How is 2007 shaping up for the insurance industry, and what lies ahead? Insurance Networking News asked Mark Gorman, strategic research advisor, insurance, for Needham, Mass.-based TowerGroup Inc.INN: Do some insurers fear being left behind by competitors this year?

MG: The dynamic forces in our industry are creating angst among executives, especially around frictionless relationships with agents/brokers and policyholders. The concerns are valid because customers and producers can defect to the competition for better prices, products and services. Therefore, attracting and retaining them is of utmost importance. To succeed, insurers must identify their core competencies and capitalize on them by improving operational effectiveness and focusing on differentiation.

INN: What else can carriers do to protect themselves?

MG: Mapping strategic goals and operational priorities to focus on the factors that differentiate the company from competitors is a must. Insurers must establish a strategic direction instead of setting priorities by using operational silos. Once the enterprise goals and operational priorities are understood, business line executives and cross-functional teams can focus on the high-value activities of an operating model that is difficult for competitors to replicate.

INN: What happens when IT and the business side diverge?

MG: At insurance companies that operate without an enterprise business and IT strategy, the IT department often supports silos of operations. IT must then support both development and maintenance from the same pool of dollars, under the same budget constraints and for different masters. As a result, maintenance costs escalate as companies purchase more technology rather than develop new approaches to re-engineer it. A common result is that less than 10% of the total IT budget is used to fund truly new development.

INN: How can insurers coordinate technology with business needs?

MG: Insurers should consider how their business drivers, strategic responses and technology initiatives complement their top priorities and projects. This will help companies manage the strict budget allowances that require improvements in setting priorities and aligning projects.

INN: Can service-oriented architecture (SOA) help?

MG: SOA is about defining the level of services granularity the business can support. SOA is not only a technical approach but also a business approach. It requires the definition of a business architecture that defines the re-useable components or modules of business functionality. To do so it challenges the business to define ever more granular levels of business expertise. This expertise can be re-used across the organization to provide sustainable competitive advantage, allow different sourcing strategies and prioritize organizational investment.

SOA is not a fad. Industry thought leaders are committing time, energy and money at the senior levels of the organization to pursue the benefits. Those organizations that can meet the challenges of organization compliance on both the business and the IT side will stand prepared to reap gains in organizational efficiency, increased flexibility, reduced complexity and long-term market competitiveness. However, this is not a short-term play. Carriers are clear about the need to focus in a three- to five-year timeframe in order to assure the approach is evolutionary not revolutionary.

INN: Do prospects for success differ between large and smaller carriers?

MG: We find that the largest insurers are approaching IT architecture with components and best-fit applications that have strong bent toward integration. They are also using outsourcing services for selected IT maintenance and development. However, small- to mid-tier insurers are paralyzed because they look for enterprise solutions and then find after a lengthy search that few vendors meet their needs and price point.

INN: Where can insurers-large or small-turn for help?

MG: The more innovative insurers are using a combination of internal resources and external resources. They are making domestic or foreign investments in captive sites and are actively managing information technology outsourcers for maintenance and development. In our research, we uncovered a few leading insurers that have engaged their human resources and marketing departments in this trend and will be well ahead of their competitors in IT resource management very soon.

INN: Any last thoughts?

MG: Insurers need discipline in project management so that business and IT are actively involved in managing project scope, assessing enterprise needs and setting priorities. Clarity on priorities that are of strategic importance is the key component to focusing technology in ways that enable the organization to achieve goals. Technology must operate at the speed of business, but business must set the tone with discipline, focus and behavioral change to establish strategic priorities.

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