can not only provide tangible benefits today but adapt to whatever tomorrow brings.
Some vendors of policy administration systems have taken this route, and most of those have been rewarded with strong interest in their products. Those that have failed to adopt modern architectures and programming languages are not seeing the same levels of interest and will struggle if they don't adapt to the insurance world that is rapidly evolving around them.
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