To the Rescue

The insurance industry–for the second time this decade–is going through some difficult times. Already facing a soft market entering 2008, the industry exits one year and enters another with not only the market on its mind but the global economy, as well.

Tech Decisions contacted several leading CIOs for their view of where things are headed in 2009. Included in the discussion are Srinivas Koushik, senior vice president, property/casualty insurance operations, Nationwide Mutual Insurance Company; Neal Ruffalo, vice president and CIO, ACUITY; Michael Weiskircher, CIO, State National Companies; and Michael Fergang, CIO, Grange Insurance.

We asked them a variety of questions on the economy, the insurance market, and what IT departments can do for the business to help ride out the financial mayhem that mainly has impacted banking and investments but has clipped the wings of some leading insurers, too.

When queried about the increased scrutiny on the financial services industry and what technology can do to help insurers deal with compliance and regulatory issues in 2009, Ruffalo replied: "The financial services industry got in trouble because it lacked discipline. Technology is important in enforcing and maintaining discipline. Therefore, we see technology as increasingly essential to deal with regulatory and compliance issues as well as to optimize business processes."

For more provocative comments on the issues that face the insurance industry in general and information technology in particular, we invite you to read on.

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What steps will need to be taken within IT if the economic crisis changes the soft-market conditions for the insurance industry?

>> Koushik: We have to get more aggressive about managing the demand for IT projects. We also need to look at our application portfolio and at ways to prune it by turning off underutilized systems and infrastructure.

>> Ruffalo: It depends on what direction the change would take the market–harder or softer. Obviously, as continued downward pricing puts downward pressures on margins, it's tempting for a company to target IT budgets if IT is considered a "cost center." That's why I'm glad ACUITY continues to see the wisdom of investing in IT as a matter of strategy regardless of market conditions.

>> Fergang: I anticipate no changes. In both hard and soft markets, insurers must be sensitive to needs. The capability to price products effectively is important as well as the ability to design products that are desirable for customers. It's also beneficial to be responsive and ahead of the curve to know which markets need what and what's needed in advance.

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Are investments in predictive analytics and business intelligence tools likely to increase rather than decrease in tougher economic times for insurance carriers?

>> Fergang: Each company has to evaluate business needs and financial metrics to determine overall spending. If you don't have the tools to do so, it could prove costly in the long run as you need to invest in these tools in order to be seen as a player in the market.

>> Ruffalo: A carrier that doesn't invest in predictive analytics or business intelligence is being shortsighted. But it wouldn't surprise me to see these investments decrease across the industry as insurers struggle with overall expense management. We plan to continue to make investments in both areas because we realize how important they are to our tiered rating strategy and overall competitive differentiation. Precision pricing, for example, will lead to fairer pricing for the consumer and carrier alike. It also will attract the business mix/type you want, improve retention level of the business you want, and–bottom line–increase profit.

>> Koushik: In order to deliver on the "On Your Side" promise, we need to provide more real-time intelligence to our agents, service centers, and our Internet. Analytics and business intelligence are the foundational tools that make this happen. We have increased our investments in predictive analytics over the past 18 months. I believe these investments are critical to the success of our company and will still be at the top of the list even in these tough times.

>> Weiskircher: I don't know whether we'll see an increase in this area because we already have a lot of these systems in place to help us do predictive forecasting and projections and allow us to monitor what our business is. There might be an increase in resources to some of these functions if things get a little tighter.

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How do you view outsourcing for 2009? Will economic conditions in this country cause you to look at outsourcing more work, or will the benefits achieved over the past decade begin to fade?

>> Ruffalo: ACUITY doesn't use outsourcing because we believe we know our systems best and have both the business and IT knowledge unique to our company. For many companies, outsourcing will continue but at a more judicious pace. The value proposition is not the same today as it was four years ago, and I see companies reclaiming some of the work that previously was sourced.

>> Fergang: Grange has not outsourced and has no plans to do so.

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Many people have expressed concerns for staffing IT departments over the last few years. Has this issue been addressed to your satisfaction, and will the hits taken by many workers in their 401(k) plans force some boomers to hang around longer?

>> Koushik: With the uncertainty in our economy and unemployment rates creeping up in 2009, I expect voluntary attritions to taper off and delays in retirement plans. However, I think this situation also gives us the opportunity to win the minds and hearts of our employees. Most people want to go in, have fun at work, and be at a place where they can do their best work every day. If we do things right in these tough times, we will be able to retain our talent when things turn around. It also will help us attract the best and brightest in the industry.

>> Fergang: Absolutely. People will need to work longer to offset layoffs and reductions in their 401(k)s.

>> Ruffalo: Obviously companies already are keenly aware of the IT talent shortfall. We all work hard to find talent and just as hard retaining talent. Now, whether people will be working longer, I can't say for sure. However, my sense is people who were near retirement and were relying on their 401(k) already were making investment moves to more conservative positions before the market declined, so they may not be overly affected. Younger workers have a much longer time horizon to consider.

>> Weiskircher: We personally don't see this as an issue. Our IT staff doesn't have a significant portion of baby boomers.

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Is the need to forge a strong alliance between IT and the business side reaching full acceptance by both sides, or is there more work to be done? If so, what are your concerns?

>> Fergang: The alignment between Grange [IT] and its business partners is superb, but we cannot rest on our laurels. We're always looking for ways to improve and maintain relationships within all business areas.

>> Koushik: Building an alliance and having more work than can be done are perennial problems that are faced by all CIOs. I try to go a step further than an alliance and try to think, live, and act like a business leader. We can do this by making a deliberate attempt to be in front of our internal users, agents, and policyholders and come up with ideas of how we can make things happen.

>> Weiskircher: We do see the need there for cooperation. For our systems, it has been established. We always are working on better communication and clearly defined requirements and making sure the benefits [from these requirements] are achieved.

>> Ruffalo: I see companies continuing to struggle with this issue. My colleagues at other carriers express frustration that projects are just thrown over to them. Some companies still view IT as a cost center rather than an enabler to grow the business profitably and have not realized the significance of having IT integrated within the executive management team. Fortunately, that is not the case at ACUITY. Technology has been in our blood for many years, and our CEO has worked very hard to integrate IT and technology across the organization.

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In what ways do you see your company's relationships with software vendors changing in the coming year? Are you expecting more from them than what you have received in the past?

>> Koushik: Yes, in a tough economy it is important to remember all of us are facing similar challenges. So, we are looking for relationships to go beyond their traditional short-term transactional approach and work on a long-term partnership approach. We are looking to manage aggressively consumption of hardware, software, and services from our vendors, and we are looking to develop win-win relationships.

>> Fergang: We're not expecting more products; however, the expectation is that standards will be followed more closely and a clearer road map will be outlined. We'll see less about actual products and more on how vendors communicate their business strategy.

>> Ruffalo: Since we develop all our own core systems, we won't see much change.

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On the flip side, how will your company's relationship with its agent partners change or improve in the coming year? Are they expecting more from you, and what can you deliver?

>> Koushik: Our agents are our front line and the key to our success. It always is important to ensure our systems support and enable our agents. But to win in this environment, our systems have to be able to deliver real-time customer information that gives our agents the extra edge and allows them to provide an "On Your Side" experience to every one of our policyholders and prospective customers.

>> Fergang: In hard economic times, partners need to align closely and maintain open and consistent communication. That's never going to change. At Grange, agents are our sole distribution, and throughout the upcoming year, we'll remain committed to them through ease of doing business. We'll continue to provide them diverse products and services to meet the individual needs and lifestyles of their customers.

>> Ruffalo: First, understanding we are an independent-agent company, we have to provide superior products and service to stand out. Obviously, in today's market, the pricing and underwriting components play key factors. But even though it's a tired phrase, it's true in our market: Agents demand companies be easy to do business with. As agents' commissions and margins decrease due to softer prices and as their time is squeezed, they need systems and interfaces that easily integrate with their workflows. We get it! And even though we have some of the best dynamic tools available for agents to use to issue business, we constantly are challenging ourselves to make them even better.

>> Weiskircher: Agents are only a small part of how we go to market, so we don't see any change there. We work with credit unions and other lending institutions. They actually are the ones that take it to market.

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What do you see as the initiatives that will enable flexibility? Will you and the industry be able to achieve them in this environment, and if so, how?

>> Ruffalo: Some of this was addressed above. What I failed to mention, though, was having a plethora of tools can become your Achilles heel if not done with a common goal. It is imperative they follow a set of standards such as is the case with ACORD XML standards. Nearly all the integration initiatives in the industry rely upon that foundation. Obviously, within companies, SOA and BPM are key initiatives that are enabling internal process efficiency, but what the agents see is how you connect to them and other partners outside your walls.

>> Weiskircher: We'll have to tighten up some of the basic things, and we've already started that, making sure we have basic business continuity. We've also taken on more adaptive-type development methodology so we don't have very long projects. Our projects are more iterative. We really try to allocate our resources as required, and we try to be as nimble as we can.

>> Koushik: It is never too late. I believe being adaptive is even more imperative today than it was in the past. Over the past few years, we have taken several steps to increase our flexibility by implementing a cadence for our portfolio management process, service enabling our key systems, streamlining our organization, breaking up our projects into frequent deliverables, and increasing our adoption of agile development techniques. We expect to do more next year.

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Until the economy tanked, the focus had been on growth and speed to market. What is going to happen in terms of these goals, and what does that mean in terms of the focus of IT initiatives?

>> Weiskircher: We're like everybody else. We look to see what our basic needs are as far as the profitability of the company. We review them, we sit down with our business partners, and we prioritize what is needed.

>> Fergang: In light of the current economy, our goals have not deviated. We continue to focus on profitability, speed to market, and overall growth.

>> Ruffalo: Even before the economy tanked, we were battling a soft market cycle. The focus was and still is on profitable growth. While speed to market is important, stability as it relates to a carrier's appetite and product offerings may be even more important. Equally important, systems, underwriters, and adjusters all have to provide superior service in a world that doesn't know 8 a.m. to 5 p.m. Still, a company has to be able to position itself to respond quickly and proactively to market changes. That means bringing new products to market quickly. So, in that respect, the focus of IT hasn't changed. Leveraging that speed to market into growth is the real challenge, but ACUITY has seen strong growth in both personal and commercial lines even in a soft market.

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Do you foresee any changes in the financial/investment management side of the company?

>> Fergang: I expect to see more oversight and regulation, particularly greater scrutiny by companies and the government.

>> Ruffalo: ACUITY's investment strategy always has been very conservative. We are nearly completely insulated from the market forces that brought down other companies and have made headlines. Our policyholders, agents, and employees all depend on that strategy to continue.

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Some people believe discussion of an optional federal charter for insurance will be put aside temporarily as the government focuses more attention on banking and investment issues. Is that beneficial to the insurance industry or not?

>> Ruffalo: Absolutely. When was the last time the federal government did anything right? I can't see a federal charter being an improvement over anything states do. Changing to a federal charter also would further complicate an already complex regulatory and compliance environment as companies struggle with the switch.

>> Weiskircher: It could be a double-edged sword. As far as a federal charter, it could help us or hurt us. In a lot of instances, we have systems in place so we can maintain what we do. For each state, we have to be authorized to do what we do. If there were a federal charter, the [changes] we might have to do in each state could be less or more. From an IT perspective, [having a federal charter would be beneficial] because it would make it easier to standardize our code and requirements. We don't know whether the requirements would make it more stringent–a lot more changes than we have today. So, my stance on this is I'm right in the middle.