The economy may continue to tread in rough waters, but that's not stopping carriers from moving forward with plans to replace, consolidate or augment their aging policy administration systems. Insurance technology analysts agree that there has been a surge lately in plans to invest in these systems, which serve as the core repository of policies and processes that support product configuration, rating, underwriting and customer service.
Frank Petersmark, former CIO of Amerisure and current CIO advocate with consultancy X by 2, has seen the challenge of managing aging policy administration systems firsthand. "Policy admin systems have been slow to change," he agrees. "That's because insurance carriers have had to put a lot of customization into their policy admin platforms-to the point where often those systems aren't even recognizable anymore from their original state. Carriers have also built big and hairy maintenance and support teams around these platforms."
This large base of customized systems presents the most vexing challenge for moving the industry forward to more modern systems. At Amerisure, Petersmark's department built a policy administration system from the ground up during his tenure as CIO, a project which commenced in 2001. "We didn't see any that were that good in marketplace, at least in our view. Carriers were often left with this choice to build or buy. We decided to do sort of a hybrid build and buy, buying a rating engine and putting rules around it. In hindsight, it probably wasn't exactly the best way to go, but it was just an example of how difficult it can be for carriers to find something out there."
The proliferation of such jury-rigged solutions also presents challenges in a key area for insurers: integration. For many companies, the choice was to either be forced to buy an all-inclusive enterprise system, or to piece together best-of-breed software, relates Dick Hoye, CIO for Arrowhead General Insurance Agency Inc. "The thinking is that best-of-breed approaches make an organization more flexible and more competitive because you get exactly what you want, rather than having to settle for the module within the gigantic enterprise system that comes from the factory," he says. "But the downside is that any kind of integrated or enterprise-level reporting becomes a nightmare. The systems don't talk to each other." Currently, Arrowhead is pursuing a consolidation strategy to bring its disparate platforms together employing ISCS' SurePower Innovation solution.
Indeed, it isn't always a lack of money or budgets that get in the way of policy administration systems upgrades. Hoye relates that one major carrier he recently worked with expected producers to work with a 1980s mainframe green screen to enter policy information.
The reason they remained with this system is the fact that it contained "millions of lines of code that went back to the 1970s, and no one at the carrier was originally associated with the system's development," he says, adding that "just because you have billions of dollars of capital and surplus, doesn't mean that you are immune from some pretty serious proliferation of legacy systems issues."
The Essentials
So what options does a carrier shopping for modern policy administration have? Petersmark says vendors have come a long way in the past five years in providing open platforms based on industry standards and provide greater flexibility. According to industry experts, carriers should note the following seven considerations when contemplating modern systems:
1. Scalability: This may seem obvious, but many policy administration systems have limits in capacity that may slow down the business. New features such as business intelligence dashboards and reporting interfaces are adding more stress to today's policy administration systems. "One thing that everybody needs in systems is scalability," says Hoye. "If your marketing guys just knocked the ball out of the park, and have 150,000 policies in force after two years instead of the 100,000 they were planning, your systems need to be able to scale up to those levels of transactions. That was true in the 1960s, and it's even more true now."
2. Ease of integration: Carriers have a range of applications-from business intelligence to customer relationship management to accounting to agency management-that need to talk to one another. "The way information gets into insurance companies nearly exclusively is through policy administration systems," says Petersmark. "That's the front end, the touch. Integration is key, and all that has to flow to claims systems and billing systems and CRM systems and so forth." He adds that vendors' offerings have improved in this area.
"We've been around going on three decades now, so we have a lot of baggage," adds Hoye. "So when we bring a policy administration system up and implement it, it has to connect. It has to bring data to and receive data back from these already existing systems."
3. Easy to change: Many systems over the years have been rigid and difficult to change as the business changes as well. Business end-users or analysts need to be able to change configurations on an as-needed basis. "In the past, we'd get the thing built and out, and hope that things don't change too much," says Hoye. "But change is a fact of life, especially these days. Changes come from regulators, legislators, and from your own people. And you don't want an engineer tied up for 30 days to do the reprogramming, you want to do that easily and cost-effectively."
Petersmark agrees the ability to adapt is also a key criteria many CIOs now insist on from vendors. "One of the first things carriers need to ask vendors is how configurable their systems are," he adds. "It can no longer be this 18-month process of pain, which it often is with all of this regression testing, and building a million QA environments, and so forth. Somehow vendors have to make it easier for me to get to new versions."
4. Point-of-sale centric: New systems need to support robust portals through which producers and customers can conduct business, including quoting, rating and binding of coverage. For many carriers, the ability to accept policies online is a must. "Ninety-five percent of our business comes to us online," Hoye says. "There are certain specialty lines that are still being handled by attaching PDFs to e-mails and sending them to the company. But just as that was considered pretty state of the art 10 years ago, that's pony express snail mail today."
Moreover, many effective policy administration systems also now include features such as link analysis and netmapping, which provide a bigger picture on the policyholder.
5. Standards based: Modern policy administration systems natively support XML, the lingua franca of the Internet economy. "XML is platform-agnostic, and is the defacto standard for native repositories of data," Hoye says. "You can take it from there anywhere you want to take it. We happen to use SQL Server as our back end, but it no longer matters what database you use."
6. Modularity: With modularity comes the ability to rapidly adapt or adjust for changes in the business. "System implementers need to be able to pick and choose which modules they want to integrate, and thus be free to add more when and where they want to down the road, without having to rewrite the whole system, or have another nine-month implementation cycle. You want to be able to just plug and play."
7. Highly accessible: "In this day and age, any policy administration system has to be a Web-based Internet solution, where users can get at it from any computer in the world," says Hoye. "You also have to be able to accommodate mobile computing-including tablets, smartphones and netbooks." This capability also speeds time to market, he says, as customers often may act on competing quotes. "We just wrote a little Web app, which was published to the iPhone. You just put in the insured's name, the date and a few other pieces of information, and hit 'enter.' It goes through the clearance process, and comes back and tells you in real time: you're good to go, or sorry, too late."
There's a need to look ahead to future business as well, Petersmark adds. "Our future policyholders are growing up with smart devices with mobile apps."
The Impetus
In addition to the growing technical prowess of the systems, there are ample business reasons to speed up conversions to newer, more open platforms. One reason is a need to improve product development speed, enabling pursuit of new opportunities and accommodating shifting consumer preferences.
Additionally, older, non-integrated legacy systems leave carriers open to fraud and abuse, notes Linda Webb, former AVP for American International Group (AIG), and currently president of Contego Services Group. "What has changed in the insurance world? The SIU [special investigation unit], which used to only work on the back end of claims processing, now must work on the front end and with underwriting, doing due diligence, so that you know who you're doing business with," she points out. "You have to not only work with your underwriting department, you have to work with your policy administration department, and also your billing and collections department on the back end."
A recent survey of 200 carriers by Strategy Meets Action (SMA) underscores this urgency, finding that between 50 percent and 60 percent of respondents are actively engaged in some stage of moving toward or implementing new systems. The activity is driven by the demands of "an increasingly competitive market and the need to improve flexibility and speed to market," observes Karen Furtado, partner with SMA and author of the study.
However, much of this activity still only represents a small fraction of the total base of legacy policy administration systems still out there, cautions Chad Hersh, an analyst with Novarica. At this time, only about 10 percent to 20 percent of the functioning systems within P&C and life carriers can be considered "modern," he says. The reason for the slow pace of turnover "is that a typical carrier has multiple policy admin systems," Hersh adds. "There are probably more than 3,000 to 5,000 policy administration systems in use today. In the best of years, there are on average no more than 100 policy admin systems sold, which means there are probably no more than 300 to 500 modern systems in production today."
Still, he observes, "more carriers view policy administration system replacement as a top priority than any other type of project."
The SMA survey finds different motivations between P&C and life carriers for wanting to move to new policy administration systems. While both segments are interested in improving business efficiencies and speeding up time to market, life carriers also are far more interested in promoting a self-service approach to managing these systems, enabling business users to update rates and business rules. There's also a greater driver toward consolidation on the life side.
Novarica's Hersh also sees some important differences between P&C and life carriers in the pace of change. Life and annuity carriers have been far less likely to move off legacy platforms. "The conversion tends to be considerably simpler on the P&C side," he explains. "It can be done on renewal, and almost all policies renew at least every year or more often. When its time for somebody renew, you just create a new policy on the system, and you don't have to do a lot of expensive work to automate renewals." On the life side, however, there are policies that can up be to 50 years old, he says. "They never have to renew, so the expense of conversion is just pure expense. So oftentimes it makes sense to consolidate for P&C - whereas on the life side, it's been incredibly hard to justify the conversions."
Ultimately, irrespective of line of business, the ability to deliver capabilities faster may be the ultimate competitive differentiator. Petersmark points out that many carriers believe, erroneously he adds, that their advantage is embedded within the highly customized systems they have developed over the years. He argues that the advantage lies not in the system itself but the agility it affords.
"When you think about real competitive advantage for insurance companies, the products in general are all the same," he says. "You can play with coverages, premiums and commissions and things like that, but this is sort of a 'follow-the-leader' product world. The only competitive advantage is finding ways to very quickly react to changes or opportunities in your marketplace."
Joe McKendrick is an author and IT consultant, and a regular blogger for insurancenetworking.com.
