Look Before You Leap

Taking care of business. For insurance companies, taking care of business means acquiring, servicing, and keeping policyholders. It means making it as easy as possible for policyholders and intermediaries–whether they are career agents, independent agents, insurance brokers, or others–to conduct their transactions with the firm. It means having the requisite information available to regulators on a timely basis. It means that because policy administration systems (PAS) support those functions, PAS are a critical part of the portfolio of systems enabling insurance companies to take care of business.

However, a significant number of insurers are using PAS that are at least 20, 30, or even 40 years old. These PAS were developed and deployed for another era of insurance commerce–a time period that generally could be characterized as slower; with simpler products, less demanding clients, known competitors, a relatively straightforward relationship between the insurer's home office and its distribution channels, and regulators moving with the rhythm of the market.

That time period is gone, assuming it ever existed. Are the PAS keeping pace–or more to the point, are insurance companies able to keep pace in this dynamic marketplace with their PAS? If we could look inside the heads of the insurance people who support their firms' PAS, we would hope they continually are asking questions such as:

o If we don't invest in significant upgrades, how much longer will our PAS last, given the product and service changes we expect from the business side of the house? (Yes, the technology staff should be concerned about the business implications of their actions or inactions.)

o Have we passed the point where we can continue to manage effectively and efficiently all of our PAS and still meet our expense targets (and let's be honest, far too many insurance companies have far, far too many PAS)?

o Should we outsource the PAS technology support?

We'd also expect there are some business executives, preferably working closely with their IT counterparts, asking questions such as:

o Will we lose business to our competitors because we cannot meet distribution channel and policyholder expectations with our current PAS?

o Is our current system able to help us get products to market faster? Does our current system comply with all laws and regulations in every jurisdiction we do or want to do business in?

o Should we consider outsourcing the policy administration business functionality itself along with the technology support?

To answer or at least help to begin to answer those questions, we have put together this modest buyer's guide to the brave new world of policy administration systems.

The late Senator Everett Dirksen of Illinois, referring to accelerated federal spending, was reputed to have remarked: "A million here and a million there, and pretty soon you're talking real money." Some sources have updated this quote to reflect billions rather than millions, but regardless of the metric, Dirksen's point still comes through loud and clear. Insurance companies are spending real money on their policy administration systems. Financial Insights, an IDC Company, estimates insurers spent a combined $5.6 billion on their life and property/casualty PAS in 2005 and are projected to spend a combined $8.5 billion on these PAS in 2010, representing a very healthy five-year compound annual growth rate of 8.8 percent (see Figure 1).

This projection will have to be adjusted downward if insurers decide to spend more on PAS information technology outsourcing (ITO or, for some people, ASP) or on PAS business process outsourcing (BPO). There are more and more outsourcing providers, particularly BPO providers, that believe insurance companies will look to them to maintain and enhance the PAS insurers need to compete profitably. Time will tell. But if PAS really are at the heart of an insurance company's operations, are the risks of outsourcing the business functionality really worth it?

Whether looking for a software solution for their in-house PAS or to an ITO or BPO technology provider, insurers will find the technology firms supporting PAS business functionality tend to fall into three camps:

o After: These technology firms could be called traditionalists. Their PA software or outsourcing supports the activities only after the decision has been made to issue the policy. Their systems do support issuing the policy and also activities such as, but not limited to, policy information updates; interacting with any billing systems or possibly having the billing functionality within the PA system; endorsements; out-of-sequence (OOS) transactions; cancellations; reissues; paying commissions; premium accounting; financial reporting; compliance reporting; P&C renewals; life policy terminations, including cancellation, lapse, death claim or payout; and reinsurance.

o Before and after: These technology firms combine support for what some might consider business-acquisition activities while also, of course, supporting the activities after the decision has been made to issue a policy. The business-acquisition functions these technology firms support include rating, quoting, sales illustrations (for life insurers), underwriting, and binding. They also support policy issuance and the usual set of functions after the policy is issued.

o Before and after and so much more: These technology firms could be thought of as super-sizers. They have greatly extended the functional footprint of PAS. Their PAS not only offer support for the "before and after" policy administration functions but also support activities such as product development, customer relationship management (CRM) support, and notifying policyholders of new products.

Before packing up their marshmallows for toasting, insurers need to think through their business models, including how they go to market, how they compete, the level of service they want to provide to policyholders and intermediaries, and what products they will be introducing in the near future. To help insurers better decide on their course of action, they need to keep in mind what makes today's PAS different from those of the past and what will make the PAS of five years from now different from what is on the market today.

What is being offered today by technology firms providing PAS products and services that differentiates today from yesterday? There are five capabilities–externalization, flexibility, ease of use, streamlining, and real-time access–which together add up to getting products to market faster while also providing better information more quickly to stakeholders impacted by PAS (see Figure 2, p. A17).

o Externalization: Rules engines and calculation capabilities extracted from the PAS logic enabling insurance companies to develop whatever simple or complex products they need, whether for asset protection (this includes both P&C and L&H) or for asset accumulation (i.e., a combined health savings account and annuity product).

o Flexibility: Product configurable components, product customization, and product modeling capabilities enabling underwriters, actuaries, and others involved in product development both to attain a more comprehensive understanding of the financial implications of new products faster and to get the products themselves to market faster.

o Ease of use: Web portals providing a common look-and-feel online interface enabling home office and distribution channel personnel to have a common view of the policy life cycle as well as information flows into and out of policies, whether because of operational needs of the insurer, requests by policyholders or intermediaries, or complying with financial and regulatory requirements.

o Streamlining: This is all about creating interoperability within PAS functionality, which quickly is becoming a critical basis of competition if insurers want to get to market faster and also support information queries against their PAS. Technology firms are enabling interoperability through the use of industry standards such as ACORD and technology standards such as XML, .NET, and J2EE. The technology firms also are including workflow and business process management capabilities to further accelerate PAS functionality streamlining.

o Real-time access: By combining the four capabilities above, several technology firms are enabling stakeholders within the home office or in the field with real-time or near-real-time access to PAS functionality on a 24/7 basis. Real-time access dramatically increases the pressure on insurers to provide a secure environment, allowing access to only those people who should have access to the PAS or its subprocesses and ensuring the privacy of policyholder–and intermediary–information.

Insurance companies also will find most technology firms in these three camps are leveraging the above capabilities to offer more Web services within the PAS spectrum of business functionality. When it comes to these pieces of business functionality, insurers must remain cognizant of the granularity of the Web services they need now and in the future. Insurers have to think through the integration implications within PAS and across the other operational systems that are attendant with the use of any PAS Web service.

Five years from now, the future of PAS will look like a mix of today's capabilities, the natural extensions of those capabilities, and a few wrinkles that might not be readily apparent just moving along a straight path from today. The watchwords of five years from now will be customization, security, stakeholder-centricity, and agility.

o Customization: This will play out for both people and business functionality. In five years, technology firms will enable role-based access to PAS. The military calls it "need to know." Insurers will be able to determine specific pieces of PAS functionality and data they want to authorize to specific people regardless of where those people are in the insurance value chains. Customization also will apply to business components, as Web services will both multiply like rabbits and simultaneously become more detailed. Technology firms will provide more robust rules engines and BPM capabilities to combine or disaggregate PAS functionality–and other operational process functionality–to issue and service policies.

o Security: The two interdependent pillars of operational change and industry structure change will lead to insurers and regulators demanding technology firms offer a more secure environment. The operational changes include customization of the functionality that only specific people can access, customization of the components themselves, and increased real-time processing of policy applications including data flows from or to PAS from other operational processes. Industry structure changes will emerge as more insurers become manufacturers and their distribution channels become more responsible for using the PAS functionality. Even insurers that have a mix of tied agencies and independent agencies will push out PAS functionality to both types of channels.

o Stakeholder-centricity: There always has been a need for insurers to have a comprehensive 360-degree view of their policyholders. The PAS of the near-term future will enable insurers to be able to do what they always should have been doing even if the available tools weren't the easiest to use. Tomorrow's PAS will enable insurers to know all the products and services their policyholders own; when they purchased, changed, or terminated products; and all the intermediaries involved from the selling agent to the servicing agent.

These PAS will enable insurers to track all the queries and other transactions policyholders conduct with the firm as well as when a query began, from which touch-point (i.e., mail, e-mail, telephone, Internet, fax), why the policyholder contacted the insurer, the resolution of those transactions, and how long it took to satisfy the policyholder transactions. Knowing all about each policyholder is crucial, but so is knowing all about every distribution channel. Future PAS will enable insurers also to have a comprehensive 360-degree view of their various intermediaries from tied agents to independent agents and insurance brokers to wholesalers such as banks or investment firms.

o Agility: Leading insurers will be conducting increasingly more of their business acquisition and policy administration in real time. Insurers wanting to keep the PAS in-house will find technology firms that support electronic signatures and straight-through processing for activities from the policy application process in the field to the collection and analysis of data for the underwriters, regardless of their location, to binding the policy. Increasingly for both personal lines property/casualty and the small to midsize commercial property/casualty market, "underwriters" actually will be predictive analytic systems or modeling bots.

Some of these future PAS will improve the productivity of customer service staff and customer retention by finding the data customer service staff must access to resolve quickly policyholder queries and other transactions. Technology firms will accomplish this through the use of meta-data management, taxonomies and search engines, and text mining. This will happen only if insurers already have or work with the technology firms to agree on data definitions and processes to clean existing data and ensure the cleanliness of policy transaction data from new policyholders. Insurers will come to expect these same capabilities discussed above from their ITO or BPO providers.

It goes without saying every technology firm–whether a new company or one that has been around for a while–has the "latest and greatest" set of PAS capabilities to offer insurance companies. Every technology firm claims it has the systems and skills to help insurers cut costs by streamlining processes or improving workflow, or grow revenue by introducing new products faster or providing world-class customer service to policyholders and intermediaries. It's often very easy to get drunk drinking the Kool-Aid from a technology firm that knows how to market and sell its wares. To guard against that particular state of inebriation, insurers have to know what they want their PAS to accomplish today, know what they want their PAS to accomplish in the future, and develop a rational, objective methodology to determine when the technology firm claims are real. This methodology should encompass vendor selection, product implementation, and tracking of ongoing post-production issues.

Here is a partial list of claims of features technology firms say they have in the PAS area, which they believe differentiates them from their competitors (obviously, insurers will find more than one technology firm with these capabilities or products):

o Many flavors of architectures. Reference, open, loosely coupled, and service-oriented are all available. Reference architectures go beyond the technology side of the house to include meta-plans and best practices for both the business and technology areas of the insurance company.

o Pieces and platforms. Technology firms with these products claim to offer insurers the ability to choose from a collection of components that together comprise PAS or opt for an end-to-end platform having all the necessary functionality. One technology firm provides a Web-based platform with a data model, workflow, and enterprise address book that together offer a single methodology for configuration, integration, conversion, and system upgrade.

o Models and rules. Modeling tools increasingly will be used by business staff–underwriters or actuaries and perhaps even marketers–to design and develop insurance products. Externalization of rules will become commonplace, and rules discovery capabilities will become a competitive necessity for both insurers and the technology firms wanting to succeed in the PAS space.

o Multiplicity. As insurers operate in more than one country or even with more than one distribution channel, technology firms will find offering "multiplicity" is table stakes. Multiplicity means supporting some mix of multiple languages, multiple currencies, multiple jurisdictions, and multiple distribution channels.

o Rapid Integration. Integration really is one of the key issues the insurer's technology staff must be concerned with to ensure the smooth operation of its PAS. Whether the insurer is using packaged software, pursuing Web services, outsourcing some or all of the technology support, implementing on-demand Web-based software, or including some mix of any of these efforts, it will need to integrate the various pieces of PAS functionality together and with the other systems that help the company take care of business.

It's impossible to stress enough what technology firms offer to insurers is secondary, at best. What matters is:

o The strategy the insurance company has in place to persist profitably over the decades to come. The insurer might have decided being a product manufacturer is the way to go or perhaps to be customer focused. The insurer might have decided to be totally vertically integrated and to own all the marketing, distribution, and product functionality.

o The insurer's business model, including how it goes to market, distributes its products, services its policyholders and intermediaries, and develops products.

o When and how the insurer wants to improve or replace its current PAS.

o How fast the insurer feels it needs to react to the pressures of the marketplace whether from policyholders, intermediaries, regulators, or shareholders, if applicable.

Technology firms do exist with a current PAS portfolio and seemingly solid plans for the future to support whatever objectives insurers might have to better compete today and in the future. The constant challenges insurers have to meet are determining which technology firms to choose, why, and how best to manage the relationship to ensure optimal results.