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October 23, 2008

Partnering for Data-Driven Financial Planning and Analysis

By Karl Hersch, Principal, Deloitte Consulting.

Chief information officers have vast responsibilities, many of which revolve around solving core information technology problems. But to reach those solutions, partnering with the business users is critical. Simply put, the IT department is a service organization for the rest of the company; without appropriate support and service levels from IT, the remainder of the organization suffers. But with the right input from business leaders, IT can help create competitive advantage.

One of the departments most in need of IT support is finance, especially around financial planning and analysis (FP&A). A review of data use in financial planning and analysis provides an instructive look at how the CIO can collaborate with other organizational teams and build a solution that extends across the traditional silos where data often resides. If done correctly, IT can help build the proverbial bridge to connect different parts of the organization and the CIO has a critical role in supporting this function.

At the root of this challenge is information management, including managing the underlying data and implementing and maintaining the supporting technology. The CIO needs to understand the finance team’s requirements around budgeting, planning, forecasting, scenario planning, measuring KPI’s and analytics. The important thing here is determining what’s critical for executives and business group leaders to run the business, manage P&L’s and cost centers, and make informed decisions.

Once the CIO has determined that the data platform fits well with the organization’s existing infrastructure, he or she should consider what the financial planning and analysis team actually needs to accomplish its goals. What data is necessary? Where does that data exist? How is that data gathered and rolled up to the team that utilizes, analyzes, measures and reports it? This bottoms-up approach must be planned in collaboration with the chief financial officer to ensure the information is useable.

Once the appropriate dialogue has taken place with organizational leaders, then the CIO can apply his or her knowledge and expertise helping drive the selection of the best tools and applications to execute the processes required. Which tools are selected for FP&A purposes should be driven by what the modeling and scenario planning requirements are, what the data inputs are, how the organization needs to report, and how the end results will be disseminated.

When talking about FP&A, the CIO must discuss how the CFO plans the budget, what data he uses to forecast, and how CFO will manage incoming demands on his or her constituencies. And let’s not forget that the finance group is a service organization within the company as well, so this solution should be customized to the needs of the company as well as the group.

If the CIO takes that client service view, and focuses on the needs of the end-user and lets those requirements drive the information management and technology decisions, the results are far better. Success here is evidenced by a jointly driven analysis – finance and technology teaming together. And it is in that environment, where the technology is viewed as a catalyst for out-of-the-box thinking, that real change can be accomplished.

Posted at 10:11 AM | Comments

October 21, 2008

What Insurers Can Learn from the Curse of the Bambino

I can’t help but think that my colleague Anthony O’Donnell’s mention in yesterday’s Edit Memo of the Boston Red Sox’ loss in game 7 of the ALCS was meant especially for me. Anthony is well aware that I’m a lifelong Sox fan. That said, it didn’t bother me too much -- the mention in yesterday’s newsletter or the loss itself. Anthony was quite polite about the whole thing and, well, its tough to be upset with a baseball team that has won two World Series since 2004. In fact, the only real issue I had was with yesterday's Edit Memo was a mention of the so-called “Curse of the Bambino.”

It’s funny. Everyone thinks that the Curse of the Bambino is something that dates back to the days of Babe Ruth -- specifically when he was sold by the Red Sox to the New York Yankees. Really though, as writers like Bill Simmons and Seth Mnookin have pointed out, the concept of the curse started with George Vecsey and was popularized by Dan Shaughnessy, a sports columnist currently writing at the Boston Globe.

Here's how Mnookin put it in his book:

"In fact, The Curse of the Bambino served as an unintentional primer on the ways in which the Boston press was able to inflict itself on players and fans alike. Forever after, every Red Sox fumble, misstep, or mistake would be attributed to a curse that had been popularized, if not largely invented, by a cantankerous sports columnist."

Before 2004 -- when the team finally won a World Series after an 86-year drought -- I often wondered whether the Red Sox were doomed not by some curse, but by a sort of self-fulfilling prophecy. Confidence and, maybe to a lesser extent, visualization (picturing yourself doing something before you do it) are keys to success in baseball. Perhaps a team that is used to falling short and that has been become accustomed to being “cursed” is more likely to lose.

I started thinking about that again recently, but it had nothing to do with the Sox or the Tampa Bay Rays. It had to do with a story I’m working on for the December issue of Insurance & Technology about e-payments and remote deposit capture technology. One of the recurring themes that has come up as I speak to sources for this story is that customers are expecting (and in some cases demanding) e-payment functionality from their insurer because it is a capability that is widely available in other industries such as retail and banking.

This, of course, begs the question: Why did insurers fall behind those other industries in the first place? And almost uniformly the answer I receive is some form of the following: “As I’m sure you know, the insurance industry, by its very nature, is risk-averse. Carriers have always been slow to adopt new technologies.” Apparently, this is just the way it is.

The Curse of the Bambino was a concept created in 1980s and 1990s that came to represent decades of past Red Sox baseball teams. In that same spirit, I wonder if the concept of the insurance industry as a technology laggard is less historical fact and more popular opinion. After all, the insurance industry is still rife with 40-year-old legacy systems. And that tells me that, 40 years ago, insurance carriers were among the first organizations to embrace technology into their business processes.

Certainly, in 2008, it’s accurate to say that, in many ways, the insurance industry lags behind other industries when it comes to technology adoption. Let’s just stop assuming this is because of tradition or some deeply-seeded conservative culture that has been prevalent in the industry since the dawn of time. It’s time to break another self-fulfilling prophecy.

Posted by Nathan Conz at 10:46 AM | Comments

On the Accenture/Guidewire Dismissal News

The latest news out of the Accenture/Guidewire case seemed to promise some kind of resolution, resulting in my early misinterpretation of the result. Others similarly expected something more substantial than what actually emerged. Alas, nothing much has been resolved by the opinion recently issued by the Delaware U.S. District Court, judging by my conversations with knowledgeable sources. But interesting questions remain.

The substance of the opinion consisted in Judge Sue L. Robinson's acceptance of motions to dismiss from each of the parties to the case. Among the charges covered by the motions were Accenture's claim that Guidewire had misappropriated trade secrets and Guidewire's claim that Accenture had litigated in bad faith. The opinion by no means affected Accenture's claim that Guidewire infringed its patent related to Accenture Claim Components software. Nor did it even necessarily bar the door to Accenture resuscitating some of the claims dismissed, according to a patent attorney I consulted. Similarly, Guidewire could conceivably resurrect its counterclaims depending on how Accenture chose to reintroduce claims against Accenture.

In other words, Judge Robinson's decision sheds no light on whether or not Guidewire did in fact misappropriate Accenture's intellectual property, to say nothing of whether the company infringed Accenture's patent deliberately or otherwise. In essence, the opinion merely found the form of Accenture's claim inadequate to justify discovery. However, if the court later found that Guidewire had indeed infringed the patent, it seems possible that a process of discovery could ensue in which evidence of misappropriation could emerge.

Given the tenuous character of the Accenture charges dismissed, Guidewire had insufficient grounds to countercharge. In any case, according to my patent attorney source, it is notoriously difficult to find that one company has maliciously taken action against another in order to interfere with its ability to conduct business. In this particular case, it seems, Accenture is free to say it believes that Guidewire stole its trade secrets rather than alleging such behavior as a fact.

In the meantime, the wheels of justice turn at their accustomed pace, and much treasure must continue to be spent as the case proceeds on the central question of infringement. The spectacle of a very large, established company suing a smaller, newer vendor has raised the question of whether Accenture is engaging in "software by litigation" and thereby establishing a malign precedent for an industry segment that has remained relatively free of such activity. Those who raise that question say they fear an Accenture win will stifle innovation in the insurance software marketplace. However, Accenture's size and power ultimately has no bearing on whether its relevant partners genuinely believe their rights have been violated.

Guidewire's sudden and remarkable success in the market was no doubt a shock, coming at a time when Claim Components was poised to take off in a big way, following its initial success with large insurers such as Chubb. And Accenture's suspicions are not implausible. On the other hand, Accenture's claim that Guidewire couldn't have developed its solution so quickly could be seen as analogous to an incredulous professor who accuses a student of plagiarism merely because the latter writes unexpectedly well. As Judge Robinson wrote, simply believing that Guidewire couldn't have done it doesn't entitle Accenture to a "fishing expedition" to try to find a way to substantiate the suspicion.

The central question remains as to whether Guidewire has infringed Accenture's patent. Guidewire says it hasn't, but that Accenture shouldn't have had the patent in the first place. It's hard to imagine that Claim Components doesn't include a multitude of features that deserve patent protection. At the same time, it is possible that the patent issued includes protection for elements that are generic and shouldn't be owned by anybody.

I have no insight into whether and how the Judge would consider the question of the original patent's validity, but Guidewire reports that the U.S. Patent and Trademark Office has agreed to re-examine Accenture's patent. Clearly, Guidewire expects the USPTO's determination to have some effect on the case, but I have no information as to how the company plans to play that. Perhaps they'll motion for the Judge to suspend proceedings while the USPTO rules, though that is pure speculation on my part.

Whatever the case, the USPTO is backed up owing to a rage for re-examination caused by recent case law, and I'm told that the Delaware U.S. District Court is not known for its speed.

Posted by Anthony O'Donnell at 10:38 AM | Comments

October 20, 2008

The Cosmic Order Reasserts Itself

After a week of focusing on the Insurance & Technology's 10th anniversary Elite 8 issue, the world seems to have begun a move to normality. As we report in I&T Daily today, insurers are showing signs of stress, from a rating perspective, but that is only to be expected at this stage of the crisis. A glance at the Wall Street Journal's financial news shows both the continuation of extraordinary measures -- e.g., the Netherlands' planned injection of $13.4 billion into ING, among other newly announced European measures -- as well as signs of stabilization. "Futures Rise on Hints of Thaw," trumpets one headline; "Global Indexes Advance," announces another.

Perhaps the surest sign that the cosmic order is reasserting itself is the Boston Red Sox's loss of the American League championship to the Tampa Bay Rays last night. However, the Curse of the Bambino remains broken and the Sox retain their place in the pantheon of recent World Series winners.

In the I&T blog today, we present the "pantheon" of Elite 8 Award winners in simple list form, including every honoree since the inception of the Award in 1999. "The Elite 8 Hall of Fame," a graphically enhanced version of the list, including reporting about and photographs of past honorees, appears in the print and online versions of the current 10th Anniversary Elite 8 Issue.

Posted by Anthony O'Donnell at 10:35 AM | Comments

The Elite 8 Pantheon

During the months-long process of naming each year's Insurance & Technology Elite 8 Award honorees, the editors of I&T are often asked who has been chosen in the past. Some who inquire may be new to the world of insurance IT. Others are familiar with Elite 8 and could name a good few honorees in the past. All are curious to see the entire list, which we refer to internally as the "Pantheon." With our 10th Anniversary Elite 8 November issue, and here on the I&T blog, we present the complete list of Elite 8 honorees, going back to 1999, the year it all started. For a graphically rich version, with additional reporting on some of the past honorees, see the print issue version of the list, "The Elite 8 Hall of Fame."

2008
Charles Cornelio, CIO, SVP of Shared Services, Lincoln Financial
John Golden, EVP, CIO, CNA
Steven K. Wiggins, EVP, CIO, BCBS of South Carolina
Jeff Carlson, EVP, CIO, AIG American General
Bill Jenkins, VP, CIO, Penn National Insurance Co.
Linda Squires, Senior Executive, Operations and IS, North Carolina Farm Bureau Mutual
Akhil Tripathi, SVP, CIO, Harleysville Insurance
Raymond Voelker, CIO, Progressive Insurance

2007
Catherine S. Brune, SVP, CIO, Allstate Insurance
Meg McCarthy, SVP, CIO, Aetna
Chris Steward, CIO, Arbella Insurance Group
Jim Hanson, EVP, IS, Mutual of Omaha
Dennis Mehmen, CIO, Grinnell Mutual Reinsurance
George Napoles, EVP, CIO and Chief Administrative Officer, Jackson National Life
Mark Boxer, President & CEO of Operations, Technology and Gov. Services, WellPoint
Holly Morris, SVP, CIO, Thrivent Financial for Lutherans

2006
Al Bowen, SVP, Information Systems, Ohio National Financial Services
Jim Court, VP, CIO, First American Property & Casualty Ins. Group
Bruce Goodman, SVP, Chief Service and Information Officer, Humana
John Kellington, SVP, CTO, Ohio Casualty
Stuart McGuigan, EVP, enterprise CIO, Liberty Mutual
Rick Roy, SVP, customer operations, CUNA Mutual
Jeff Stoll, SVP, CIO, individual business, MetLife
Joan Zerkovich, CIO, International Catastrophe Managers (ICAT)

2005
Dennis Noice, SVP, CIO, Nationwide Financial Services
Georgette Piligian, SVP, CIO, Corporate Systems, MetLife
Piyush Singh, CIO, RLI Corp.
Annaclair Kiger, SVP, Customer Service and IT, Colonial Life & Accident
Paul Rix, SVP, CIO, AIG Life
Ron Ponder, EVP, CIO, WellPoint
Scott McKay, CIO, SVP of Operations & Quality, Genworth Financial
Mike Byam, VP, e-Business and Technology, Head of Transformation Office
The Hartford Financial Services Group

2004
Steve Sheinheit, SVP, CTO, MetLife
John Chu, SVP, e-Business and Technology, The Hartford
Barbara Piehler, SVP, CIO, Northwestern Mutual
Todd Ellis, SVP, CIO – commercial lines, Chubb
Bob Best, EVP, CIO, UnumProvident
Bob Wilkes, Business Transformation Officer, CSAA
Douglas Reynolds, SVP, CIO, Allianz Life
Michael Connolly, CTO, Aetna

2003
Srinivas Koushik, vice president and enterprise CTO of Nationwide
Joe Gauches, EVP, The Hartford
Gary Scholten, CIO, Principal Financial Group
Linda Fraley, VP and CIO of Lincoln National Life
Matthew Piroch, CIO, Highmark Life
David Saul, CIO, Zurich North America
Greg Tranter, VP and CIO for Allmerica Financial
Ed Leveille, VP, CIO, Providence Washington

2002
Billy McCarter, SVP, CIO, Firemans Fund
Paul Donovan, CIO, ING US Financial Services
Bill Levine, EVP, CIO, AXA Financial
Sherry Manetta, SVP, CIO, The Phoenix Companies
Dennis Callahan, SVP, CIO, Guardian Life Ins. Co.
John Sommerwerck, CIO, Erie Insurance Group
Ken Jaffe, EVP, CIO, MetLife Investors
Carl Ascenzo, SVP, CIO, BCBS of Massachusetts

2001
Bob Walters, EVP, CIO, John Hancock Financial
Barbara Koster, SVP, CIO, Prudential Financial
Chuck McCaig, Managing Director, SVP – IT, Chubb
June Drewry, EVP, CIO, Aon Corp.
Steve Yates, President, USAA IT Co.
Ken Barger, CTO, The Hartford
Byrne Chapman, VP-IS, American Family Mutual Ins.
Mark Popolano, CIO, AIG

2000
Leon Billis, EVP, CIO, AXA Client Solutions
Kevin Murray, SVP, CIO, AIG Claim Services
Max Drucker, VP, CIO, eCoverage
Tony Candito, President & CIO, New England Financial IS, SVP, MetLife
George McKinnon, VP, CIO, Nationwide
Christine Modie, EVP, CIO, Mass Mutual
David Annis, CIO, The Hartford
Cecilia Claudio, SVP, CIO, Farmers Group

1999
Bill Friel, CIO, Prudential
Glenn Renwick, CIO, Progressive
Don Walker, CIO, USAA
Judy Campbell, CIO, NY Life
Walt Wojcik, CIO, Northwestern Mutual
Andrea Anania, CIO, Cigna
EP Rogers, CIO, MONY Group
John Hodge, CIO, NAC Re

Posted by Anthony O'Donnell at 09:08 AM | Comments

October 17, 2008

Elite 8 Honoree to Attempt Mt. Everest Summit

Today's four-day I&T Daily coverage of Elite 8 podcasts ends, asymmetrically, with only one of our recorded interviews. We offer you I&T editor Nathan Conz's conversation with Progressive CIO Ray Voelker via podcast, but we share my written profile of CNA's John Golden rather than a podcast.

The profile itself had to be based on written answers to my questions because Mr. Golden was unable to come to the phone for a couple of weeks. His excuse topped any I've heard during my years of persistently knocking on CIO doors: he was climbing a mountain in the Himalayas. Giving new meaning to the term "Executive Summit," Golden is currently training for an attempt to reach the top of Mt. Everest next year both as a personal goal and to benefit wounded veterans.

The story begins about two years ago, when fabled Seattle based climber Ed Viesturs spoke at a CNA leadership meeting. Perhaps the topic had special resonance for a flatlander in Chicago. For whatever reasons, Viesturs presentation fascinated Golden.

Golden had undergone knee surgery about a year earlier. He was still doing intensive therapy and saw mountain climbing as an exciting next step, but also an opportunity to do something for others.

"In my quest to learn about mountain climbing and [develop the] physical capabilities to reach the top of a mountain, I wanted to find a way to give something back," Golden says. "The procedure on my knee was leading-edge transplant surgery instead of an artifical knee. Working with my doctors, we came up with a charity to raise money with my climbing to provide Veterans with funding to have the same type of surgery when returning from combat."

Golden set a goal to climb Everest in spring of 2009 and developed a plan to study techniques, reach the necessary level of physical fitness and build confidence. As part of the plan, Golden summited several peaks, including Mount Rainier (twice), Mount Hood and Mount Shuksan, in the Pacific Northwest; and the 18,490 foot Pico de Orizaba volcano in Mexico. Golden shared these specifics while on his latest climb: Ama Dablam, in the Himalayas.

Ama Dablam does not rank among the highest mountains of the Himalayas, but at about 22,500 feet of elevation, few peaks outside that range surpass it. It is renowned for both its outstanding beauty and its technical difficulty. Impressively, for one who has been climbing for so short a time, Golden summited Ama Dablam earlier this month. Next spring, he will attempt the world's highest mountain.

We often talk about the courage of executives who boldly innovate, defy conventional wisdom or otherwise face greater risks than they have to in order advance their companies' fortunes (and, yes, their careers). We often resort to colorful metaphors to illuminate that courage, such as saying that a bold executive is doing a "balancing act," perhaps "without a safety net." Well, Golden won't have a safety net on Everest—though, he'll at least have the right mixture of belays, anchors and pickets to mitigate his risks. That requires a kind of courage that goes well beyond any boardroom bravado or careerist daring. Golden's endeavor is further ennobled by his embrace of the risks of Everest in order not only to improve himself, but to help others who have suffered for the selfless risks they took.

I don't know what challenges all of our Elite 8 honorees have lived through, so I won't presume to rank them by their heroism, if such a thing were even possible. One, at least, faced combat as the commander of an infantry rifle company. But we can safely say of John Golden that even among the distinguished company of Elite 8 honorees, he has reached new heights, both metaphorically and literally.

Posted by Anthony O'Donnell at 11:14 AM | Comments

October 14, 2008

Steve Wiggins Promotes Business-driven, Forward-thinking Tech Strategy at BCBS of South Carolina

Stephen K. Wiggins, EVP and CIO at Blue Cross Blue Shield of South Carolina, has capitalized on past technology investments, such as those in parallel processing and code generation, to develop an IT operation with repeatable processes and extraordinary capacity.

Download this Podcast

Posted by Nathan Conz at 10:27 AM | Comments

Linda Squires Balances Technology and Operational Roles at N.C. Farm Bureau Mutual

Linda Squires, senior executive, operations and information systems at North Carolina Farm Bureau Mutual Insurance, has turned the carrier’s IT unit into a business-driven technology shop that has made big strides towards modernizing it systems.

Download this Podcast

Posted by Nathan Conz at 10:27 AM | Comments

Chuck Cornelio Oversees IT Evolution at Lincoln Financial

Charles Cornelio, CIO and SVP of shared services at Lincoln Financial Group, has led the carrier’s IT team as it adopts a more centralized organizational model, consolidates it legacy platforms and looks for new IT talent.

Download this Podcast

Posted by Nathan Conz at 10:26 AM | Comments

Raymond Voelker, CIO, Progressive

Ray Voelker Works to Keep Progressive Ahead of the Curve

description/deck: Raymond Voelker, CIO of Progressive Insurance, discusses the new IT projects and strategies behind the carrier’s efforts to handle growth and remain on the cutting edge.

Download this Podcast

Posted by Nathan Conz at 10:23 AM | Comments

October 13, 2008

Bill Jenkins Combines Experience and an Innovative Spirit

Rejecting the false dichotomy of buy-versus-build, Bill Jenkins has leveraged the best of both in Penn National’s systems transformation.

Download this Podcast

Posted by Anthony O'Donnell at 11:08 PM | Comments

Akhil Tripathi Drives Superior Ease of Doing Business at Harleysville

Since 2005, Akhil Tripathi has delivered a state-of-the-art portal, two new policy administration platforms and innovative underwriting capabilities.

Download this Podcast

Posted by Anthony O'Donnell at 11:07 PM | Comments

Jeff Carlson Strives to Make Innovation a Core Competency at AIG American General

Jeff Carlson, EVP and CIO of AIG American General, balances support of the life and annuity carrier’s core legacy applications with the need to foster innovation that can improve product development processes and enhance a multichannel distribution model.

Download this Podcast

Posted by Kathy Burger at 10:58 PM | Comments

Daily Observations: Oct. 13, 2008

Today's American bank holiday will likely make for a slower financial news day, which in the current climate can only be good. Moves to at least partly nationalize banks continued in Europe. In Britain, the Royal Bank of Scotland came under the sovereign's control. European stocks reacted positively to the government actions. Government infusions of cash on both sides of the Atlantic seek to prime the markets.

Just as attempted solutions proliferate, so do efforts to understand why this unprecedented crisis happened in the first place. Newsweek's Robert Samuelson argues that the contribution of subprime mortgages should not be exaggerated. While far from insignificant, the bad debt associated with subprime merely exposed widespread vulnerability owing to the thin capitalization associated with high leverage ratios. The delusion that high debt-to-capital ratios were viable rested, Samuelson writes, on "the presumption…that the MBA types had learned how to 'manage risk.'"

Samuelson's point is vague, but perhaps he means that the "MBA types" ultimately confused the categories of probability and reality. Certainly he alludes to the capacity for rationalistic solutions to oversimplify reality and give a patina of control to the essentially uncontrollable. However, risk management is no illusion, whether one is managing financial portfolios or merely walking down the street. One can do a better or worse job at identifying and mitigating risks. Too many financial institutions have inadequately managed risk, according to guest commentator Jefferson Wells' Joseph Herr, both by taking too narrow a view of risk exposure and failing to recognize the fundamentally dynamic nature of risk.

Posted by Anthony O'Donnell at 11:01 AM | Comments

How Misuse of Risk Modeling Contributed to the Financial Crisis

By Joseph Herr, CFPIM, global director of ERM, Jefferson Wells

For years, nearly every financial services firm in the country has been performing risk modeling activities. However, few are actually managing the risk elements and even fewer are monitoring the entire risk environment. In the case of the current financial crisis, the root cause is most likely a combination of the lack of both disciplines.

In the case of the current financial crisis, it is safe to say that all institutions understood that there was an element of risk associated with practices such as sub-prime lending. Some of those in the industry point blame specifically at the Community Reinvestment Act (CRA) of 1977, while others point blame at predatory lenders, Congress, uneducated borrowers, greed and the housing downturn.

Unfortunately, all of this blame is only Monday morning quarterbacking and reactive thinking. The fact of the matter is that most institutions have a very narrow view of risk management, which captures less than 35 percent of all the risks that could impact their organization negatively. Consequently, a minimum of 65 percent of the risks that could impact their institution negatively are never even identified.

Case in point is that all of the above issues occurred at varying time intervals, especially the CRA, which was enacted in 1977. So why is the crisis happening now? The answer is that the risk environment has changed over time, however in most institutions; the assessment of risk modeling remained constant, never recognizing nor considering the consequences that the changed environment caused. If the financial institutions had developed a proactive risk management process that was embedded into the fiber of each business entity, then not only would the above risk elements had been "modeled," but a remediation plan would have been implemented.

It is time that all institutions redefine the way risk is managed to not only ensure that the root causes are truly mitigated, but also that the environment is monitored to understand when changes occur that may alter the way a risk is managed.

...

About the commentator: Joseph Herr has more than 30 years of operation and business experience, specifically with strategic planning, process improvement, efficiency optimization, quality, risk management and compliance initiatives such as Sarbanes Oxley. He can be reached at 724-333-7051 or via email at joseph_herr@jeffersonwells.com.

Posted at 09:42 AM | Comments

October 10, 2008

Austerity Looms for Insurance Industry

The destination of AIG's subsidiaries remains one of the big questions about the near-time future of the insurance industry. The answer to that question continues to be postponed: as markets plummet worldwide, it's getting more difficult for AIG to find buyers. While the AIG question will ultimately have its resolution, its current status shows just how much of a beating the industry is taking due to insurers' exposure as institutional investors and, in the case of many life insurance companies, as securities lenders. However, as the economy worsens, insurers will increasingly feel the pinch of diminished premium revenue as well.

Insurers' exposure as investors can't help but increase consolidation in the industry as individual insurers' vulnerabilities make them attractive targets for M&A. As Celent's newly released report, "Bad News on the Street: Insurance IT Strategy and the Financial Crisis" puts it, "Companies will combine through government-forced shotgun marriages or voluntary elopements."

The Wall Street Journal reported yesterday that some merger sweet talk recently passed between MetLife and The Hartford, both of which companies' stock has taken a pounding in recent days. Those talks came to nothing, but The Hartford found a sugar daddy in the form of a $2.5 billion investment from Allianz.

Of course the hits insurers are taking from the investment side are only part of the picture. As the Celent report emphasizes, "in any economic contraction, the overall insurance market shrinks. If market turmoil persists, that process will accelerate. The report warns that a

lower revenue stream will worsen an already difficult expense situation. Insurers have been under expense pressures for some time. Across all lines, lower sales mean less revenue to support fixed expenses. To adjust the cost base, companies will reexamine spending, including technology.

As we reported yesterday, insurance IT organizations and technology vendors have reason for optimism. As Accenture's Michael Costonis suggested in our report on IT spending trends, the drop in investment income drives a need for greater profitability; that profitability will be found through improvements such as more sophisticated technology-driven underwriting capabilities and through automation in a variety of areas.

The financial crisis comes in time for insurers to tune their 2009 IT budgets, and that will likely result in some downward revision. Nevertheless, the analyst firm doesn't anticipate any significant cuts:

Carriers know that a large portion of their IT spending is essentially fixed by maintenance requirements, and relief in this category is hard to come by. In addition, projects that span budget cycles cannot be unplugged easily without sacrificing the strategic value that is already partially paid for. The trend in subsequent years may be more open to downward revisions.

Celent backs up its mildly reassuring language with reference to the insurance industry's strong capitalization, exemplified by the U.S. life industry's statutory capital all time high of $281 billion. The report notes that P&C policyholder surplus is declining, but from the record level of $518 billion.

The overall picture is one of increasing austerity. Not only will insurers suffer diminished investment returns and lower premium revenue, they will be under intensified regulatory pressure, Celent asserts:

insurers' mark-to-market practices will come under much higher levels of scrutiny by securities analysts, rating agencies, and regulators. This means that keeping unrealized gains off the balance sheet and impairments out of the income statement will become much harder.

Such strictures seem reasonable enough, as the nation suffers a hangover in reaction to financial wishful thinking and self-serving accounting practices. Indeed, as every day brings new financial calamities and the essential contingency of our prosperity is exposed, austerity may be the best we can hope for.

Posted by Anthony O'Donnell at 09:06 AM | Comments

October 09, 2008

Will Insurers Spend More or Less in 2009?

By Jonathan Steiman, analyst, Financial Services Technology, Datamonitor

As the financial crisis unfolds, technology vendors exposed to the insurance sector are asking one question: will insurers spend more, less or the same on technology in 2009?

There are several factors dampening technology spend next year. First and foremost, investment income has and will likely continue to negatively affect net income. Nearly every investment vehicle – stocks, bonds, real estate – has lost value this year. Additionally, today’s frigid credit market is elevating the cost of capital, further draining profitability. Lastly, an economic downturn will lower the demand for coverage, particularly for life products.

It’s not all doom and gloom, though. Given withering investment income, insurers may tighten their underwriting discipline and begin to raise rates. Such a strategy could reverse the current soft market plaguing the non-life market in general and commercial lines in particular and usher in a period of greater underwriting profitability. Of course, raising rates on already strapped consumers and businesses may prove challenging.

Additionally, IT spending in certain areas may accelerate. Tops on the list are risk management solutions. The models of old are no longer sufficient, as witnessed by AIG. Insurers will be seeking solutions capable of capturing and correlating every risk from every corner of the enterprise. Furthermore, new regulations, which are likely to materialize in the near term, could drive investments in compliance solutions.

Finally, it is important to remember that insurers are relatively strong. Aside from AIG, whose insurance lines are stable, and some mono-line insurers, the industry has not been as badly bruised as the banking sector. For this reason, technology vendors that have offerings across the entire financial services spectrum may turn their attention to insurers. If this happens, insurers will gain immense pricing power that they may exploit. This could drive technology sales in 2009, albeit at the expense of lower margins for vendors.

Posted at 09:33 AM | Comments

Health Insurers Reaching Customers with e-Learning

Health insurers don't need to look any further than the industry of their healthcare provider colleagues to see that consumers are increasingly turning to search engines and the web for healthcare information.

from the NY Times:

At least three-quarters of all Internet users look for health information online, according to the Pew Internet and American Life Project; of those with a high-speed connection, 1 in 9 do health research on a typical day. And 75 percent of online patients with a chronic problem told the researchers that “their last health search affected a decision about how to treat an illness or condition,” according to a Pew Report released last month, “The Engaged E-Patient Population.”

Reliance on the Internet is so prevalent, said the report’s author, Susannah Fox, the associate director at Pew, that “Google is the de facto second opinion” for patients seeking further information after a diagnosis.

As carriers themselves begin entering this fray -- developing online initiatives around educating consumers on the basics of health insurance -- it will be interesting to see if any specific approaches work better than others.

As Peggy Bresnick Kendler reported last week, CIGNA recently launched a public-facing e-learning program that aims to educate consumers on the basics of health care and health insurance. Developed by CIGNA University, the carrier's educational unit, the program revolves around three online learning modules that incorporate various technologies such as streaming video.

If CIGNA's program proves to be successful, I wouldn't be surprised if other health insurers follow the Philadelphia-based carrier's lead. In particular, I expect that CIGNA's decision to make its e-learning modules carrier agnostic (the modules do not specifically market CIGNA-branded products or services).

In another way though, I wonder if an insurer that takes a less regimented approach to its education initiative might also position itself for success. The CIGNA modules are built almost like guided tours. It's an effective way to provide information, but the information within the modules is self-contained. It'd be difficult for a user using Google or another search engine, to find an answer to a very specific health insurance query. In other words, it doesn't lend itself to the very specific ways people are likely to seek out health insurance information.

Look at the aforementioned healthcare industry. Sites like WebMD allow visitors to drill down to specific diseases and ailments. In the same way that people don't go to Google and search for "healthcare information," they don't go to Google and search for "health insurance information". Instead they use search terms like "pneumonia symptoms" and "HSA details."

CIGNA's site is an important step in the right direction as insurers learn the value of establishing themselves as a source for good information. It's only a first step though. If CIGNA can build upon this program with a more search engine friendly repository of health insurance information -- perhaps with a glossary of industry terms, user forums around specific topics or a wiki -- it could turn itself into a trusted source for consumers who, in increasing numbers, are going online to educate themselves on the basics of health insurance before enrolling in a specific plan from a specific carrier.

Posted by Nathan Conz at 08:54 AM | Comments

October 03, 2008

Are Insurers Going Green or Just Greenwashing?

Every company, it seems these days, claims to be a green company, but I've often wondered how true many of those claims really are. For instance, paperless billing and e-payments are sometimes promoted as green initiatives, but can companies with such initiatives really call themselves green when they still conduct large-scale direct mail marketing campaigns?

It's called 'greenwashing' and it was one of many topics covered in "Green IT – Facing the Downside of Moore's Law," a Wednesday afternoon session at CSC's Connect 2008 conference in Lake Buena Vista, Fla.

"If you really look at what companies are doing, you can see that there's a very fine line between what companies think is best for themselves and what the outside world would [consider] greenwashing," said David Moschella, global research director for CSC's Leading Edge Forum Executive Program, who led the led the session.

Things get particularly interesting, Moschella says, when metrics get involved. "If you want to make yourself look like you're improving things and are lowering your carbon footprint, the first thing you want to do is get energy emissions and usage off your books," Moschella explains. "You can simply outsource your data center...to someone else or move it to another country. All that energy will no longer be on your books, but nothing has actually happened."

Moschella's presentation, to me, was eye opening. The green IT issue is one that, as an technology journalist, I have followed for the past couple years. Some insurers are truly working to use less energy and do less harm on the environment. Others though -- and sometimes this is unintentional -- have launched green initiatives without making it a priority.

In other words, just because a carrier says it's a green organization doesn't mean that it is. In fact, Moschella says that around half of all corporate green initiatives are led by marketing departments (note: his stats were not specific to the insurance industry). That's not a bad thing in and of itself, but a marketing department is not positioned nearly as well as an IT department is truly reduce an organization's energy consumption and emissions.

It is a good thing that companies are beginning to realize the importance (and true value) in "going green." Still, most companies -- inside and outside the insurance vertical -- have a long way to go. Until an insurer takes a good hard look at its overall carbon footprint and not just its perceived carbon footprint, it's just greenwashing. Marketing efforts are great, but it's time for everyone to put their money where their mouth is.

Posted by Nathan Conz at 09:38 AM | Comments

Insurers Begin to Show Effects of Financial Crisis

In the world of securities trading, where merely thinking a thing can make it so, Harry Reid's injudicious comments aren't helping. On Wednesday, seeking to underscore the urgency of voting to pass the bailout bill, the Senate Majority Leader said he had learned that an insurance carrier "with a name that everyone knows" was on the verge of bankruptcy. In the wake of is comments, MetLife, Prudential and The Hartford issued defensive statements about their companies' financial strength, while their stock prices continued to drop.

Things may not be anywhere near as bad as Reid suggested — no major insurer has gone bankrupt since Wednesday — but they aren't good. "Investors have painted their latest bull's-eye on the backs of insurers," quips a Wall Street Journal piece that notes that The Hartford's stock "fell 32 percent Thursday alone and is down 70 percent this year."

In terms of stock value, insurers are undoubtedly suffering from the misconceptions arising from AIG's collapse. If that collapse demonstrated anything it was the contrast between the financial soundness of insurance operations relative to banks and securities: the parts of AIG acting as insurance companies, duly regulated, remained healthy as the credit default swapping holding company came a cropper. But these are niceties that tend to escape the notice of the general public. The impression remains that, along with major banks and securities companies, a major insurer was felled by the crisis.

That doesn't mean the insurance industries crisis-related problems aren't serious. Its most obvious exposure is as an institutional investor whose holding are suddenly worth significantly less than previously. And as the Journal article notes, some insurers lend securities in exchange for collateral they invest and can find themselves at a loss if the value of the investments decline. Insurers are also exposed as marketers of variable annuities. This is particularly the case where those annuities are sold with a guaranteed that they will pay out no lower than a stipulated threshold.

As with insurers' institutional investments, variable annuities success or failure depends on insurers' bets on investments to which customers annuities are tied. Insurers have invested heavily in highly complex risk modeling technology that generates a highly sophisticated view of the probability of investment performance. The problem is that probability is just probability.

Reflecting on this potential area of exposure for insurers I called a major life insurer at the beginning of the week to ask, in essence, whether the possibility of major economic downturns were adequately factored into the models powering variable annuities. And even if they were, could annuities business fail to take a hit from such events, if only in the short term?

My contact was unusually reserved in his response and failed to give a satisfactory answer. He said that none of his company's annuities made guarantees as extravagant as those of some competitors, which was true enough, and he implied that this would not be an area of exposure for the company, which I suspect may turn out to be less than entirely accurate.

As the crisis evolves, the fate of variable annuities programs ought to be of interest because it may deliver some important lessons about the limitations of risk modeling. It may be that these instruments will work over the long haul, but it also appears that they could be more risky than anticipated. In the end, risk modeling relies on assumptions about the future based on the past. But predictions are only of probability, and nobody can predict the future. I am reminded of Bertrand Russell's example of the turkey whose assumptions about the farmer were based on his being fed every day. Then came Thanksgiving.

Having emerged to meet the Baby Boomer retirement market during sunny financial times, do variable annuities have excessive optimism built into them? If that is the case, it will be interesting to see what marketers of these products do to address that problem as the retirement market booms and competition intensifies.

Posted by Anthony O'Donnell at 08:51 AM | Comments

October 01, 2008

Thoughts on CSC's New Social Network

A full drum corps section paraded through the opening session of CSC's Connect 2008 conference on Tuesday to help announce the launch of POINT IN J, a Java EE compliant version of the vendor's P&C policy administration system. And with such fanfare, it's not too surprising that another announcement has gone, relatively speaking, unnoticed.

Also on Tuesday morning during the opening session, CSC property & casualty division systems architect Bob Evans and Ray August introduced WikonnecT (a combination of the terms "wiki" and "Connect"), a CSC-hosted social network for its customer community. According to Evans and August, WikonnecT will run on a Sun Microsystems infrastructure and will include blogs, polls, and a feature that will keep customers informed and up-to-date on the latest software enhancements and deliveries. Users will also be able to rate and provide feedback on CSC solutions.

This launch may not impact the industry in as big a way as the POINT IN J launch might. In fact, WikonnecT may not have as big an impact of insurance as WiiConnect might have on video games. Although, I expect that it will more successful that another Wikonnect site, which appears to be a medicinal hemp users group.

Anyway, I'll be very interested to see if CSC's online community takes off.
We could discuss the intriguing capabilities and functionality of WikkonecT but, in my experience, a social network's true value is directly linked to the participation of its users. After all, what's impressive and valuable about a MySpace or a Facebook is its scale. The value of CSC's WikonnecT, I think, will be similarly linked to how many users participate in the social network.

As Novarica principal Chad Hersh suggested to me yesterday while discussing the POINT IN J release, when CSC -- the 800-pound gorilla of the insurance technology space -- makes a move, everyone is bound to take notice. That's true when CSC develops a policy admin system in Java and when it decides to build a social network for its users. Now that a major player like CSC has entered the realm of social networks -- and that's not to say that the concept of creating an online social network is not completely foreign to other business software vendors -- maybe the idea is set to take off.

CSC is one of just a handful of vendors with enough customers and enough products to successfully create such an online community. If it takes off, it could prove to be a valuable tool to insurance carriers seeking peer-to-peer advice on how to best implement and support their CSC systems. It could even serve as a source of information for carriers that are in the midst of an RFP process.

I'm very skeptical as to whether or not CSC's customers will embrace WikonnecT. In general, most efforts like this do not end up achieving the desired results. For every successful Facebook or Wikipedia, there are many more similar ventures that have failed. However, for the few that do succeed -- we've learned with more mainstream Web 2.0 endeavors -- the heights of success and possibility are nearly limitless.

Posted by Nathan Conz at 02:56 PM | Comments

Drivers Fear Big Brother

The success that Progressive claims to be having having with its MyRate program may indicate some kind of softening on the part of consumers toward having their driving monitored. It may be that taking location monitoring out of the picture will reassure a sufficient number of drivers to make such programs viable. However, insurers should be aware that Americans' "Big Brother" fears are alive and well when considering launching similar programs.

A writer named Edgeling details his misgivings about telematics in an entertaining and informative essay. The author describes the decision of a consumer named Scott Weires to forego buying a coveted Nissan GT-R. The car is everything he had hoped for, but he backs out of a deal when he discovers that it comes with a "black box" electronic data recorder that transmits telemetry allowing others to monitor his driving.

While acknowledging the utility of the technology, Edgeling smells a rat:

It also sounds pretty benign, even useful. But unlike Scott Weires, I’m a technology guy — and I have a very acute sense of how seemingly harmless new technologies have a tendency to metastasize into something far nastier and, usually, end up invading our privacy or diminishing our freedoms. And, perhaps due to my own driving history, the story of Weires and his Black Box had sirens going off in my head.

Posted by Anthony O'Donnell at 07:38 AM | Comments

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