Insurance equity analysts have been described as the "E.F. Huttons of the insurance industry." Since 1985, the number of publicly held insurers has increased nearly five-fold. And with this expansion, equity analysts have emerged among the most powerful voices in our industry. Accenture completed a survey of nearly one-quarter of the world's insurance equity analysts this year in order to gather their views on the challenges carriers face and the business strategies that analysts reward. The survey, conducted by New York-based Institutional Investor Market Research, focused on how insurers can outperform the market and achieve superior ratings over the next three years. The findings, especially with regard to technology, were eye opening.

While analysts acknowledged the difficult market conditions-an uncertain economy, softening premium rates and an array of competitive threats-the survey clearly indicates that they have high expectations for growth and profitability.

Moreover, while insurance analysts traditionally have not emphasized technology, their responses to Institutional Investor Market Research suggest a clear change of mind. They ranked "aging technology" as the second greatest challenge facing the insurance industry (after climate change for property/casualty insurers and growing investment portfolio risks for life insurers). The majority described technology investment as "critical" to industry performance over the next three years. Simply put, they said insurers without a compelling technology story will be challenged.

REWARDING TRANSFORMATION

Analyst opinions' on current insurance industry technology performance were less than flattering. A majority rated IT performance as "poor and in need of significant improvement."

But analysts also laid out a compelling roadmap for improvement. Property/casualty insurance analysts ranked the three most important areas of insurance IT investment as pricing/underwriting, claims management and distribution channels. Life analysts rated distribution channels first, followed by pricing/underwriting and risk management technologies.

Beyond agreeing on the urgent need for IT investment, analysts widely agreed that insurers need to do a better job of communicating their technology plans and how those plans are expected to impact performance. Indeed, nearly 60% of respondents said insurers poorly communicate technology initiatives to the investment community.

The enduring implications for insurers are clear:

* Investments in IT strategies that are well-executed, well-communicated and form an integral part of a growth strategy, will be rewarded.

* Disparate and outdated technology is a barrier to performance. Analysts perceive that many insurers either have not spent enough, or not spent wisely, to bring systems into the 21st century.

* CEOs must do more to understand-and help Wall Street understand-the connections between their IT initiatives and their prospective business performance improvements.

* Given the elevated importance of technology modernization and the potential size of required investments, CEOs need to play a more active role in technology modernization decision-making processes and project execution.

OPERATIONAL EFFICIENCY

Another key finding of the survey was that analysts see operational efficiency improvements - or "transformation programs"-as one of the smartest uses of capital by insurance companies today. Surprisingly, transformation initiatives are viewed as a better investment than merger and acquisition activity, business line expansion and even product development (for property/casualty insurers).

Analysts demonstrated a clear view about the types of transformation they believe insurers should undertake. When asked which cost reduction strategies have the most positive impact on ROE, the overwhelming favorite was "process optimization"-maximizing the effectiveness of core business, technology and operating processes. Additionally, analysts said they would reward insurers that take bold steps to make their business operations more flexible and scalable.

The journey will be different for every insurer, but there are several requirements for success.

Since technology transformation programs tend to be large-scale, we believe the best approach is to proceed in steps with defined phases. For example, one carrier replaced an aging batch-oriented product development system by breaking down the project into three phases. Term products were tackled first since it was the biggest line of business, next was permanent products and the final phase was annuities.

The continued engagement of top management also is essential. To help ensure senior executive buy-in and boost employee morale, successful transformations require a front-loading of as many benefits as possible into the early phases of a project.

A final requirement is to align the objectives of the business and IT units so they work together. To ensure accountability, one life insurer created an integration group consisting of all the project managers, which was led by an executive who reported to the CEO.

Insurers can reap significant benefits from transformation initiatives. By improving processes and outsourcing, for example, one multi-national insurance group sought to substantially cut expenses and improve profitability. Its transformation program included a fundamental restructuring of its claim processes that resulted in significant expense reductions.

To award superior ratings, Wall Street expects to see transformative changes in operational efficiency. And it expects this goal to be supported by investments in modern IT infrastructure. The window of opportunity may be short to take the steps that analysts have signaled they are willing to reward.

In today's environment, insurers cannot afford to wait and see.

John Del Santo is managing director of the insurance practice in North America for Bermuda-based Accenture LLC.

(c) 2008 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

Register or login for access to this item and much more

All Digital Insurance content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access