As it has been for the past few years, policy administration replacement or extension is the most common top strategic IT project for insurers in 2011. Recent Novarica research shows that more than one-third of midsize insurers across both property/casualty and life/annuity insurers have core policy administration systems projects as their top priority in 2011, along with more than 40% of large property/casualty companies and close to 20% of large life/annuity companies.
Given that this has been a strong area of focus for insurers for the past few years, what is new for 2011? While the general issues are consistent with previous years, there are some areas that have become better understood or achieved a level of prominence that is notable for this coming year.
One issue is the focus on business capabilities. Insurers that have completed core systems replacement projects have generally ranked the impact on business capabilities (speed to market, data accessibility, user satisfaction, etc.) higher than the impact on cost reduction. Most recent policy administration projects have been designed primarily to deliver capabilities or replace an unsustainable system, not necessarily to reduce costs. This shift, which has occurred over the last few years, has become more pronounced. Few core systems replacement projects in 2011 will be driven primarily by cost concerns.
Insurers also are paying closer attention to the use of agile development methodologies in implementation of vended software packages. In a recent Novarica study, nearly half of insurers both large and small were using agile in at least some of their implementation work for vended software, and about 20% of companies were using agile in more than half of their implementation work.
The "buy v. build" question regarding core systems projects has largely been settled on the buy side of the ledger, with an expanding and maturing set of newer products in the marketplace, and considerable research and development and replatforming work starting to yield results for more established products. While there have a been a few notable examples of successes with a build (or at least, assembly-of-components) strategy recently, the overwhelming majority of current and new core systems projects in North America will be based around a software asset.
There are two important trends in this market as well. One is the emerging dominance of the "component-based suite" model, where an individual vendor offers policy, claims and billing components on a common architecture with a common data model, but sold as loosely coupled components that may be implemented sequentially or singly rather than as a tightly integrated whole. The other is the growth of hosted or software-as-a-service delivery models, which are starting to get more acceptance, especially among smaller companies, and which are benefiting from the general hype in the technology trade media about "cloud computing."
Along with these issues comes the growing realization of the requirement for business/IT unity of purpose in both planning and executing these projects. A core system replacement is not an information technology project, it's an organizational transformation, or at the very least, an organizational evolution. These projects take tremendous amounts of business resources for design, development, and user acceptance testing. As agile development methodologies become more common, the demand for active participation of business resources in these projects becomes even more critical. Core systems projects that are viewed as an IT issue are doomed before they start.
The requirement for an active and comprehensive change management program is also better understood. Insurers will be more active in planning for change management in business processes as well as within IT, and will be best served by having a dedicated program office (rather than a project office) to manage this large operational change.
Core systems are called core for a reason-they are at the heart of insurers' ability to function. Replacing them is not to be done lightly, but failing to replace them can mean diminishing the ability to compete and function effectively as a company. By learning from the experience of their peers, insurers can improve their odds of success in these critical strategic projects.
Matthew Josefowicz is partner and managing director of New York-based Novarica. He can be reached at mj@novarica.com
