Tech Decisions Summer 2009 Online Analyst Series: Part I

Opportunity exists in both good times and bad. Here's how insurers can find and have been achieving success despite a failing economy, according to Matt Josefowicz, leader of the insurance practice at Novarica.

TD: A few years ago insurers were relying on mergers and acquisitions to grow their business, but the economy has stalled that tactic. What type of things are insurers doing to grow their business organically?

MJ: First of all, I think we probably will see additional M&A activity pick up in the second half of the year as the larger, well-capitalized companies look around for growth opportunities and perhaps take advantage of competitors or niche players that may be hurting in the current economy. It's certainly a challenging market out there. The U.S. insurance market is not just flat; it's actually down slightly over last year, which is very unusual compared with the last few decades. So, it's quite difficult to grow organically. Where organic growth is occurring, it's always taking from somewhere else. We see in the personal lines market an intense competition that has been driven by advertising spending and a very serious price and value message. And in other lines, in a lot of cases it's really coming down to superior distributor service as well as customer service and customer retention.

TD: Where does technology fall into these efforts and various tactics?

MJ: Well, technology is absolutely critical with one caveat. We often tend to talk about technology in the insurance business; still, although it's clumsy to say, it is important to talk about information technology. Technology itself is not critical to insurers. Particular technology platforms, types of databases, or whether things are hosted or delivered through the cloud, or whatever--all of that is very much affecting the concerns of insurers. But the ability to manage information effectively through the judicious use of information technology is absolutely critical. Insurance is an information business. The only thing insurers do is gather, analyze, and communicate information, and information technology is absolutely core to that. A few years ago, there was the idea a dichotomy existed between high tech and high touch, and companies that relied heavily on personal relationships and human underwriters or claims people for high-value types of products didn't have to worry as much about investing in information technology. I think we've seen that's proven not to be the case. In fact, the highest-touch strategies are the ones that rely heavily on effective information technology to empower those high-value individuals who are managing customer relationships.

TD: You seem optimistic when you talk about M&A activity increasing later this year. One of the problems companies have faced with M&A activity in the past was merging disparate technologies. What are companies considering acquisitions now doing to prepare on the technology front?

MJ: That's a great question. Unfortunately, the technical integration tends to be at the bottom of the stack in any M&A discussions. The discussions tend to be driven by product and market and deal with customer-based and financial issues. A lot of times, IT isn't even brought in until the very end and is told, "OK, this is what we bought; make it all work." Certainly no one would make a case IT should drive M&A activity--obviously that has to come from the business side--but I think companies will find the earlier they get IT into the process, the better the post-merger process is going to look. In some cases, they may be able to use that for leverage in negotiations. If they are anticipating a complex post-merger integration, they may be able to use that as leverage during the negotiation phase.

TD: Hasn't that been a recipe for disaster for some companies--waiting until the last minute and finding integration is years away?

MJ: Absolutely. A lot of companies traditionally have been over-aggressive in terms of their projection for what cost savings really could result from consolidating operations. In the insurance industry, a lot of mergers spend their first two or three years as balance-sheet mergers, and the companies continue to operate nearly independently or possibly rebranded. You can go into any multibillion-dollar insurer and talk to any staff member who has been there a number of years, and that person will tell you where he or she came from [pre-merger]. In a lot of cases, large insurers still are made up of people who think of themselves as employees of predecessor company number one or predecessor company number two. Technology tends to follow suit there. In order to make M&A more than just additive and to create a multiplication factor, there needs to be integration of customer databases and sales channels and all those things that make it possible to cross-sell within a large customer base. Otherwise, it just becomes an additive play rather than one that involves a multiplication factor.

TD: Getting back once more to organic growth, you say growth is flat for insurance right now, but that's likely to change, hopefully by 2010 or 2011. What do insurers need to do internally to ensure their efforts in the future are going to be more profitable?

MJ: One of the things we see happening now that initially surprised us is companies are using the downturn as an opportunity to reinvent their own operating model and operating capacity. In a lot of cases, that involves core systems replacement or major upgrades to their core policy admin systems. At the end of the day, a company's ability to bring products to market quickly, to adapt to changes in the distribution channel, and to profitably use its own enterprise data all come down to its core systems where that customer product information lives and is managed. One of the things that has let a lot of companies put off investments in their core systems--which are major investments and certainly very disruptive--is the sense everything is fine, so why bother taking this risk to do this major upgrade or enhancement or replacement. That sentiment is very much off the table for a lot of insurers right now. There isn't a pervasive sense everything is fine; there is a sense the world is changing very rapidly, and companies are valuing agility and the ability to react to future changes, which is at the top of their priority list.

TD: We are halfway through what has been an extremely difficult year. What do you see happening for the rest of 2009 and into 2010?

MJ: I certainly wouldn't try to predict the business cycle. From the IT investment and planning side, I think there is a real sense of moving full-speed ahead to create the kind of agility that's going to be necessary to thrive in whatever market conditions evolve over the next six to 12 to 18 months.

TD: We want to thank you for taking part in this. Why don't you tell us the best way people who want to talk with you more about this subject can get in touch with you?

MJ: There is a lot of information on our Web site at Novarica.com, and I am always happy to receive e-mail directly at mj@novarica.com.