Property/Casualty Insurers Adapt to the New Normal

Much has changed in the property/casualty insurance market over the last three years as carriers dealt with the financial collapse and a soft insurance market. The changes have created what the insurance advisory firm Celent refers to as “the new normal.”

Celent recently released its annual survey of insurance IT leaders: 2011 U.S. Insurance CIO Survey: Pressures, Priorities, and Practices and senior analyst Donald Light explained his views on the responses Celent received.

To Light, the new normal means carriers are operating in a different fashion than prior to the recession that began in 2008.

“I think it's a combination of two kinds of responses [to the situation] that may not seem to be totally compatible with each other,” says Light.

The first response came when insurance company executive staffs or boards acknowledged they were in a period of slow growth with very low interest rates and uninspiring levels of growth in the objects consumers were insuring.

“They need to have their cost structures in place that allow them to make a reasonable return on operations,” says Light. “You can go a year with saying the economy is having a rough patch, but the recognition we saw from the survey and in other conversations is that companies are assuming [the financial woes] are not just a patch but a continuation.”

Carriers were not ready to scrap projects, but most felt revisiting decisions in a six month time frame made sense.

“There was a possibility we'd be in a distinct phase of economic recovery, in which case everything could be different, but this depended on the headlines in the Wall Street Journal rather than anything the insurance industry could do,” says Light.

The second response for insurers has been to look for growth opportunities.

“The opportunities boil down to how do we take away market share from our competitors,” says Light. “If the pie was growing bigger we could grow by keeping our slice of the pie; if the pie stays the same size or shrinks, you have to take business from somebody else. That gets into product innovation, geographic expansion, and new lines of business, and the IT investments that have to support those growth strategies.”

The survey found the top three business issues for IT departments to address are growing the business; ease of doing business with producers; and ease of doing business with customers.

“When you talk about consumers or customers for insurance companies, so many of them use independent producers—both on the life side and the property/casualty side,” says Light. “The producers can put business with a variety of insurance companies.”

Light believes there has always been tension between carriers and agents over who owns the policyholder relationship.

“What we are seeing now is insurance companies are saying they can use technology to walk that tightrope, specifically with mobile applications, which are seen as tools that some segments of consumers are saying they have to have,” he says. “

If an insurance company doesn't have such tools available, both agents and consumers can view the company as lacking.

Light maintains there are ways of giving producers insight into what the policyholder is doing, not necessarily in real time, but at a notification level with appropriate disclosure.

“The insurance company can say to the producer that the policyholder is asking questions and here is what's going on,” says Light. “It creates a channel that allows the producer some visibility, as opposed to an opaque channel for the producer, which leads to possible distrust or suspicion.”

Custom Systems

Celent did learn some surprising things from the survey, admitted Light. One was the willingness of smaller and midtier carriers to build custom solutions.

“The big companies—over a billion and even more so when you get to five and 10 billion in premium—always built their own,” says Light. “Rightly or wrongly they felt they were unique and felt they needed to maintain what they built or build [something new] from scratch.”

Smaller companies are looking at building systems like portals or even using business process management solutions to create and orchestrate processes.

“Is that an internal build or are they working with a package?” asks Light. “Depending on how the CIO answered the question, it would appear to be a bigger number [of those building] than you might have expected.”

Another area where Light was taken by surprise was the willingness of CIOs to choose Software as a Service (SaaS) solutions on the operational side. Sixteen percent of those surveyed reported SaaS operational apps as well as SaaS enterprise apps were “in wide use.”

Light points out that this doesn't mean SaaS is taking over the entire operation side.

“Trying to get behind the numbers, it could be a larger company with a smaller piece of the operation [using a SaaS solution],” says Light.

For example, Light presented a case of a specialty lines insurance company has a group of underwriters who specialize in programs for dry cleaners, but the carrier doesn't have the systems capabilities to support the underwriters.

“So what do you do?” asks Light. “SaaS is a fast way to get up and running to support them. Not all operational systems are running on SaaS, but 16 percent of the companies have some part of the business running on SaaS.”

Light also discovered that 43 percent of respondents will begin investigating or piloting a new mobile application in 2011 and 52 percent will do the same with cloud computing.

“Insurance is an industry that has slow and cautious adopters in technology,” he says. “Sometimes that's a good idea. One in six [respondents] says they have no interest in mobile and that doesn't shock me. Some of them have a business model that in the next three to five years there isn't a need for [mobile]. It's a learning and maturation issue, but if five of their six most important competitors have it, that may be time to come around.”

Related Charts: Click next to view Celent's charts on views related to important business issues in 2011, architecture strategies, preferences on core systems, and emerging technologies.