In many ways, insurance companies have become embroiled in a sticky Catch-22 regarding their ability to use, manage and deploy information technology internally.The catch: Carriers have a good shot at becoming proficient at internally managing IT if they devote only the necessary resources and apply the proper approach to making it happen. But they won't commit to either of these until they are certain that success is in the offing.

While that's a dubious approach, it's also an inevitable one. A new study by Cambridge, Mass.-based Forrester Research Inc. provides some new insights into carriers' ongoing dilemma to avoid taking "ownership" of their IT fortunes.

The report, which was written by senior analyst Todd Eyler and analyst Ron Shelvin, declares that "compared to noninsurance financial firms, insurers are more likely to suffer from a number of IT challenges. Insurers need to adopt data-driven decision-making and groom developers who combine insurance expertise with modern programming skills."

Poor decision-making

Understanding the root of these specific problems requires tracing some of the developments that have occurred within an insurer's IT blueprint.

Several years ago, carriers charted a course for IT that often took them down a wrong path. Forrester's study found that 18% of insurers started IT projects that went unfinished, while only 10% of noninsurance financial firms fell prey to this. Moreover, 37% of carriers-versus 27% of other financial firms-said that IT projects often come in late or over budget.

This misstep has been prevalent with big-ticket investments such as data warehousing and systems integration. Many data warehousing projects fell by the wayside due to a lack of execution or poor vision.

"A system that was installed for $3 million might have been originally regarded as a business imperative. But on second review turned out to be overkill," says Jenny Emery, global e-business leader for Tillinghast Towers Perrin. "The system didn't provide the results the carrier had hoped for."

In the context of poor IT decision-making, insurers have had difficulty striking a balance between the centralized and decentralized control of IT. The end result has been poor prioritization and budgeting of IT investments. Within the benchmark report, three glaring inadequacies by carriers were exposed, including:

Senior executive IT tasking. Although 70% of insurers believe that their firms' C-level executives enthusiastically use business applications and tools, this trails 77% of noninsurance financial firms-and 81% of all nonfinancial companies-that answered the same way.

E-business struggles. Business units and IT divisions struggle for ownership of e-business projects in 25% of insurers, in contrast to 18% of other financial firms.

IT coordinating. Compared with 15% of those surveyed from noninsurance financial firms, 27% of insurers said that their IT departments have trouble coordinating with external partners and consultants.

The industry has also been dogged by the lack of good alternatives. Nearly 50% of insurers surveyed would prefer to buy rather than build new software. But few new software companies serving the industry have emerged over the past few years. That's because potential startups have been scared away by insurers' long sales cycles, and venture capital has been directed to e-commerce startups instead.

Outside-in approach

In examining several corrections that carrier can adopt, Eyler offers an "outside-in" course of action.

One "outside-in" strategy that carriers must consider is using customer data to drive balanced decision making. "IT and business decision-makers should formalize customer feedback as a basis to communicate and prioritize," Eyler says.

For instance, insurers will probably find that agents rank robust reporting and analytical capabilities for high-volume products, such as auto insurance and business owners' policies, higher than automated underwriting, Eyler says.

Another "outside-in" approach would be to challenge skilled IT developers with new projects.

"Good developers won't stay with insurers that make them maintain existing COBOL code," Eyler adds. "Insurers should rotate their best developers among R&D projects that tie them into the business and keep them updated with new technologies such as Web services and intelligent agents."

For instance, The Chubb Group of Insurance Cos., Warren, N.J., should involve its best developers in building the external portion of its claims hub that monitors service providers, he says.

Because skilled developers aren't inclined to remain with an insurer for a sustained period, carriers must rely on third parties for these key skills. In fact, 62% plan to use outside IT consultants versus 48% of the noninsurers, according to the study.

When insurers adopt this approach, many are "left in a lurch when consultants move on," says Eyler. But even at the risk of losing continuity, 32% of the insurers surveyed plan to reduce their reliance on consultants versus 42% of noninsurance financial firms.

To avoid this turnover, with consultants or internal developers, Eyler says "developers who understand and can translate business requirements into code should be treated like royalty."

If insurers must look outward for their IT planning, then it behooves them to consider partnering with offshore information technology services companies to build software.

This strategy would enable these partners "to resell base versions of the software but then require ongoing royalties from themselves," Eyler adds. "Some of these partners have deep pockets, but currently lack the domain expertise to enable them to build and maintain new insurance software products independently."

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