No Shortcuts for the Long Term

When it comes to the core systems, insurers can't afford to wait for the economy to turn around before they begin investing in improvements.

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Problems with core systems are scary for any insurance carrier, but the thought of investing heavily in today's economy is enough even for the bravest to keep on the nightlight. Still, as Craig Weber, senior vice president in the insurance practice at Celent, points out, insurers really can't afford to stop spending.

"Most carriers have done something to get on track--say, a five-year plan--to improve service," says Weber. "Cutting that off at this point would be throwing a lot of money away. Most can't afford to stop what they are doing."

The insurance carriers that have not started a major initiative around their core systems are about to be left behind, believes Weber. "Competitive pressures will dictate something needs to be done over the next three to five years," he says.

Weber concedes an insurer could afford to wait for a year, maybe two, but given the length of time it takes to replace or upgrade core systems, delays of any longer than that could put carriers at a serious competitive disadvantage.

"You might be able to squeak through a quarter or two or even a year or two, but I don't think that makes sense because it will leave a huge gap to overcome and you will have no means to overcome it quickly," Weber says. "There are no shortcuts to core system improvement. It takes a year or two to get anything in place."

Unity Financial doesn't have an in-house IT shop, so replacing core systems was a bit easier than what other insurers typically experience. The preneed funeral coverage insurer used to be owned by a larger insurance carrier called Unity Mutual, in Syracuse, N.Y. Tom Hardy, the company president, bought into the company and moved the Unity Financial operations to Cincinnati in the beginning of 2002.

"Initially we were using a lot of services from Unity Mutual, including its policy administration system," says Hardy.

There were things about the Unity Mutual system that were troublesome, points out Hardy. "We felt like it was slow in getting products to market," he says.

Hardy decided to look for an alternative. "We didn't want to run it in-house, but we wanted to deal directly with a developer/creator rather than through what amounted to another user," he says.

The search began in the second half of 2007, and by the spring of 2008, Unity Financial had signed a contract with MajescoMastek to use the vendor's Vector solution. The insurer began converting everything to the new software except for

a few services such as actuarial and accounting that Hardy maintains with Unity Mutual.

ASP Option

Unity went with an application service provider due to its lack of technology staff, but Hardy had to shop around because most of the ASP vendors his company spoke with wanted to charge the carrier per policy.

"We've been growing rapidly and expect to continue doing so," says Hardy. "By being able to lock to a price, [while] I don't doubt at the end of the contract in three and a half years there may be some increase, I would say through [the terms of the current contract] we should have fixed policy administration costs. Our numbers have increased a lot, and by holding the expenses fixed for three and a half years, it should give us nice reductions in unit costs."

Whether you call it ASP or software as a service (SaaS), Weber maintains this strategy makes a great deal of sense for many insurers. "The only question is the interplay between the richness of functionality you get via an ASP and your ability to differentiate," he says. "If you can get an ASP and deliver the same functionality you could build in-house, I would say absolutely that is something to pursue."

Speed to Market

As Unity Financial has grown, Hardy explains some changes in products had to be made. "In our niche, the product mix is pretty much whole life," he says. "We've switched from individual products to group products and found ways to make the product either more attractive, more profitable, or hopefully sometimes, both."

When Unity Financial started out a few years ago, the carrier had products approved by regulators in the states where it had distribution. Since then, though, the company has spread its geographic footprint (it's licensed in 43 jurisdictions) and now prefers to go ahead and file products everywhere, even if that particular product may not be sold in a particular jurisdiction.

"Over the last few years we've had a number of cases where we've been filing or changing products competitively," says Hardy. "What a lot of funeral homes [that are licensed to sell the insurance product] focus on is either the commission or rate of growth. Changing the rate of growth to the system amounted to a new product. We would get someone lined up to sell, and by the time we would file the product and then have the internal systems work, it would take several months. If the product was different enough to represent a new plan code, we never would get it through the systems area in less than a month."

Unity Financial is just starting to get the benefits from its ASP relationship, but Hardy contends there will be less time required to issue a policy, pay a claim, or handle a customer service item.

"Our expectation is we now will be able to continue our growth pattern for quite some time without adding staff," says Hardy. "I've run much bigger life companies than this, so I've seen times when you have to downsize, and that's a painful experience. We try here to run it as tight as we can before adding a person, and we've never had to subtract a person because of business levels."

Build vs. Buy

Putting together a financial package to buy a software solution is difficult enough, but the build scenario for many insurers is getting even less attractive all the time, observes Weber. In addition to the expense side--particularly as many companies are downsizing IT departments--there is the vastly improved capability provided by vendors now vs. four or five years ago.

"We would advise carriers--particularly larger carriers--to build four or five years ago," says Weber. "Today, we would say most carriers should be buying something and customizing as necessary."

Which Flavor Do You Like?

There are three flavors of core systems projects for carriers to consider, according to Weber. There is new business on the front end of the process, policy administration in the middle, and claims on the back end. "All three are compelling for various reasons," he says.

Selecting or prioritizing among the three requires carriers to have a deep understanding of their own operations, where their pain is, and where the pain in business partners might be, continues Weber.

For a lot of carriers [the pain] is new business--rating, illustrating, and writing new business and getting new products to market," says Weber.

A lot of new business functions bleed over into the policy administration space, Weber believes. "There's a lot that can be done with underwriting, rating, quoting, Web presence, e-applications, and those sorts of things that are well short of replacing a policy admin system," he says. "The benefit is you can be much quicker--conception to delivery--of a new solution.

On the claims side, the value proposition is geared toward improving the claims experience, loss costs, and managing fraud better. "That obviously is a critical part for insurers," he says.

Controlling Expenses

Hardy thinks Unity Financial we will have smaller fees going forward from MajescoMastek than it had from Unity Mutual. That is important as business picks up. "We're not immune to the economy, but sales in January were up 30 percent from last year, and sales in February were up 26 percent," he reports. We're still in a growth mode. If we can hold our costs flat, we get some wonderful pickups in our reduction in unit costs."

Unity Financial calculates the total general expense divided by total net premium, Hardy explains. "We have brought that ratio down very dramatically over the last seven years, he says. "We're now as good as any preneed companies and better than most even though we're smaller. You would think there would be some economies of scale with our competitors, but there aren't any [insurers] that have better unit costs by that measure."

Other Options

Hardy admits running an insurance company without an IT department is different, but the company remains focused on providing the services customers and agents need.

"We're totally willing to outsource the things the outside world doesn't see--investment management, for instance," he says. "Certain things have been outsourced to Unity Mutual, so I treat IT as one of those things the customer can't see directly."

Customers can see the results of technology, though. "We've done a serious upgrade of our Web site and made it much more useful to the agents to get into [the site] and pull out information about pending policies or current premium paying levels," says Hardy. "This has started to save time on the phone calls we receive from the field with questions. They can now easily get answers online."