Taking the Big Step

Short of going through a merger or an acquisition, the biggest challenge hanging over business units and a CIO's desk is policy administration. So, making the right decisions in this "once in a career" project is imperative not only for the company but for the professional well-being of the CIOs and other technology leaders in charge of the selection. The policy administration system is the heart of the insurance company. These systems contain all of a carrier's knowledge. "It shouldn't be a surprise it is [a carrier's] biggest investment and the biggest priority for the company," says Kimberly Harris-Ferrante, research vice president in the insurance practice at Gartner.

There are two categories of potential issues insurers face with older administration systems, according to Mark Cyphert, principal with Deloitte Consulting. One is the legacy concept of having undocumented business rules and logic and ineffectual code constructs in data stores. So, going through any sort of change–even something as simple as adding a new product–becomes inefficient and cost prohibitive. The other consideration is the overall complexity of the carrier's environment and the risks that accompany that environment.

One driver for policy administration system replacement is consolidation. "Companies that have acquired but not necessarily integrated blocks of business have an ongoing cost to maintain the systems or perhaps pay a license fee as well as maintain a skill set across multiple systems," says Cyphert.

Commercial lines insurer GuideOne Insurance enhanced its older systems, retrofitted them, and reengineered them to satisfy the carrier's needs, reports Mike Schneider, director of systems implementation. GuideOne complemented its policy administration systems by utilizing a third-party for rating. "We really had three systems supporting the commercial platform we were looking to streamline," he says. "It now will be one all-encompassing tool that can be extended out to our agents, which was one of our goals."

The nice thing about the Insurity solution purchased by the carrier, Schneider believes, is GuideOne views it as an evolution. "Our agents are accustomed to doing some of that front-line entry via the tool we had in place," he says. "This new tool with Insurity will be a more robust and enhanced tool that will provide more feature functionality down to our agents."

A second reason carriers turn to new solutions is inflexibility. "There are things that appear relatively straightforward to an agent or to the marketing department–a tweak to the plan code or a new commission structure, something that appears relatively straightforward," Cyphert notes. "But you have a legacy system that can't process the business, and it will take IT 16 months and $10 million to make and test that change."

There also is a need to understand the operating environment and what processes and systems are doing, especially in today's environment of more regulatory scrutiny. The set of initiatives that have gone on around Sarbanes-Oxley or for compliance opened up a lot of organizations eyes to see the number of controls, deficiencies, or overall inconsistencies in the way their systems operate, according to Cyphert. "Sometimes it is a lack of predictability," he says. "One way insurance companies make money is setting aside reserves based on projections for the coming year, and sometimes the complexities inherent in legacy administration systems skew the results. Some companies repeatedly have been unable to project their claims, new business, and the like and have made up for it with workarounds."

Darwin Professional Underwriters, a specialty lines carrier, is only a little more than two-and-a-half years old. In the summer of 2003, it started out on the RFP process. "We had a pretty good idea on what we needed, and we were able to put together a pretty detailed RFP we brought out to a bunch of different vendors," says Bob Asensio, Darwin's CIO. "First of all, it had to be a complete system. It had to support things such as rating, policy issuance, letter generation, producer management. Second, it needed to be very configurable." Asensio believes the ability to configure was the key benefit that got Darwin to the solution it purchased from OneShield. "It gave us the ability to control our own destiny," he says. "I looked at it as they were supplying the blocking and tackling for a system that did certain basic things and then, working with them, we were able to add customized work flows, products, and whatever we needed."

Darwin has been able to extend the system, Asensio reports. "Not only do we use it internally, but we have partners logging in externally," he says. "[Partners] have a different view and a different work flow." The carrier also has added value to the system by automatically underwriting certain lines of business.

"In my previous experience [with Chubb], I was responsible for home-grown systems, so you run into limitations and dead ends," says Asensio. "When we went through this process, we did everything we could to make sure there were few dead ends."

GuideOne is a customized niche insurer, and the Insurity base platform wouldn't have supported the carrier off the shelf, resulting in a delay in putting new business on the system until the vendor builds customization for the carrier. In addition, GuideOne has a whole host of infrastructure issues to address, as well. "One of the many reasons this is a long-tailed project is we have dozens of different interfaces in order to satisfy all our business requirements," says Schneider.

One of the biggest changes today is the options available to companies. "Companies are starting to change what their choices are for policy administration," Harris-Ferrante says. "It used to be companies were thinking about buy, build, or outsource–those were the three choices you had. A lot of companies now are looking at the different alternatives and broadening some of these options." Such options include installing components rather than the entire system or adding different alternatives on top of the current system, which could improve the policy system without changing it. "We've seen companies start looking more and more at the option of adding things on top of the system–BPM, work flow, and different types of supplemental systems you can add on top without replacing what you already have," says Harris-Ferrante. "Companies are taking a variety of approaches to their policy system vs. the big-bang approach."

Gartner recently researched both life and property/casualty carriers on whether they were going to replace their policy administration systems, go with components, or do nothing. "What we find is somewhere around 27 percent [of life insurers] say they want to replace the whole policy admin system, compared with 50 percent looking at componentization–a specific piece of policy admin but not the big bang," says Harris-Ferrante.

As for the most troubling piece of the system for life insurance companies, the claims component is the most problematic followed by the rating/quoting part. "The investment in the claims functionality by life insurance technology providers in the last few years has been pretty low," states Harris-Ferrante. Many technology providers have overlooked the necessary advancement in business requirements, such as managing the life insurance process, while doing more around fraud, she contends. "Under life insurance, it's not just life–you have disability, long-term care, or critical illness types of insurance that have more complicated steps in the claims process than the traditional term life product," she adds. "Life insurance companies are saying we need more data management and work flow, more steps than what some of the vendors have offered. They don't feel the claims technology has matured at the rate they would like."

On the P&C side, Gartner found 27 percent say complete replacement of the suite is preferred compared with 32 percent who say components are the way to go. The part that is most problematic for the P&C companies, Harris-Ferrante asserts, is rating and quoting. She believes companies also are looking to do things around new product development, getting products to market faster, and being more accurate in their pricing. "A lot of the traditional ways [carriers] did pricing and quoting have changed," says Harris-Ferrante. "They are trying new concepts, but the technology hasn't matured at the rate they would like." The second problem piece is underwriting, which Harris-Ferrante points out is an extension on the movement toward pricing and new product development.

Any insurer taking a big-bang approach to policy administration must have more commitment, more detailed assessment, and more work done upfront to figure out what to do. Harris-Ferrante advises project management and long-term commitment are two of the challenges to be addressed. "With large projects, people get off track and can't stay with the project timeline because it is so long and involved," she says. When you get to componentization and parts, the challenges are more around integration, compatibility, the technology, and how you turn off some of the functionality and integrate it with the best-of-breed approach, she adds.

New strategies are being developed. "It used to be if you did best of breed, you did the one-off approach, whereas if you did the suite, you had one vendor but multiple technologies from that same vendor behind you," explains Harris-Ferrante. Today, there is a middle alternative where there is a best-of-breed consortium that looks like a suite, but it's a suite with different vendors behind it giving carriers specialized technology vs. the one vendor/one system approach.

Asensio indicates his company's business is called "specialty lines" for a reason. "There are more challenges," he says. "There are no real ISO or ACORD standards at this point [for specialty lines]. Everything is unique." The specialty industry is limited a little in that the agency systems don't have a lot of connectivity options. Carriers have been forced to do a lot of home-grown development themselves. "What we've been able do here are some things other companies would never attempt," he continues. Underwriters have always maintained their work is an art and not a science. "We don't do [automatic underwriting] for everything, but we've been able to turn it into somewhat of a science and been able to implement that into our tool set," says Asensio.

"The options are getting better," agrees Harris-Ferrante. "Insurance companies have better options today than they've ever had. [Policy administration is] definitely an emerging market and an emerging model where there aren't any proven safe alternatives right now. Everything, to a certain degree, has some risk. It's just a question of what risk a company is taking. And to be honest, it's how much money they have in the pocketbook."

Cyphert doesn't believe finding the right solution is a difficult task for insurance carriers. "There is a bit of a tried-and-true approach that will minimize risk around implementing new technology, and that is making sure you select one that is going to meet as many of your business and technology requirements as possible upfront," he says. Some issues are obvious, he points out, such as going with a solutions provider that is financially secure and has a strong set of references. "You don't want to be a science project," he adds.

Cyphert also notes there is no substitute for going through due diligence. "Organizations that align with a technology vendor first and then figure out how to fit that solution to their problem are the ones riding the biggest risk," he says. "It's more important for a company to take a strategic view of the strengths and weaknesses of its current administration platforms. By that I mean span five years, not last quarter's problem."

He advises carriers think through all the alternatives, such as: Do you have to replace the whole system with a new administration system, or are there other solutions, such as a portal, a middleware layer, or a new repository, which are going to solve the bigger part of the problem and be viable for five years out? "Once you make the strategic decision around what type of conceptual solution you want to apply, I think that's the time [to move]," says Cyphert.

The questions that arise when discussing legacy systems are whether they are working or not and why you think that, according to Harris-Ferrante. "What is the breaking point, and how do you measure it?" she asks. There are IT and business breaking points. On the IT side, it comes down to whether the system is going to continue to run, and do you have the resources to support it. "A lot of companies face massive skill-set problems because the technology is so old they can't support it, which leads a lot of companies to another huge issue–relying on third-party outsourcers to come in and provide the IT skills to run the system," she says.

The IT issues are easier to quantify, Harris-Ferrante believes. What is more difficult is looking at the business issues and asking questions such as: Does the system meet the business unit's requirements today? Do the business users know where they want to be in, say, three years from now? Will this policy system support the functionality they are going to need? Can they create new products and get them in the market in a competitive fashion? Can they get the data out of the system they need for compliance and reporting? "Those types of questions are harder for insurance companies to get their arms around because the business strategies aren't in place," she says. "[Carriers] haven't sat down and figured out where they want to be in five years. From a technical side, we have people who will have a conversation about legacy, and half of them will say legacy is old and needs to go, and the other half will say it's reliable and works every day. Business people are starting to say the system will not support what they need it to do, so it needs to be more of the business requirements that drive the large replacement projects, particularly those projects that are more strategic."

GuideOne began looking at new systems about two years ago, Schneider reports. The effort started out as more of an investigation to see what the marketplace held rather than a search for a specific tool. "Most companies do this on a regular basis, just to stay abreast on what's going on from a technology perspective in the marketplace," says Schneider. "We found some pretty exciting things compared with what our structure looked like."

GuideOne did an initial presentation to the carrier's executive team to present the business case. Once that was done, the carrier had momentum behind the project, and it was able to go through the formal RFI process in which some 20 vendors were screened down to one.

"I think [the market] is very good for shoppers these days," says Schneider. "Of the 20 [vendors], there were a fair number that either were new entrants into the market or foreign interests that were trying to get a domestic presence." While the solution GuideOne will be going to from Insurity is one that currently is not deployed, it is the next generation. "[Insurity] demonstrated its willingness to invest in the future to make its solution attractive to us," he says. "Insurity has got a large client base of significant tier-one companies. When it boiled down to three or four, it got down to new entrants/foreign entrants against what I call a proven vendor with a solid history."

In a market with a problem as big as administration platforms, Cyphert is surprised carriers don't have more options. "There tends to be two classes of solutions providers–on one side, the guys who have been around forever with relatively old architectures," he says. "They've built upon business logic to try to make the solution more flexible in today's technology environment, but there's a lot of baggage there. You are bringing some of the deficiencies from the past as well as having the company kind of hamstrung by the legacy customers hanging on that they need to continue to support."

The other option is vendors that say they are going to build this thing right, put it on a scalable open architecture, and develop business-rules depositories and anywhere/any time access. "The problem [with these vendors] is they are not tested and their functionality tends to be very basic," says Cyphert. "They are looking for a partner in an insurance company to help them build out their solution."

Cyphert admits the market doesn't fully make sense to him, but he sees a brighter future. "There are a couple of solutions capable of doing a full replacement of an administration platform that are looking very good," he concludes, "so I guess I can take an optimistic view and say there is some change occurring in what solution providers are offering."