The prolonged soft market and decline in investment income has left property/casualty insurers in a tough place.

A new report from Capgemini concludes that investment in core systems such as policy administration and underwriting is the most viable path to future growth. The firm’s “World Insurance Report 2012” notes insurers are powerless to change the macroeconomic conditions sapping demand and should instead focus on rationalizing their cost structures and reducing expenses.

“With the decline in investment income, which once provided a constant profit stream for the non-life industry, insurers have been forced to concentrate on improving the building blocks of underwriting performance: claims, and operational and acquisition ratios,” the report states. “In many markets, the economics of risk pricing call for an increase in premium rates, but insurers face such competitive pressure that they have refrained from any significant rise in rates for fear of customer defections.”

The primary building block, the report contends, is a modern policy administration (PA) system that enables end-to-end management of insurance policies. “PA is gaining attention as the next transformation priority,” the report states. “In fact, IT-enabled PA can facilitate many interactions directly between insurers and their customers, agents, brokers, and other third parties throughout the lifetime of these relationships. As a result, while PA transformation affects the bottom line most directly, it can also have a positive impact on the top line, because of the potential to improve satisfaction levels among customers and other intermediaries.”

In addition to the myriad decisions insurers must make surrounding functionality and technology when upgrading or replacing a policy administration system, some weighty business issues present themselves. “In particular, insurers must first decide at a business

level which parts of the business to retain, sell or transfer (such that the insurer still owns the business, but end-to-end administration is transferred to a third-party administrator or a business process outsourcer),” the report states. “After that decision is taken, insurers need to proceed to transform the retained blocks of business (on their current systems) through business process re-engineering, consolidation, modernization and sourcing strategies.”

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