The insurance industry is facing a seemingly insurmountable challenge: The leading companies need to invest in new technology simply to keep pace with escalating customer claims.But the cost of replacing policy administration, claims, product management, billing, producer management and customer/account information systems is more than any one company can bear. More importantly, it is a cost that the insurer's own customers will not fund.

Incrementally adding new functionality onto older legacy platforms has provided some relief. But that approach contains a hidden trap: Each incremental application that must be interfaced to existing legacy platforms adds complexity to the total solution and, therefore, increases maintenance costs.

Indeed, service and maintenance costs now consume more than 50% of the funds allocated to insurers' IT departments. These costs now run the risk of outpacing the growth of IT budgets.

Voting with their wallets

Almost every insurer acknowledges that sometime in the near future, they must fully replace these large, complex applications (see "Statistically Speaking," page 14). Yet, it seems clear that the customer base will not provide sufficient revenue for these insurers to independently develop their own product and policy administration, claims, billing and account management systems.

To stay competitive, industry leaders recognize that they must improve their return on investment (ROI) from technology investments and maintenance. A typical carrier currently spends $150 million annually on technology. This investment will only increase as carriers attempt to replace their teetering legacy applications and systems with entirely new ones.

But economic conditions make it unlikely that any one insurer will be able to face the prospect of replacing all these large-scale applications over the next decade. Fortunately, an entirely new approach to building operational capabilities can offer a way out of the technology trap and even present new opportunities for growth.

Focusing on people

The most important infrastructure investment today is a skilled and well-trained workforce. Therefore, any competitive differentiation will come from those people.

Good people equipped with the right tools are more able to deliver success. Thus, the second-most important infrastructure capability is to provide that skilled workforce with the technology it needs to operate at peak efficiency. Those insurance industry players who get this resource balance right will be in a better position to operate efficiently, seek out new products and markets, and even acquire their competitors.

Therein lies the opportunity for a breakthrough in the way insurers do business. If individual companies cannot afford the cost and the risk of building entirely new technology systems and capabilities, they should consider an approach that works for other large-scale, high-risk businesses such as financial services and petroleum exploration-share the cost with others.

Research shows that some insurance companies are already moving in the direction of shared or outsourced services. In a departure from traditional corporate restructuring strategies, insurers are increasingly choosing ventures, alliances and outsourcing as their preferred methods of meeting current economic and industry challenges.

Ready for change

A recent insurance industry survey by Accenture of 68 major property/casualty and life insurance companies found that 36% of respondents were most likely to use joint ventures, strategic alliances or co-sourcing arrangements in order to restructure themselves in the future.

Furthermore, one-third said that outsourcing, in-sourcing, or net-sourcing was their most likely restructuring vehicle. Only 18% said they would give priority to new mergers and acquisitions, and only 13% indicated that divestiture was their preferred approach to restructuring.

Insurers realize that traditional mergers and acquisitions have not produced the results they're looking for, particularly during the current global economic slowdown. Insurers have caught up with their peers in the financial services industry and are now undertaking what's called capability-based restructuring (CBR).

CBR enables companies to grow by leveraging a variety of vehicles to transform their business models into networks of internally and externally sourced capabilities. Rather than replicate redundant IT systems, innovative insurers are using CBR to identify the distinctive capabilities they need to grow their businesses and add value for their customers.

Insurers then focus their investment resources on acquiring and delivering those capabilities, either internally or externally through alliances.

For those remaining capabilities that do not need to be truly distinctive, smart insurers can outsource, spin off or divest them to other organizations.

The insurance industry clearly is facing a looming technology challenge. But overcoming that challenge presents it with a rare opportunity for breakthrough change. With limited resources and pressing needs, insurance companies are being forced to consider non-traditional approaches to operating, which may lead them to entirely new ways of doing business-ways that emphasize vital capabilities, shared risks and renewed growth.

Vic Guyan is a partner with Accenture's Insurance Solution Group.

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