Insurance carriers continue to be in an acquiring state of mind, and that can mean both challenge and opportunity for a carrier's IT department. While business analysts might look at how much a book of business will mean to a carrier's bottom line, technology professionals have to examine how well the new systems can be integrated so the real gain of an acquisition–more revenue and lower expenses–can be achieved.
Keith Sievers, senior vice president and CIO of Kemper Auto and Home Group, a Unitrin company, asserts there are two key issues his company examines when considering a merger or an acquisition. The first is how quickly Kemper can move the new business to the Kemper systems. "In the insurance world, the longer an acquisition takes, the less business there will be to roll over," he says.
Insurance carriers can't look at the technology alone because the newly formed company has to take into account the culture of the insurer being acquired alongside the culture the larger entity wants to create with the two combined companies, according to Janeen Blanton, managing director of consulting firm Appix. "It's not always just about the technology," she says. "You have to make the business people of both companies happy and meet their needs."
When a book of business is acquired, Sievers points out, there is a destabilizing influence, and the acquiring company opens itself to the risk agents will move the business or customers will move themselves due to the uncertainty around the acquisition.
Renewal retention rates typically are much lower on an acquired book than on a stable book, he adds. "Part of the technology challenge is how quickly we can move the business over so we actually can get the benefit from as much of that business we bought as possible," he says.
The second key point from Kemper's perspective pertains to the back-end systems, in particular, how soon the buyer can derive cost savings. Claims systems, statistical systems, and financial systems are areas carriers look to for cost savings beyond policy systems, and they want to know how long it will take to reduce expenses.
"When your parent company gives you the capital to go do an acquisition, the expectation is you are going to see a return on that fairly quickly," says Sievers. "You get a year or maybe two at the outside to start showing some return on that investment, but not long."
Based on his experience, George Grieve, CEO of CastleBay Consulting, believes there are instances where either compatibility issues or the viability of the acquired company's systems can have a significant impact on whether the deal actually goes through. "Most people believe the systems environment is an afterthought, but in some instances, it's a significant driver in whether an acquisition happens or not," he says.
Acquiring companies don't have a playbook drawn up on how to handle conversions, but Sievers indicates the basic process is similar in nearly all mergers and acquisitions, though it can vary based upon the specifics of the company or the specifics of the acquisition. "Part of the issue is what you are acquiring," he says. "Are you acquiring the business only, or are you buying the whole company? If it's renewal rights only, it's a slightly different situation than if you get everything."
When examining acquisition targets, Sievers explains, normally he will take a look at the company to be bought at a high level and search for what he calls "big show stoppers."
Again, a lot depends on the kind of acquisition and how much time is available to complete things. "If I've got four or five years to complete an acquisition, I'm going to look at it differently than if I have only one or two years," he says. "Often when doing these acquisitions–because you know your systems and how you do things–you have a predisposition that your way is the right way. Sometimes it's good to keep an open mind because you may find things of value in an acquired company you might not otherwise spot if you move too quickly. It's an element of patience and open mindedness."
A good consolidation effort is almost like a miniature requirements study, remarks Blanton. A company needs to map out each business unit's requirements and compare them with the company's technology. "One of the things you have to look at when you are acquiring a company is whether it has good technology," she says. "Sometimes a company can buy another because [the company being bought] has great technology, and [the purchaser] wants that technology as well as that book of business."
Lessons from mergers and acquisitions often are learned the hard way, maintains Blanton. In some cases, decisions are made too quickly, such as rushing to move to a particular platform when the other carrier was doing something else that might have been beneficial.
"You can't jump into it too soon," she says. "On day one of the acquisition you can't say this is the platform you are going to pick. You need to take the time to understand each business unit and how it does business." It doesn't have to be one system, either, adds Blanton. "You could take Company A's policy system and Company B's claims system," she says. "They probably each have strengths they bring to the table, and you need to understand that before you pick a technology."
When mergers take place, the big emphasis is on consolidating everything and getting everyone working in the same manner so they are not duplicating effort, notes Blanton. Sometimes, though, the decision-makers are so focused on not duplicating efforts, they don't take the time to see what's out there. "Sometimes we miss the forest for the trees," she says. "We are too focused on each little piece of what's going on."
One of the obvious issues in a merger is how the IT department is going to be able to get to one set of systems, according to Grieve. "It's like when two people get married and you have two toasters and four television sets," he says. "What are you going to consolidate, and what are you going to get rid of?" Acquiring companies go through a rigorous planning process, continues Grieve, with companies having to make decisions about locations, who is going to be the CIO, and what the structure of the organization is going to look like.
A challenge that can slow consolidation initiatives occurs when directions change in the middle of a project, warns Grieve. "Business people will come across improvement opportunities, such as cleaning up ISO forms in a particular state," he says. "In other words, they start attaching other requirements to the conversion and consolidation process. If you are not careful, though, you get scope creep."
Another factor Blanton advises to be aware of is employees are loyal to the way they've been doing things. People normally dislike change. "Maybe they've complained about the system for five years–but don't try to take away their system," she says. "One of the biggest fears for people is they are going to lose their jobs. You have to make sure you understand each employee's contribution, how the employee does his or her job, and what the employee needs to do the job."
Data is one of the toughest parts of any merger or acquisition. "It's not just the data but the data quality," Sievers says. "You can have a problem where the data in the systems is not organized very well, and it makes it difficult to complete the conversion, or you can find the data is not of good quality, which also can make it difficult to complete the conversion. Or you can find both–it's poorly organized, and it's not of very good quality–in which case you really are going to struggle."
Judging the quality of the data is one of the tougher tasks to accomplish for the acquiring company during the due diligence process. "You're not going to walk into any company, ask staff members about the data, and have them say their data is not very good," Sievers says. "That's something you really have to go look for. It's hard to uncover that."
Operating your IT department in a dual environment is an ongoing drag on business, Grieve contends. "It's very difficult to cross-sell the business if it's on separate platforms," he says, adding if the two companies write in the same state, they might write slightly different flavors of the same kinds of business; also, they might rate business in somewhat different ways.
"You really have two separate books of business," he says. "Unless you rationalize that business on one product definition and one policy administration system platform, it's very difficult to move forward. Once you are done, you can analyze your data and grow your business."
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