It may be an old joke, but it's not a laughing matter: The only people who really understand the legacy policy administration systems running at most insurance carriers have either retired or passed on.Nonetheless, most carriers are reluctant to replace these systems, preferring to live with the devil they know, even though their systems may impose limits on their operational flexibility.
As the money-saving advantages of Web-based communication become more obvious, many carriers are trying to bring their legacy systems into the 21st century using various front-ends, translators and middleware systems. However, a growing number of insurers are taking a bolder step by replacing their legacy systems with new platforms.
Although the desire to reap the Web's benefits in agent management and customer service is prompting many of these decisions, updating policy administration systems can benefit other areas, such as improving outdated workflow processes, making it easier to add new products and providing better access to company and customer data.
Driven by these factors, U.S. and international carriers will spend an estimated $1.65 billion on these next-generation systems over the next five years, according to "Profiling the Vendors of Web-Enabled Policy Administration Systems," a report published by Celent Communications in October 2001.
And more than half of the $990 million in domestic spending is predicted to be spent by mid-tier firms-those with annual direct written premiums between $100 million and $500 million.
Despite the fact that mid-tier carriers are expected to spend two-thirds less per installation than top carriers, the large number of mid-tier firms-and their appetite for new technology-will make them one of the most important segments of the market for technology providers over the next few years. Their projected strong adoption rate is due to these factors:
Lack of previous action. To date, many mid-tier carriers have been reluctant to upgrade their core systems. Some of the top-tier insurers have already implemented aggressive internal initiatives or engaged outside vendors. The mid-tier carriers are just now addressing this issue, and will take action within the next several years.
Lack of internal competition. Mid-tier carriers have smaller IT staffs than top-tier carriers and are more likely to use an outside provider to implement a Web-enabled policy administration system.
Fear of the top tier. As the top-tier carriers move aggressively to capture the efficiencies of Web-based workflows and the flexibility of newer systems, mid-tier carriers that want to compete will be more aggressive in their efforts to catch up.
Top-tier insurance companies-those with more than $500 million in annual direct written premium-will be less aggressive in implementing Web-enabled policy administration systems, focusing their activity on new business lines or start-up units where their legacy systems are not yet entrenched.
In some cases, these projects will serve as test cases for an eventual replacement of legacy systems. However, a few top-tier carriers are forging ahead, replacing their legacy systems with next-generation, Web-enabled systems without this intermediate step.
At the other end of the spectrum, small carriers share the same motivations as mid-tier insurers, but they will move more slowly and will focus on less-costly systems. Small carriers also are more likely than mid-tier carriers to outsource their entire IT function to a business process outsourcer (BPO), and therefore have a lower anticipated conversion rate for installing their own systems.
As a result, system providers that serve the lower tier will need to offer an application service provider model to compete with the BPO model.
Providers of policy administration systems have recently undergone significant consolidation. Some of the most familiar names have merged with, or been acquired by, other players during the last two years. The positive reason for these consolidations is: Hungry, expanding buyers-such as CGI Group Inc., Computer Sciences Corp. (CSC) and IBM Corp.- are always looking to expand their offerings and product lines to maximize their existing relationships and distribution channels.
* the negative side, many smaller independent companies had difficulty convincing conservative insurance companies to take a chance on a newer provider. In addition, many players were hurt by the capital crunch of the past two years.
Current strong players in this market include industry giants such as CGI, CSC, FiServ Inc., and SunGard-as well as other well-known names such as Allenbrook Inc., Castek Inc., NaviSys Inc., Sherwood International and Rebus Systems. There are also several interesting emerging companies with unique offerings.
Choosing a provider for a policy administration system is never simple. Carriers must examine their own strategic plans closely before starting to evaluate vendors. In addition to technical concerns such as integration with other systems-including customer relationship management or enterprise resource planning-carriers must consider their long-term product expansion plans and whether the skills of their IT staff will be able to support the new system.
Although it may seem a daunting prospect to some carriers, the potential benefits are enterprisewide. Updating core systems with more modern database designs and more flexible and easier-to-integrate architectures can give carriers more information about their own businesses than they've ever been able to extract before. This new information about customer, agent, and staff behavior can be used to streamline operations and increase cross-selling and up-selling opportunities.
In a tightening market, the new opportunities lie in increasing efficiency, and carriers would do well to consider next-generation policy administration systems as means to that end.
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