Core policy administration replacement is one of the highest-priority projects among insurers in the United States. Driven by the need to support new channels, improve speed-to-market for rate changes and new product introductions, optimize internal workflows and improve access to enterprise data, we estimate that more than a third of U.S. P&C insurers, and a fifth of U.S. life/annuity insurers, are currently planning, evaluating or conducting core policy administration system replacement projects.
Nearly every one of those insurers has the same questions: How does our project compare to those of our peers? Are we spending too much? What impact can we expect? What has been the experience of others who've taken this step?
Novarica's recent research based on interviews with 26 P&C insurers and seven life/annuity insurers that have completed policy administration system projects over the last 10 years has uncovered the following findings:
* Timelines average one to three years overall, but can be less than sixmonths or more than four years. Projects generally start with a small number of products/lines of business across all their states of operations, then roll out additional lines. For most companies using modern admin systems, the first line/first state is the biggest challenge since it requires the initial implementation of the system and involves the biggest learning curve. Additional lines and states are often developed through cloning (or inheritance) as variations on the first one created.
* Insurers have been most likely to use internal resources for testing and conversion, while relying on vendor resources more heavily during deployment. We believe this may shift as IT services firms focus their offerings and models to emphasize their value in the testing and conversion stages, especially offshore, and as some vendors more tightly partner with such firms for implementation.
* Costs can vary widely, but license fees generally account for about 25% of total project costs for P&C projects, and a considerably smaller percentage for life/health/annuity projects (for whom conversion eats a significant percentage of the project budget). This represents a break from much of the conventional wisdom that these projects typically have a 10x services ratio rather than the 2x as we saw in the P&C sample, or 6x in the life/health/annuity sample. Of course, there are still outliers who do achieve that 10x-even on the P&C side-through a combination or poor project management and attempting to modify the system heavily during the implementation.
* The impact on business capabilities (speed to market, data accessibility, user satisfaction, etc.) is generally rated as being stronger than the impact on cost reduction. Most recent policy administration projects seem designed to deliver capabilities or replace an unsustainable system, not necessarily to reduce costs dramatically.
Some of the challenges that insurer IT groups face in their policy administration system projects ranged from working with vendors and business staff to basic project management issues.
In working with business users and sponsors, insurers face challenges in:
* Change management. Getting value out of a new policy administration system means doing things differently. Insurers need to plan for change management in business processes as well as within IT. Insurers also should understand the value of having a dedicated program office (rather than a project office) to manage this large operational change.
* Communication. Few business users have lived through a core systems replacement and know what to expect. If a core systems replacement project is being led by IT, then the insurer's IT group must establish clear, pro-active communication strategies to keep business community involved, engaged and supportive.
* Overcoming fear of change. This is closely related to communication. One respondent noted the value of pilot projects to help "make it real" for business users.
In working with vendors, some of the issues were specific to the vendor, such as lack of available resources. Insurers should get firm commitments from vendors on the availability of resources to effectively support the project. Lack of vendor knowledge of business is another problem. Some respondents cited challenges related to vendors not knowing the carrier's business, which had negative effects on their ability to scope and configure effectively.
Some of the issues also were related to the insurers' own project management capabilities, especially scope creep. Several insurers mentioned challenges related to scope creep and "getting sidetracked." One respondent mentioned the value of setting up a formal review board to manage scope and change requests during implementation (though insurers should be certain that approvals can be provided quickly).
Also, a common reason for project failure or overrun is the inability of many insurers to adapt to the product they've purchased rather than force the product to adapt to their existing processes and needs. Insurers should realize that by doing so, they are essentially combining a product implementation with a custom development project, and should re-scope accordingly.
Policy administration replacement activity is up, and we expect it to continue. We urge all insurers who are planning activities in this area to:
* Clearly define your business goals and tie them to organizational goals; business ownership, not just sponsorship, is key
* Don't define your business requirements in detail up front; use high-level requirements to find the right vendor and set the project direction, and an iterative approach to developing more detailed requirements later
* Carefully evaluate vendors for both product fit and organizational capabilities
* Focus on program-and project-management and change management.
Matthew Josefowicz is director and Chad Hersh is a principal at Novarica, New York. This column draws on their recent research on policy administration replacement projects. They can be reached at mj@novarica.com and chersh@novarica.com.
