The insurance industry has endured the reputation of a technological straggler in the rapidly evolving world of financial services. Marked by a general propensity to avoid risk and an ambivalence about new technology, many experts believe that insurers have fallen behind banks and securities firms in the race to become the dominant financial services provider.However, prodded by cutthroat competition from carriers and the threat of new competitors outside of the industry, insurers understand that new technology is a competitive necessity. And while insurers have shown they're not afraid to dip into their corporate wallets to spend more on technology, determining exactly how and where those dollars can be most effectively spent continues to be a problem that's plaguing many insurers.

What's clear is that insurers are investing in Web-related hardware and software that will enable them to conduct business with their agents and customers online. Linked to these investments is increased spending on customer service and business intelligence technologies that respond to how agents and customers, rather than insurers, want to do business. To accomplish this, insurers are revamping their legacy systems, building intranets and extranets, employing new programming languages and extending their operations to include electronic rating, billing and claims handling.

Insurers also are increasing their investments in data warehousing and data mining, technologies that, when designed properly, can assist their cross-selling efforts and help target specific products and services to the individual needs of customers.

Apart from the technologies that insurers are investing in, another emerging trend is how insurers are implementing new technologies. Unlike in the past, when insurance companies were more inclined to develop their own support systems, they are now employing application service providers more frequently, and outsourcing business processes once considered core insurance functions.

Shifting focus

Last year, insurers' focus on the year 2000 problem precluded them from making strategic investments in new technologies. Now that the year 2000 problem is behind them, carriers are looking at how technology can help them attain their strategic business goals.

"We've seen a lot of pent-up energy starting to become unleashed in 2000," says Anna England, vice president, e-business solution, with IVANS Inc., an e-business software provider for the insurance industry based in Greenwich, Conn. "We're seeing an uptick in overall budgets."

In the past, insurance companies on average spent 3% to 4% of their overall spending budgets on information technology. This year, England says, insurers' IT spending is reaching 4% to 5% of their overall spending.

Property and casualty insurance companies will spend approximately $12 billion on information technology this year, an amount that should increase to $12.6 billion next year and jump to $13.8 billion by 2003, according to TowerGroup Inc., a research and consulting firm based in Needham, Mass.

"Insurance companies have awakened to the kinds of opportunities and potential that e-commerce presents," says Richard Roby, TowerGroup's director of research. IT dollars, according to TowerGroup, are spread across sales and marketing, which includes e-commerce, underwriting, policy administration, claims processing and management information systems (see story on page 44).

IT investments

Life insurance companies also appear to recognize the importance of technology, although they may not be well-prepared to manage it.

A recent survey by New York-based consulting firm Tillinghast-Towers Perrin found that life company CEOs believe technology is the most important tool to address their top strategic challenge-improving their distribution systems.

The 65 CEOs surveyed also see technology as the second-most important way that insurers can become competitive. However, 85% call themselves only "somewhat prepared" to deal with information technology management issues.

Overall, life insurers are using technology to improve their distribution efforts by incorporating the Internet for sales support and electronic commerce, establishing corporate intranets and implementing sales illustration systems and training tools, the survey found (see April issue, page 6).

A Web focus

Expressing a desire to invest in new technology is one thing; filling out a purchase order is another. Many insurers are increasing their investments in Web-related technologies as they attempt to match-and in some cases exceed-the investments that banks and brokerage firms have made in e-commerce.

"The technology gaining the most activity at insurance companies is the Internet, intranets, browsers and thin-clients," says Larry Johnson, vice president of enterprise solutions, architecture and infrastructure for insurance software and consulting firm, Mynd, Columbia, S.C.

Most insurance companies no longer are just focusing on putting up simple brochureware on their Web sites. Instead, they're focusing on technologies that will make their sites become more interactive with consumers, such as enabling customers to receive policy quotes, purchase policies or file claim information online.

Farmers Insurance Group is one insurer that's continually expanding its Web offerings. This year, the Los Angeles-based insurer will invest $20 million more on Web-related technology when compared with its spending level in the late 1990s, says Deb Mukherjee, vice president and chief technology officer for the insurer.

Overall, Farmers has increased its technology spending this year by more than 20%, Mukherjee adds. Although the company is not spending exclusively on Web technologies, Farmers is making sure that all of its IT investments, such as those enhancing its distribution channels, are Web-enabled.

Online rating

The mounting pressure on insurers to enhance service to agents and customers also is contributing to their desire to move policy rating, applications and processing to the Web.

Heritage Mutual Insurance Co., a property/casualty insurer based in Sheboygan, Wis., is presently moving to Java-based programming language that will facilitate instant online rating of various insurance products. The company recently demonstrated the process with agency management system vendor Applied Systems Inc., University Park, Ill.

Using the system, agents enter application information into their agency management system, and select the carriers from which they want to obtain a quote. The information is sent over the public Internet to a server, in this case hosted by Applied, and then sent to Heritage for a quote. Heritage receives the information through its Java-enabled front-end server. The information is sent to the insurer's back-end underwriting legacy system. A quote is generated and returned to the agent in real time.

It takes about 10 seconds between the time an agent requests a quote and the time it is sent back, says Neal Ruffalo, Heritage's vice president of information technology.

One advantage to the new rating process is that agents and customers receive an exact quote, which is something they can't get when they can't access an insurer's mainframe. "It's not an approximate number," Ruffalo says. "This gets the exact same rate because it runs through Heritage's system."

Also facilitating the rating process is Heritage's use of Extensible Markup Language, or XML, a Web programming language that codes or annotates computerized text to express meaning. XML contains more flexibility than other programming languages, and makes it easier to communicate across technology platforms (see article, page 24) .

"It's easier to use and to interface with and have the least number of follow-ups between carriers and agents," Ruffalo adds.

Another Web initiative that Heritage recently rolled out is Internet billing, a self-service system that gives agents and consumers all of their billing information online. The system, which Heritage developed internally, was implemented in March and provides information such as the amount of the bill and access to various policy data for personal and commercial policyholders.

Although customers and agents are currently limited to making information inquiries, Heritage's goal is to eventually enable them to make changes to policy information and to pay bills online.

Overall, Ruffalo estimates that Heritage's investment in information technology has increased more than 10% this year compared with 1999. "We're seeing more resources go into Web development," says Laura Conklin, Heritage's director of business systems. "We're beefing up that area."

Incorporating Web technology is just one of many IT steps insurers are taking on the e-commerce pathway. Carriers also are revamping their older mainframe systems and legacy applications and linking them to the Web.

These systems include information that enable carriers to run their billing, customer service and policy-processing operations, among other applications.

Replacing legacy systems

Alfa Mutual Insurance Co. is in the midst of a three-year project in which it is replacing its legacy systems, human resources and its life policy administration systems. "We are looking at replacing our entire legacy systems with purchased products," says John Jung, senior vice president and CIO for the Montgomery, Ala.-based personal lines insurance company.

The company is spending "multiple millions" of dollars over the next several years as it tries to make up for the lack of technology spending during the previous 10 years, Jung says. "New management saw we had underspent for so long, it was time to invest."

In April, Alfa Mutual announced that it was licensing the S3+ system from Mynd, an enterprise property/casualty processing system that operates on a Microsoft Windows NT platform.

The insurer also is seeking to install a wide-area network that will link the insurer via an intranet with its more than 650 agents at more than 400 storefronts in the Alabama, Georgia and Mississippi area, where the insurer currently does business.

Alfa Mutual needs new technology to implement its plans to expand into new markets. "We are considering, as part of our corporate strategy to go outside of the three-state area," Jung says.

One way to grow would be to obtain agent and company licenses in other states and to set up agencies in those states, but Alfa is also considering merging or acquiring insurance companies. "Our system did not allow for the latter," he says. "We needed a new one."

While Alfa Mutual clearly is pursuing efforts to incorporate the Internet, the emphasis will be to improve service with agents rather than to allow customers to obtain quotes and purchase insurance online.

"It's much more on the service and agent support side," Jung says, although supporting online sales is an option if the insurer moves into states where it currently does not have an agent presence.

A look at the customer

Customer relationship and business intelligence technologies are crucial for supporting online insurance sales. In addition to improving customer service, these technologies seek to collect information, identify prospects, and develop sales and marketing information for insurers.

"Companies are blending e-business and customer relationship management," says Chuck Johnston, vice president and director of insurance information strategy for research and consulting firm Meta Group, Stamford, Conn.

One way that insurers are accomplishing this is by linking their different distribution channels. That way, information received over one channel, such as the Internet, is automatically updated at other contact points, such as a company's call center, so that the most recent information is always available, says Andy Williams, general manager for IBM Global Insurance Industry, a division of IBM Financial Services, White Plaines, N.Y.

In addition, insurance companies are also investing in data warehousing technology to collect information about their customers, anticipate their financial needs and cross-sell new products.

New York Life Insurance Co., for example, is developing a data warehouse that will ultimately collect customer information that it can use for target marketing campaigns, says Steve Attias, vice president in the insurers' advanced technology, architecture and strategy group.

Downsizing data warehouses

But some carriers are downsizing their data warehouse plans or building them incrementally. In part, that's due to their tremendous cost and the mixed success that large companies have had with data warehouses in the past.

Previously, companies might spend more than $2 million for a data warehouse that took many months to build and didn't always work, says IVANS' England.

Data warehouses aren't the only areas where insurers are becoming more conscious of their IT spending. Although insurance companies increase their spending on technology, they aren't necessarily getting more for their money. Insurance IT executives note that the cost of hardware keep going down but that software product and maintenance costs continue to rise.

"We continue to see hardware costs go down, but need to find more of it," says New York Life's Attias. Increasing software costs, meanwhile, also call on insurers to improve their negotiating tactics with vendors, he adds.

Because of these trends, some companies are taking a piecemeal approach when purchasing new technology. Many are saying their gravitation to the Web must be incremental-"a bite-sized approach," England says.

That way, rather than spending millions of dollars to do everything at once, an insurer can get Web-enabled more quickly. A company can initiate billing inquiries on the Internet for $50,000, including software and services, she adds.

Outside help

Outsourcing IT projects to application service providers and to other third-party providers is another way that insurers are reducing their costs, in addition to achieving a greater presence on the Web and improving relationships with customers.

Application service providers often can get an insurer up and running on the Web more quickly and for less money than if the carrier did work. ASPs are third-parties that manage and distribute software-based services and solutions to customers across a wide-area network from a central data center.

For example, an application service provider can reduce an insurers' overall costs, turn fixed costs into variable costs and take advantage of the latest technology thinking, says IBM's Williams.

Because of these advantages, Williams expects that application service providers will more likely be used by smaller or mid-level insurers rather than large companies which can better afford the technology investments.

Among technology providers that have ASP initiatives are Trumbull Services LLC, Windsor, Conn. The company recently began providing application service provider capabilities for commercial and personal lines policy administration, including business owner's policy, workers' compensation, personal automobile and homeowners.

Atlanta-based The NetCommerce Co., meanwhile, bills itself as an application service provider for the property/casualty industry. The company provides an Internet platform that uses shared processing for the distribution and underwriting sides of the property/casualty industry.

In many cases, carriers don't have the systems and thus have to migrate to a new platform or take their legacy systems and push them out to Web servers, says Brook Carter, vice president of Mynd. "All companies are evaluating outsourcing now," he says. "Technology is changing so fast, they can't do it alone. They need a partner."

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