Last year, the Connecticut FAIR plan purchased a software package to create, print and mail policies for property coverage. But that turned into a near-nightmarish experience of extensive problems with setup and testing of the software and lengthy delays waiting for technical issues to be resolved.

The Connecticut FAIR plan is now contracting with an application service provider (ASP) for policy issuance and claims processing. Now that the software is housed with the ASP "my life is a lot easier," says Tony Bauer, accounting systems manager for the Connecticut FAIR plan. "It would not be nearly as easy if I were housing the system here along with the data."

Outsourcing never has been a common IT practice in the insurance industry. Indeed, many insurance companies only recently began relying on more off-the-shelf technology rather than developing software and systems in-house.

However, an increasing number of carriers are turning to ASPs, vendors that provide software applications, systems infrastructure and data storage capabilities for a variety of functions that companies previously had handled themselves. Policy processing, claims administration, billing, customer relations, human resource tasks, accounting and bookkeeping, are among the processes that carriers can outsource to ASPs.

The primary advantage of switching to an ASP arrangement is that businesses can save thousands of dollars on software they don't have to purchase or upgrade. Furthermore, the headaches associated with connecting upgrades and tying disparate systems together can be eliminated.

Contracting with an ASP can all but do away with the expenses associated with constantly maintaining and updating information systems, says David Irwin, senior vice president of SPAN2, an Atlanta-based provider of information management and transaction processing services to insurers and agencies.

"The people can be on someone else's payroll and those assets can be on someone else's balance sheet," he says. In addition to off-loading IT maintenance and upgrade costs, a carrier can devote more resources to strategic planning, marketing, customer management, and product development, Irwin adds.

Steady growth

Although the ASP market for the most part is still in its infancy, growth has been steady and it's riding a "good tailwind," says Richard Roby, director of insurance research with TowerGroup, Needham, Mass.

Only a fraction of the insurance industry's $12.4 billion annual IT spending is being devoted to ASPs, Roby says. But double-digit annual spending growth will continue into the near future, he adds.

The eventual payoff may well be worth it. Some carriers that are using ASP services for policy processing reportedly have cut their costs by 10% to 20%, Roby says.

Industry observers agree that more carriers are switching to the ASP option. Annual spending on enterprise ASPs by insurers is "still kind of small" at about $15.4 million, but it will grow to more than $100 million by 2004, says Meredith Whalen, director of ASP research at IDC Corp., a Framingham, Mass.-based technology research and consulting firm.

Indeed, carriers who in the past were reluctant to use outside help with core functions are beginning to loosen their tight control on functions such as policy processing and administration, concludes a recent TowerGroup study on the industry's use of ASPs.

Insurance companies have come to view policy processing as a function that doesn't vary much from company to company and can be handled more efficiently by a trusted third party. This is a logical fit for the ASP model, according to the study titled, "Insurance Application Service Providers: Policy Processing and Administration."

For example, Seattle-based Safeco Corp. uses a three-tiered outsourcing system for processing applications and policies, and for document printing and mailing, for its insurQuest auto insurance program. In April, Safeco launched the program, which targets high-risk drivers. The program is available in Texas and is expected to be available in 13 other states by the end of the year.

Executives with insurQuest established an ASP structure with its technology suppliers that enabled the company to spring into action quickly in accordance with Safeco's directive, says John Brooks, senior systems analyst for insurQuest. "It was an issue of time; we were under a mandate to enter this market rapidly," he explains. "We went from the time of the signing of the contract with Fiserv SIS Inc. to receiving our first live policy in less than four months," Brooks says. The insurer currently has in excess of 20,000 policyholders.

How it works

The process works like this: When a vehicle owner visits an insurance agent and applies for insurQuest coverage, the agent enters customer and vehicle information into Turborater, an Insurance Technology Corp. rating program. If the customer is happy with the quote and wants to proceed, the information is sent to ITC's application processing software.

The agent collects a down payment for the policy and the application remains at the ITC server until it's uploaded later in the day to the policy processing system provided by Fiserv, which creates the insurance policy. That system, which is housed in Cedar Rapids, Iowa, stores the policy, sets up a billing schedule and invoices the customer at specified intervals. Policies and billing information are batched daily and sent to Atlanta-based DocuCorp., which prints and mails those documents along with all other routine policyholder correspondence.

The vendor systems are sufficiently coordinated "so that the file layout that ITC provides us is conformable with the policy processing system," Brooks says. During processing, Fiserv creates a file and uses another vendor to check MVR and CLUE reports to verify accident and claims records. If those findings differ from what the insured stated on the application, the policy's rate is automatically adjusted b Fiserv, depending on whether verification of risk is greater or less.

The entire application, rating and policy development process "can take place without any intervention from us," Brooks says.

Different approach

Although the distinctions can be somewhat blurry, an application service provider arrangement is different from simple outsourcing.

In a typical outsourcing arrangement, a company hires a provider to execute selected functions in their entirety. With an ASP arrangement, however, an insurer will do the task on its own computers, but using software housed at the provider's location where the data is stored.

For example, insureQuest's customer service representatives can access the policyholder files maintained by Fiserv to perform such tasks as policy changes, endorsements, adding or deleting a vehicle, changing or verifying a VIN number, handling billing issues or correcting wrong information in the file, Brooks explains.

Furthermore, actuaries and product managers can make queries and analyses of stored data so it can be "sliced and diced any way we want," Brooks explains.

Insurers appear to be less skittish these days about the idea of their data being housed remotely by an application service provider, TowerGroup's Roby says. Insurers are increasingly confident that application service providers are taking advantage of the latest security measures available, he says. "Insurers are realizing that data security is a manageable problem. Banks showed the way a decade ago in how to transfer funds in a secure fashion so the insurance industry knows they ought to be able to figure this one out."

A mixed bag

ASPs come in all shapes and sizes, and technology suppliers are quickly filling the market with new products, ranging from services where companies use provider software for one or more back-office functions to entire packages that more closely resemble outsourcing through which a company can become a "virtual insurer."

In a virtual company, the insurer outsources most all administrative functions and the insurer remains focused on strategic tasks such as sales, marketing, underwriting and client relations.

Computer Services Corp. (CSC) is using this buffet-style approach for its repertoire of products for financial service providers. Among the services El Segundo, Calif.-based CSC provides on an ASP basis are policy processing, billing, collections, customer service, accounting, printing and distribution, agent commission processing, management reporting and regulatory compliance.

These services also can be packaged for a complete outsourcing arrangement for a carrier that is considering a "virtual" business strategy, says Dan Himmerich, CSC's vice president of integrated sources solutions and marketing. "Our business model is to create a solution out of our combined capabilities to meet specific needs," Himmerich adds.

The Providence Mutual Fire Insurance Co. has been using an application service provider option from CSC for policy processing for about 18 months and is just now adding the service for claims administration, says Ty Cottam, chief financial officer for the Warwick, R.I.-based insurer.

The advantages of the ASP approach, Cottam says, is that it frees Providence from the expenses of system upkeep and retaining programmers on staff. "It allows us to focus on the insurance business," he says. "We don't want to have to maintain a lot of hardware and software and go through the hiring and training of programmers."

Under the arrangement, policyholder data is stored at CSC's Columbia, S.C., facility. Providence sells homeowners coverage through independent agents who relay application information to the company where its underwriters review each risk.

If the risk is accepted, company personnel enter the policy information into CSC's POINT System and a policy is produced by the next business day. Providence then prints the policies and the accompanying invoices, and either mails them directly to the customer or sends them to the agent for distribution.

Endorsements and policy changes are handled the same way. Once notified of the change, company personnel enter the revisions and order the system to produce a new policy, which is then mailed either from the insurer or via the agent, Cottam says. When premium payments come in, Providence employees make the appropriate entries to the customer file in the database housed at CSC.

With the claims component, an employee enters the agent's first notice of claim, verifies coverage and then turns it over to an adjuster. The file is updated to reflect the work necessary to adjust the claim. The employee can order the system to pay the claim and it can also pay the independent adjuster's fee at the same time, Cottam says. Providence processes some 3,000 claims yearly, he says.

"The company does all the entry and provides all the intellectual content and makes all the decisions," says Dianne Parker, CSC vice president of outsourcing. "They manage the claims process through our software."

Cottam will not disclose the amount of money that the ASP arrangement has saved the company, but adds, "we believe it's financially beneficial to us." The fee Providence pays to CSC is a percentage of direct written premium in addition to a negotiated implementation fee "to get the system up and running," he says.

Pay as you go

Pricing arrangements for ASP services offer the same variety as the services themselves. Typically, it's a pay-as-you-go system based on volume and type of usage, or by the number of transactions carried out by the client company after a minimum monthly charge.

Pricing can be based on projections of what it would cost the ASP vendor to provide the service. "We have a fixed level of cost that goes into the equation," says CSC's Parker. "If you have 100,000 policies you're going to be processing, we can tell you how much it's going to cost to run those policies through our system."

The costing model can vary depending on the type of insurer. It's going to cost more to process an auto insurer's policies because of the greater technical support requirements involved, Parker says. A carrier's service-level standards-if an insurer wants seven-day, 24-hour data access-also figures into the equation.

At Pleasanton, Calif.-based PeopleSoft Inc., ASP customers purchase a license for the company's human resources and financial management software and pay a monthly fee based on the number of users authorized to access its eCenter application, says Gary Robinson, vice president of business development for eCenter. The license fee can be folded into the monthly charge or paid for up front, he adds.

Carriers that have contracted with ASPs say the arrangements enable company executives to focus their energies on business strategies.

An ASP helps Premier Insurance Co. of Massachusetts, a unit of Travelers Insurance Cos., handle the enormous task it faces of essentially having to issue each of 230,000 policies twice yearly.

The use of provisional rating in the state's auto insurance system and state-mandated deadlines for policy issuance creates conflicts, says John Kostal, chief information officer.

"The date by which the insurance commissioner has to set the rates for the upcoming year is actually beyond the date that we are compelled to deliver renewal policies for our insureds," he explains. "We have to issue policies with provisional rates and then when the rates have been established and approved, we have to essentially 're-rate' and send out revised policies to reflect what the new rates will actually be."

Contracting with an ASP "allows our staff to focus on policy issuance as opposed to having to worry about the day-to-day running of networks and data centers," Kostal says.

John Maes is a freelance writer based in Elk Grove Village, Ill.

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