Moving forward on a forbidding economic playing field, most insurers hoping to modernize their policy admin systems are running flat. Yet CIOs who already allocated funds for core system upgrades are proceeding as planned, albeit under extreme pressure. Like a quarterback facing a blitz, they must maneuver around outdated code, vendor mergers and acquisitions, budget constraints and the integration of new tools and technologies. Those CIOs who put together a successful drive know that the end zone holds great promise.
Against a dire economic backdrop, most insurers entering Q2 are running flat. Yet those insurers that had already allocated funds for core system upgrades are proceeding as planned, albeit under extreme pressure to manage their spend efficiently. This means dealing successfully with outdated code, a changing vendor landscape, and entirely new tools and technologies that must be integrated in advance of switching to the new system.
"In this economy, more of insurers' attention is paid to 'show me the cost savings' versus 'show me revenue benefits,'" says Donald Light, senior analyst with Boston-based Celent.
Despite the sheer scale of such undertakings, the most popular modernization projects are taking place in the policy administration area. StoneRiver, previously Fiserv Insurance Solutions, West Des Moines, Iowa, surveyed IT leaders at P&C carriers in the United States in July 2008. When companies were asked to identify their next three large-scale projects, policy administration or service came out on top - rising from 69% in 2006 to 75% in 2007 and to 87% in 2008.
As core systems solutions, policy admin systems have been modernized, and so has their value proposition, says Chad Hersh, principal with New York-based insurance analyst firm Novarica. "Once viewed as tremendously risky projects, we are seeing differences in the competitive landscape, differences in carrier attitudes toward IT and differences in these types of available core systems as having a positive effect on the decisions being made to modernize," says Hersh.
Nevertheless, the value proposition may seem elusive to carriers choosing to rip and replace core systems that hold as the norm hard-wired rules buried deep within the code.
Separate policy admin systems supporting separate lines of business, each with their own front ends, add to the complexity, and integration with other core systems creates a challenge of almost overwhelming proportions. The "fix" often requires working with a host of vendors and consultants to create a well choreographed mix of feature-functionality that will work together to get the job done.
"Even if you do everything right, the replacement of a policy administration system is the single biggest IT project that can happen inside of an insurance company," says Light. "Every step, from deciding whether to move forward with the project, to integrating with other core systems and finally moving into production, has to be done in such a way that takes into account the tremendous risks and ultimate benefits of this very big, very expensive project."
Even with those risks in mind, given the option, most carriers are replacing legacy policy admin systems, claims Susan Hutt, SVP, Services, with Camilion Solutions Inc., Markham, Ontario. "It's an imperative driven chiefly by the competitive landscape. And insurers know that to get the full benefit they most often need to replace what they have."
For Andy Edwardson, VP of information technology with Farmers Alliance Mutual Insurance Co. (FAMI), McPherson, Kansas, the replacement of its policy admin system was part of a larger overhaul of some of the company's other existing core technologies (billing and claims).
Partly a matter of cost of ownership and the need to move off their legacy systems, Edwardson also points to the realization by the company's leadership team that modern technology would make FAMI more competitive. Insuring rural Americans since 1888, the company writes property and casualty insurance through a network of 650 independent agents in nine states.
"Senior management recognized the fact that we need to become more customer focused and have the ability to change with the market," he says. "It's about ease of doing business and being a nimble company."
FAMI took a unique approach to this undertaking, choosing to replace its policy administration system using a phased approach by line of business and state, and its other two core systems in a big-bang manner. By enlisting the support of components, the creation of a FAMI object model and an enterprise service bus designed to help the myriad new systems talk to each other (see "FAMI's Winning Game Plan," p. 16), this custom approach earned the company the 2009 Model Carrier of the Year award from Celent.
"It comes down to having the right strategy for implementation," notes Hutt. "Celent says that between 30% to 80% of all large IT projects fail. The biggest reason for failure in our experience is when an insurer bites off too much in one phase, so it's not humanly possible to manage. If you can break it down to manageable chunks and control as you go, you can build on those successes."
To move the first LOB business owners policies (BOP), the carrier worked with OneShield, Westborough, Mass., to conduct a manual conversion of its existing BOP policies over to OneShield's Dragon product. The carriers other lines (homeowners, personal auto and then farmowners) will be converted at renewal to an in-house-developed policy admin system, automated through processes integrated into the FAMI Object Model.
The insurer's IT team looks out 120 days in advance and designates a certain weekend to convert all the policies that fit into that window, says Edwardson. "It's a way to manage the risk."
Edwardson acknowledges that there may be some overlap in the first year of conversion, but says that "over the course of a few of these iterations, if something goes south, we can go back to it. This is why we want to do this at renewal, and as we go forward we will come to trust the process with less handholding."
Managing risk is but one of the obstacles in the insurer's path as they take on a project the size of FAMI's. According to Hutt, another type of risk looms large in the project's life: scope creep. "Executive sponsorship helps alleviate this, along with an understanding of what's really important in the first phase, and managing expectations as to what can realistically happen next," she says.
Scope creep is a challenge not just for policy admin projects, but for the implementation of any new system, notes Brad Lontz, senior director for Indianapolis-based Liberty Mutual Agency Markets' commercial lines IT on policy administration systems.
The company's history-making growth, both organically and by acquisitions (the Agency Markets business unit now comprises nine companies, including Ohio Casualty and Safeco, that sell personal and commercial lines), has forced the company to consolidate across a common SOA, Web services platform and take a stepped, migration approach.
Overseeing a complete commercial lines policy admin replacement, Lontz says the company's new system will support all lines sold in 49 states, including workers' comp, commercial auto, general liability, property/casualty, crime, packages, business owner's policies, farm, umbrella and schools.
"We've heard of the 'endless project,'" he says, "and we address it by keeping the releases of iteration small and manageable to get business value out faster. If you tell the business side that you'll deliver 18 months from now, too many things can change and you risk never getting there."
Lontz says the first release was a nine-month effort. "It allowed us to manage the bulk of expectations, because people wanted to put new functionality into the first iteration, so we asked them to hold on until we could get the first release out, promising to address their requests later."
To some degree, the flurry of Liberty Mutual's larger acquisition activities played to Agency Markets' credit, Lontz says.
"We've had some real positives from the Safeco deal, which closed the fall of 2008, because we looked at what Safeco had embarked upon that would add value to our own program configuration. We found that they had focused on things unique to us, yet complimentary.
"For example, they had a product development suite that included a model execution environment and an insurance component controller that would enable us to do rating and product changes holistically across all components," he says.
One of the positives from the Safeco deal had its origins in a partnership with Bermuda-based Accenture, points out John Cusano, managing director of Accenture's financial services U.S. property & casualty insurance client services group.
"Safeco and Liberty are taking a componentized SOA approach, and one of the key components that both of us agreed did not exist in the marketplace was a product configuration model."
As part of the deal, Safeco became a charter for creation of Accenture's official product development system, the Insurance Configuration Components Solution, which is designed to help centralize the carrier's product development capabilities across all geographies.
"As vendors turn increasingly to a model of configuration rather than customization, it has the tendency to reduce not only the financial risk, but project risk as well," says Hersh. "In addition, vendors have begun to put truly scalable solutions onto lower cost platforms."
"We took the best of what we had, and what we had seen, and now it's all Java; there is no real legacy policy administration left," Lontz points out. "We are doing renewal conversions to the new platform."
If component configuration is becoming the popular option for insurers modernizing their policy admin systems in-house, Software-as-a-Service is becoming a popular medium for a hands-off approach to employing applications.
Tom Hardy, president and CEO of Cincinnati-based Unity Financial Life Insurance Co., brought unique circumstances to his company's vendor RFQ requirements: deliver, manage and maintain the company's policy admin system for a set price.
Hardy had good reason - an explosion of growth. After purchasing the pre-need and final expense lines of business from Unity Mutual in Syracuse, N.Y., in 1997, he opened his doors in Cincinnati as Unity Financial. Today, with 900 agents and assets that have jumped from $14 million its first year to $75 million in 2008, Hardy's company has been recognized in 2008 by Inc. magazine as the fastest-growing, privately owned life insurance underwriter in the United States.
The existing policy admin system processed annual updates, but, according to Hardy, the pre-need policy face values increase by the quarter, which the system would not accommodate efficiently.
"The choice was to transfer all the policies over to a new system, or hire an application service provider," Hardy recalls. "Based on the manual workarounds we had already faced, we ended up short-listing eight vendors, and decided on an ASP platform and MajescoMastek's Vector policy admin system."
To date, MajescoMastek's North American Life & Annuity Division, New York, has converted 30,000 policies, and will process additional policies at a predictable fixed IT cost.
Making the decision to move to an ASP may not have been an easy one, but Unity Financial is satisfied with the results to date. The service provider also has helped the company establish a new agent portal that provides reporting and inquiry capabilities to 500-plus funeral homes and brokerages.
"As a result of our long discussions through the sales cycle, we learned quite a bit about what we wanted and what we didn't want," Hardy says.
The information shared through the typical sales cycle - about the policy admin system being implemented and about the larger project and its associated complexity and predicted duration - often brings to light another challenge, notes Camilion's Hutt. "With everything else going on, it's often hard for the insurer to commit the necessary resources to the project," she says. In Hardy's case, internal resources became a non-issue, but for carriers working on in-house systems, it can be a challenge.
Celent's Light points to the bigger picture: "As part of contract negotiations, it's best to have a deep discussion on project specifics. There are many details in terms of products, processes and issues that require a lot of time for a lot of people. Those people are usually relatively seasoned, so if suddenly they are working 10 to 30 hours a week on this project, who is minding the shop?"
From the vendor's perspective, says Hutt, "it's our business, so we understand the impact of the resource allocation and resultant change on an organization."
The resultant change on an organization can end up being the most significant challenge for leadership to overcome, says Light. "It has to start with the leader of the business unit," he says. "That person (the senior executive) has to engage his peers, his team and the rest of the organization. Only then there is user acceptance and organizational change possible. It starts at the top, but percolates down to the workers."
For FAMI's Edwardson, the insight derived from the sea-change strategy to overhaul several core systems at once caused him to focus on how execution of this strategy would impact all stakeholders. As a result, his team created the "iFAMI" approach.
"The 'i' stands for integration of people and technology," he says. "In terms of implementing changes of this magnitude, there is definitely a challenge on the people perspective. We hear people say they are unhappy with old system, until you tell them you are changing it."
Although FAMI has experienced challenges on both the technology and people fronts, everyone is being educated about the opportunities that these changes present, notes Edwardson. "And they are encouraged that in the long run, we will throw out old problems we'd been living with for years. It truly takes a lot of 'people touches' to get policies out the door."
As Liberty Mutual continues to add companies to the Agency Markets business unit, says Lontz, the biggest challenge to date is keeping up with the cultures that are being merged into the larger business unit.
"It's like asking two or three teams who have been unknown to each other to approach the playing field as one and win the game," he says. "We started on the heels of the Ohio Casualty acquisition and then into Safeco, and each time we've picked up new team members with different cultural backgrounds and have had to find ways to leverage those teams."
It also has afforded the Agency Markets team with opportunities. "We now have a group in Seattle, and they brought Accenture to the team," Lontz says, "and although integrating those cultures has been a challenge, it gives us opportunities to review other ways of doing things, make improvements, and in examining how people work differently, look for ways to standardize on the best approach."
As the company turns off pieces of its legacy systems, Lontz is confident that the newly formed team will see incremental improvements that will help bridge the cultural divides.
Any divides between the technology and business side must also be addressed, notes Light.
"Getting business buy-in is critical," he says. "It's important to make sure your internal business partners not only enthusiastically endorse getting a new policy admin system, but will provide adequate support for it. To that end, think of governance structure in the big picture - as a classic form of risk mitigation, it helps to ensure the success of the project."
Lontz is secure in the knowledge that as part of its governance program, Agency Markets has a steering team that has been very engaged and, therefore, very successful. "The president of our regional companies group heads up the team, and is a great advocate and reinforces across the business team the level of commitment."
(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.
FAMI's Winning Game Plan
When the realization set in that legacy systems were preventing Farmer's Alliance Mutual Insurance (FAMI) from fulfilling its customer-centric mission, the insurer knew it needed to evaluate service-oriented architecture (SOA).
Its short-term goals to reduce total cost of ownership across IT, automate tasks through effective integration and improve speed to market for all product changes paved the way for the company to address long-term goals of delivering innovative products and services with the flexibility to adapt to a changing business environment.
"The original proof of concept was kind of theoretical, and everything we understood about the SOA concept sounded good," says Andy Edwardson, VP of IT with FAMI, McPherson, Kansas, "but we asked: How do we dip our toe in this big pond?"
Here's how they did it:
Project scope discussion reveals need to review policy, claims and billing administration systems.
FAMI hires third-party to lead RFP/selection process; compares end-to-end products with those requiring system assembly through integration.
Business leaders in policy, claims and billing administration evaluate and agree on the value of stand-alone products and a best-of-breed, componentized implementation.
Vendor selection completed (New York-based MajescoMastek's STG billing, Westborough, Mass.-based OneShield's Dragon policy admin, and Honolulu-based BlueWave Technology's Pipeline claims).
FAMI holds "big hug" vendor meetings to set ground rules and agreed-upon approach to project management, then sets sights on Bedford, Mass.-based Progress Software's Sonic enterprise service bus (ESB) to serve as central integration approach. Sonic's team helps create proof of concept in which Web services from each functional area could be tested ahead of integration.
FAMI works with Pittsburgh-based Jarus Technologies to design standard messaging infrastructure, FAMI Object Model, which served as centerpiece to all integration efforts and key to SOA success.
FAMI receives Model Carrier of the Year Award from Boston-based Celent, which recognizes the carrier for exhibiting IT best practices.
(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.
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