"The role of an insurance CEO is highly visible and extremely difficult," says Patricia Tilton, a partner with KPMG LLP (New York), in what might be one of the understatements of the year. That's not to say that CEOs are the only executives under scrutiny: The role of the CIOthe trusted partner of an insurer's business executivesis no cakewalk, either.
In fact, at a time when mounting economic, regulatory, accountability and financial pressures are causing all eyes to be focused on the CEO, the eyes of insurance technology executives should be the most firmly fixed. Considering that, according to John Santucci, president, Siena Group, LTD. (Arlington Heights, IL), most IT executive steering committees include the heads of business units, but not the CEO. In order to get a broader sense of the challenges facing the the entire enterprise, rather than just single-unit views, CIOs should look to the challenges their CEOs are facing and provide solutions that illustrate business value, according to Mark Jeffery, assistant professor of technology at the Kellogg School of Management, Northwestern University (Chicago).
Seeking New Revenue Sources
"[CEOs] are continually challenged on many fronts," relates Glenn Renwick, who is the current CEO and former CIO of Progressive Insurance (Mayfield Village, OH). However, there is one challenge that is particularly pressing today. "My focus is always on making certain that our rates and reserves are adequate," Renwick says. P&C CEOs, such as Renwick, are increasingly forced to contend with their underwriting capabilities because of a drop in investment income coupled with the hard P&C market. "Insurers relied heavily upon investments to offset underwriting losses," relates Bill Pieroni, general manager, global insurance, IBM (Armonk, NY) "The P&C market has not realized anunderwriting profit since the mid '70s. So there is a lot of pressure on CEOs as they think about replacing investment income."
Additionally, many insurance chief executives, feeling the after-effects of the 9/11 terrorist attacks, are concentrating on exposure analysis, according to KPMG's Tilton.
A related issue also keeping insurance CEOs up at night is financial accountability. The SEC's corporate governance rules, as contained in the Sarbanes-Oxley Act, is topping the CEO list of challenges, Tilton points out. Among Sarbanes-Oxley's provisions are that CEOs of public companies sign-off on all financial statements.
The regulatory hurdle of USA PATRIOT Act compliance is also challenging insurance CEOs, because proposed requirements leave room for interpretation. Although agents and brokers are not required to comply with anti-money laundering programs and procedures, management must decide whether or not it wants to invest in including the producer community in such programs, or potentially expose the firm to vulnerabilities. On top of this, with the stock market unlikely to reach its pre-slump heights of the late '90s for some time, CEOs of public companies are having to deal with shareholder expectations of returns that are difficult to obtain, Tilton notes.
No oneespecially not today's generation of IT executives, who have marketing or finance backgrounds almost as often as they boast computer science degreesbelieves that these are strictly business problems. Given the integral role IT plays in the business, the CIO is often on the front lines helping the CEO develop a winning strategy. A CIO's best approach for aiding struggling CEOs is not new. "CIOs can help by staying on top of the business and knowing the ROI of their contributions," says Tilton.
No matter the challenge, insurance technologists should also strive to create efficiencies. "It sounds simplistic but it's key," says Renwick. "CIOs need to present ideas that support overall goals and have a real business payback." Progressive's IT governance paradigm includes an enterprise CIO, Ray Voelker, who is responsible for the carrier's core technology groups. Additionally, the CIO works with a smaller group of technology managers who report through Progressive's business leaders, relates Renwick. "This model allows us to have direct accountability to the business leaders while preserving a single IT budget, technical environment and culture." According to Renwick, the model is successful particularly because it utilizes a single IT budget. "It gives us a mechanism for understanding where our IT dollars are going and provides a catalyst for discussing cross-business-unit priorities," he says.
Perhaps because its CEO is a former CIO, Progressive's model is conducive to tracking IT dollars and establishing accountability for the ROI that projects bring. However, according to a Kellogg School/DiamondCluster Portfolio Management Study (see related article on this page), many CIOs lack the financial skills necessary to quantify the benefits of technology initiatives, both before and after a project's completion. This creates a challenge because the ability to quantify returns is crucial, especially when it comes to illustrating the value of IT to the CEO. Although there are still many technology executives who have worked their way through the IT ranks with minimal (if any) business background, a lack of formal business education is not necessarily at the root of the problem. "CIOs tend to be pretty educated, they have MBAs and understand finance," observes the Kellogg School's Jeffery. However, "they don't necessarily understand the nuances of how finance is applied in the IT context."
It takes more sophistication to put together a business case for IT than for other areas of the business, Jeffery stresses, due to the rapid pace of technology change and its breadth of impact.
The studywhich is based on a survey of 130 senior IT executives who invest $230 million on average per year on ITfound that shifting project and enterprise goals contribute to the challenge of aligning IT with the business. Study participants were broken into three categories based on the sophistication of their portfolio management strategies: Portfolio Defined Companies, Portfolio Managed Companies and Portfolio Optimized Companies. Portfolio Optimized Companiesthose with the most sophisticated strategiesillustrated discipline in getting feedback from business unit heads to ensure that IT efforts stayed aligned with the company's strategy.
"Having a dialogue [with the CEO] is absolutely essential in companies where IT is driving strategy," according to Jeffery. Additionally, when communicating with the CEO, results were most effective when the technology leaders spoke to senior executives in terms they could understand. "[CEO's] understand ROI," explains Jeffery. He suggests that when discussing projects with the CEO, CIOs illustrate the expected ROI by plotting a project's benefit and risk estimation.
Still, Jeffery acknowledges that as CIOs strive for portfolio management excellence, some will run into difficulties. As a response to this eventuality, Northwestern's Kellogg School has established an executive program aimed at bringing IT professionals up-to-speed on the portfolio management and financial skills needed to define projects.
Three Stages of Portfolio Management Adoption
Highlights from the Kellogg School/DiamondCluster Portfolio Management Study:
Stage One: Portfolio Defined-Companies at this stage have defined and documented the key components of the enterprise IT portfolio and have high-level estimates of costs and benefits of each element. Project data is codified and logged in a central database. The IT department has standardized methods for developing and prioritizing investment proposals, has central budget oversight and most likely a central project management office.
Stage Two: Portfolio Managed-These companies have implemented periodic portfolio reviews with quantified investment feedback. They apply greater discipline to and exercise greater control over the IT investment decision-making process. New initiatives are screened, categorized and prioritized within a portfolio context. Most important, data exists to compare current performance against projections and historical baselines. Financial metrics such as return on investment and net present value are consistently calculated.
Stage Three: Portfolio Optimized-The most savvy IT management teams distinguish themselves by their ability to balance and optimize the IT portfolio, and track earned value through the full life cycle of each project or asset. They also take into account option value and measure both project and portfolio risk to maximize the aggregate value of their IT investments. In addition, these companies are disciplined in getting feedback from business unit heads.