Spending for Profit

While the events of September 11 alone resulted in the greatest property insurance catastrophe in history, the combination of that day with the already failing economy have placed tremendous pressure on the handling of financial management for insurance companies.

Now, more than ever, insolvency is a serious threat for insurers, and according to Tim B. Plunkett, CPCU, director of financial services, Lawson Software (St. Paul, MN), a provider of financial, human resource, procurement distribution, customer relationship management, services automation systems and analytic software solutions. "Some insurers wont survive. The companies that do, however, will be bigger and stronger than ever."

As a result, companies are being forced to act fast. "The events of September 11 had a significant impact on spending," says David Holtzman, partner, business consulting, Andersen (Chicago). "Companies have taken a step back and rethought their IT budgets."

According to Lawson's Plunkett, ROI is more important than ever. "If ROI is more than 12 months, insurance companies are not interested," says Plunkett. "Projects that have a long ROI are being stopped."

Financial Technologies to Watch

Since the terrorist attacks on America, according to Bill Stone, chairman, president and CEO, SS&C (Windsor, CT), a provider of software, consulting and application outsourcing services to institutional asset management, loan management and property management industries, P&C carriers especially have been requesting things like dynamic financial analysis systems, which allow for more data and information that management can use to make decisions and gauge profitability and revenue growth. "P&C companies need to be able to forecast financial results with some confidence on a high-to-low basis," says Plunkett, who explains that point-estimate systems were used in the past. "Point estimates show we will have x amount of revenue and y amount of income. What dynamic financial analysis says is revenue is between x and y and we will be between a and b in income, and here are the probabilities that we do x, x+10 percent and x+20 percent."

A trend among life insurance carriers, according to SS&C's Stone, is a drive for yield on investment portfolios. "The life industry has gone pretty heavily for variable annuities and fixed rate annuities," says Stone. "Those annuities need to be supported by investments that not only pay the crediting rate but allow the company to pay for expenses and earn a profit," says Stone who explains that given the drop in interest rates, carriers can not find instruments that yield an adequate amount to pay for the crediting rate. "There is a big squeeze on the investment side of life insurance companies."

Profitability, no matter what line a carrier underwrites, is what most companies seeking financial management systems are looking for these days. According to Plunkett, insurers are looking towards the use of analytics to identify things like geographic differences in products and the most profitable agents, brokers and customers. "They are looking to identify positive and negative trends in order to take the proper action," he says.

The popularity of business intelligence and analytic tools is a natural migration, according to Louise Stonehouse, director of strategy for insurance, Peoplesoft (Pleasanton, CA), a provider of enterprise application software, including human resource management, financial management and enterprise performance management. "First companies had their legacy systems, then they had the ability to get information from the legacy," explains Stonehouse. "Now they are overloaded with information and can't use it in an effective way to help them manage their business better."

An increase in mergers, acquisitions and the convergence of financial services, according to Lawson's Plunkett, also accounts for the trend of carriers seeking analytic tools as well as financial analysis systems. "There is a huge need to provide general ledgers," says Plunkett. "The quicker companies get their financial management systems together after a merger, the more successful they will be."

The globalization of insurance companies is causing more carriers to seek more scalable systems. "We are seeing a real increase in globalization," says Scott Ferrante, chief operating officer of investment systems provider Princeton Financial Systems Inc. (Princeton, NJ). "Clients that we started doing business with in North America, we are now working with in Asia. Increasingly, companies are not looking to a vendor just to buy software, they are looking to a partner that can provide a variety of services worldwide." Ferrante concedes that this can sometimes be challenging. "With these larger worldwide organizations its very much not a cookie cutter approach to a solution, you have to work hard to find the best approach," he explains. "You must bring together a product and/or service to meet their needs and then provide them tools to leverage it."

Web-based Systems for Global Companies

Since their emergence about four or five years ago, interest in Web-based systems continues to grow. "Companies are finding that the Web lets them take new financial systems and spread them across all of the organization," says Plunkett. "There is decentralization going on and no longer is business conducted in only one building." One of the major advantages of Web-based systems is real-time access. "Previously it could be 30 days after the close of the quarter before a financial report could be generated," says Plunkett. "Now companies have real-time analysis."

Standardization is becoming more desirable with the consolidation of companies, according to Plunkett. "I think with the tragedy we will see companies getting back to basics, and standard is key." Standardization in globalization, however, is becoming exceedingly difficult. "Everywhere you go there is a different regulator with a different set of rules so you have to define what's acceptable risk and appropriate accounting for instance," says SS&C's Stone. "If you are a software vendor it is really difficult to make sure that your system is flexible enough to handle the different structures around the world."

Looking forward to next year, profitability, naturally, will still be a priority with insurance companies seeking financial management systems. So a major challenge for financial management technology vendors will continue to be providing systems that will cut costs. Stone cites it as one of the major pressures he feels from insurance clients. "There is a tremendous drive in insurance to control costs so we are constantly coming up with processes and programs to help companies reduce costs and to effectively use technology," he says. "We are automating more processes and delivering more exception-based processing rather than having every individual item manually checked."

The use of analytics to identify profitability will continue to grow. "Insurance companies will take financial information and change that into product, customer and company profitability," says Andersen's Holtzman. "Right now companies know what products are contributing to their bottom line. But they are not as sure as they could be."

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FINANCIAL MANAGEMENT SYSTEMS: Key Trends and Challenges

-- Carriers are looking for ROI of nine to 12 months and are stopping projects with ROI longer than one year.

-- Among life insurance carriers, there is a strong drive for yield on investment portfolios.

-- Property & casualty insurance companies are requesting dynamic financial analysis systems.

-- The use of analytics technology to identify the most profitable geographic regions, agents and customers.

-- Insurance companies are seeking scalability in a financial management system to support globalization.

-- The use of Web-based systems to more easily spread across decentralized insurance organizations.

-- Although difficult to achieve, especially globally, insurance companies are requesting that vendors providestandardization in financial management systems.

-- Trends of seeking greater profitability through the use of analytics will continue on into 2002.