As the core platforms insurers depend on for basic transaction processing and a host of other business processes, it's hard to overstate the importance of policy administration systems. Indeed, in a research survey of the insurance industry released earlier this year by consulting firm Accenture North America, 92% of respondents indicated that their policy administration systems played a critical or important role in helping their organization reach its overall business performance.
Yet, it's no secret that among many insurers, legacy policy administration systems are a bit like the horse that has yet to be put out to pasture-it'll get you there, sure, but it lacks speed and agility, and still costs plenty in hay to keep.
"These legacy systems are not allowing insurers to be more flexible in responding to the insurance market," observes John Vale, senior executive in charge of the policy offering for Accenture. "The vast majority of insurers-84%-see modernization of policy administration systems as a key priority over the next three years," he adds.
Among the eye-opening findings of the survey was that 81% of insurers believed their current systems were inadequate to support current and anticipated growth needs. "For a number of insurers we talked to, the issue was how to get variations of new products out the door and the channels that support their delivery," adds Vale. "We work with insurers whose legacy systems-when originally designed-were very robust, but now the customer wants the ability to do price comparisons, and they're demanding more capabilities online."
So what's the answer? Out with the old and in with the new? Not so fast, many insurers say. While their current so-called legacy systems may be expensive to maintain and lack speed and flexibility, many are reluctant to initiate a wholesale "big bang" changeover.
While they recognize the need to modernize, insurers generally are reluctant to make a wholesale switch to new systems due to the business risk they incur in the process. "This is the revenue-generating arm of the company. If you mess with it, is it going to impact your revenue generation?" Vale asks, adding replacement also entails customer service risks. "These systems are live-and you don't want to hurt the customer."
Complicating matters, Vale says, is the relative paucity of solutions in the marketplace that can readily suit a particular insurance firm without major customizing to fit that company's specific business needs, processes and methods. "There are not a lot of solutions in the marketplace, and there is no silver bullet package system out there," he adds. "There's no off-the-shelf solution that will suit your business. It's really daunting and problematic for the larger-tier companies."
As a result, rather than completely replacing a legacy system with a new system and incurring the process upheaval as well as the potential business continuity risk, many insurers choose instead to modify their existing systems. The idea is to strike a balance between the old and the new while ensuring total business continuity in the process.
An unusual burden
Shelton, Conn.-based Prudential Annuities, which depends largely on its workhorse older platform to handle all the policy administration heavy lifting, as well as to launch new products, opted to update rather than to replace its policy admin system. "We're doing a lot of modernization on our core platform," says Steven Marenakos, VP of Operations & Systems at the annuity division of the life insurance firm. "For us, business continuity is a big deal, and investing in our platform does a lot for your business continuity."
Prudential Annuities' core platform carries a somewhat unusual burden in that the company recalculates the balances of all of its 1.2 million annuity contracts nightly, while most insurers with an annuity product line do so quarterly, or in some instances, biannually. "These are variable annuity products with $80 billion in equities tied to these contracts," Marenakos says. "We consolidate all the transactions for the day and revalue all those contracts overnight."
Another reason Prudential Annuities is modernizing its systems is that the annuities business is growing industrywide. Since the financial crisis of 2008-2009, in which 401(k) balances took a beating, many investors have elected to reinvest some of their assets in income-producing alternatives such as annuities. Adds Marenakos, "We are doing a lot of investing in our platform to add more capacity."
As is typical of many large companies and many insurance firms, Prudential Annuity's core administration platform started life as a software package in the mid-1990s, but has since been heavily customized to reflect the company's business rules and processes. Prudential has taken the approach of constantly upgrading and modernizing the system to make it more responsive, more flexible and less costly to operate.
Customize to a point
Prudential Annuities has maintained the same core technology, with the system based on Progress Technology source code, including the presentation layer, business applications server and data access layer built on an Oracle database. "We're trying to strike a balance to customize what is important to us, while not changing the core technology," Marenakos says. "All the business logic is custom, but the technology is not."
Using a component-based architecture, Prudential Annuities has been able to continue to utilize and adapt its older platform to perform both efficiently and economically. The company also has added newer systems for specific capabilities. For instance, in its call center operations, Prudential uses the NOW platform from UK-based Thunderhead, to enable representatives to communicate with customers across multiple channels.
Prudential Annuities has achieved some impressive results through its modernization efforts, enabling it to operate more nimbly at a lower cost. "For a call center representative, the speed issue becomes how quickly the system can perform, while the representative goes from screen to screen," Marenakos says.
Improved speed to market
By modernizing key parts of its core system, Prudential Annuities was able to boost its speed to market, Marenakos says. The company can now have a major new product ready for market in four months, down from the six months required in the recent past. "We are now able to do three major product releases per year, which is a huge gain in speed to market from just one major product system per year when I joined the company in 2005," Marenakos points out. "We want to be a leader in new products and innovation."
On the cost side, Marenakos says, "We've evolved from spending 75% of our IT budget just to keep the lights on five years ago, with just 25% spending on new development. Now we are about 50-50. We've definitely dropped our operations costs."
The modernization of its administration platform affords the company what Marenakos calls "leverage on the development side. The next time we want to do something new or make improvements to the system, it's going to be cheaper and simpler," he says.
On the service side, the company also has achieved some significant improvements as a result of its modernization of the core systems. "The response rate on a service representative's call center screen has to be fast," Marenako says. "We've seen a five-fold increases in our response rate, and that helps make the service call better, which is important because we're a service company."
In the online arena, Prudential Annuities is working with Atlanta-based eBIX Inc. to develop a generic Web front end to better to serve the broker-dealer community. "These broker-dealers usually do business with multiple carriers," Marenakos says. "We have a whole library of transaction capabilities than can support a modern industry initiative like that."
Accenture's Vale agrees that this approach makes sense. "A Web-oriented front end for the agent-broker channel can allow you to do more things."
A no-brainer
For some insurers, the shift to a modern policy administration system can be a no-brainer, especially when starting up a new unit or subsidiary for which there is no current legacy system. That was the case at Cincinnati Specialty Underwriters (CSU), which launched in 2008 as a subsidiary of Cincinnati Insurance Co. The new unit chose the Camilion Authority Suite from Markham, Ontario-based Camilion Solutions Inc., to launch its first products, general liability and commercial property.
The system supports the entire policy lifecycle, including application data capture, qualification, rating, quote management, bind, issuance and policy endorsement. When the company added Errors & Omissions functionality later in 2008, it was able to release the new product in 33 states in three months.
Making this aggressive timetable possible was the Camilion ProductAuthority configuration system, which enabled the company to easily configure and modify new products by accessing a central product information and rules repository. This tool not only gives CSU the ability to quickly make changes to products, but also to develop and launch new ones in a matter of weeks.
Speed to market also was an important criterion for Chicago-based Unitrin Direct Insurance Co. in selecting the DecisionMaker Suite from Honolulu-based Decision Research Corp. as its policy administration system to support a new homeowners insurance offering complementing its existing auto product line.
Again, ease of configuration of the new system was important. Unitrin was able to leverage DRC's Extended Lines Technology, which enables business users to configure the system to manage rates and underwriting rules while creating new data tables and screens as needed. Just 20 months after the project began, Unitrin was able to be in production with its new homeowners offering in 22 states.
Doug Bartholomew is a freelance business writer based in Berkeley, Calif.
