Many of the major areas of focus for senior insurance technology executives in the coming year will be familiar ones that have become even more pressing. For example, security concerns still hang like Damocles' sword above tech execs, and outsourcing and regulatory compliance efforts will proceed within an increasingly charged political environment. Among other top issues, a riskier world will continue to push ongoing improvements in underwriting as well as a new focus on enterprise risk management, and as the buy-rather-than-build trend continues, technology customers face a consolidated marketplace.
BPO: The Next Step in Outsourcing
Outsourcing has gained acceptance in the insurance industry, but primarily in the application development and support arena and mainly with domestic providers. In the coming years, however, insurers will boost their offshore outsourcing activities and increasingly dip a toe into business process outsourcing (BPO).
An optimistic attitude among outsourcing providers is a good sign that BPO opportunities are expanding. "We have seen a shift in the way offshoring is looked at - not only as an automation or system support service, but also as a provider of high-value service," says Ravi Bommakanti, head of the insurance practice at Satyam (Qutubullapur Mandal), an India-based provider of offshoring services.
Still, insurers likely will take some time to warm to the idea of BPO. "We don't see any major players going for any major BPO deals just yet," says Ram Mynampati, president, commercial and healthcare business, Satyam. "We have [seen] a growing need for outsourcing in the data warehousing area to provide a clear compliance viewpoint and a better grip on operations, as well as a lot of demand in the claims processing area and a need for standard products to be customized, including many PeopleSoft [Pleasanton, Calif.] and SAP [Waldorf, Germany]-based implementation upgrades."
According to Boston-based service provider FirstNotice Systems, the biggest upsurge in demand for outsourcing services is in the claims servicing area. "Many insurers handle claims identically, no matter the complexity, and some companies like IBM are out there with the concept of express claims," says Greg Powers, vice president, sales and business development, First-Notice. "We will be providing services that follow this notion as well, differentiating the levels of claims and improving processes from the first notice of loss through the claim life cycle."
While Satyam expects offshoring to gain momentum and the vendor will continue to provide both application support and high-value BPO offshoring services, FirstNotice is taking on the cautious insurance industry by providing domestic customer-facing functions, such as running call centers. "We are taking a more reserved approach because there is nothing more taxing to a vendor-carrier relationship than hurting customer relations," relates Powers. However, the vendor is beginning an offshore initiative in Nova Scotia to take advantage of that province's well-educated workforce and high customer-retention rate.
Accenture (New York) has found that more forward-thinking companies are considering both onshore and offshore components of outsourcing from a diversification-of-risk perspective. "Companies are increasingly looking to secure strategic partnerships with multiple providers and leverage a multicountry outsourcing model," says Glenn A. Sieber, global managing partner, Accenture Insurance Practice. This helps them "guard against things like demographic and geopolitical risk."
Sieber explains that outsourcing is at an "inflection point" - the insurance industry has been experimenting with outsourcing for the past few years, but insurers are concerned with the retention of knowledge when it comes to BPO. "Insurers are a bit behind other financial services companies because they need to maintain a level of control over their differentiators in the market," he says. While the insurance industry weighs the advantages of BPO, Sieber continues, providers are preparing for the BPO space to take off. "We and other providers are continuing to broaden our skill sets," he says. -Wendy Toth
A Single View of Risk
As in so many other aspects of running an insurance enterprise, achieving a comprehensive view of risk is an elusive goal. Traditionally, risk management has been siloed, oriented to lines of business. But that's an increasingly indefensible approach.
Without a consolidated view of risk, "a major event, such as Enron or a catastrophe, can put a large insurance organization in a very precarious position," says David Holtzman, insurance practice leader at New York-based BusinessEdge Solutions. "We've started to see a number of organizations begin to tackle the concept of enterprise risk management - mostly P&C organizations," he adds.
The overall goal of enterprise risk management (ERM) is to improve a company's ability to manage exposure and evaluate risk at all levels, across its entire client base, more frequently, with greater accuracy and to a higher level of granularity, according to Holztman. "By putting this capability in place, these organizations can be more proactive in making critical decisions, such as a change in premiums based on the change in risk or re-alignment of the reinsurance contracts they have in place," he says.
During the past year, insurers spent a lot of time meeting Sarbanes-Oxley's Section 404 requirements. But in the coming months, it will be the act's Section 409 that will further push enterprise risk questions as it requires companies to notify the SEC of a "material event" within 48 hours, Holtzman observes. "The heart of addressing this issue will be to build the capability to consolidate this information across the enterprise in an efficient and effective manner and put the tools in place to make critical decisions on it," he asserts.
That's easier said than done, Holtzman continues. "It typically means going back to multiple source systems, automating the process to facilitate interaction across the lines of business, automating account aggregation and calculations, and appending D&B rating and other financial information - followed by building an enterprise repository to hold the enterprise-level information." Once this model is completed, carriers need to create the analytical capabilities to slice and dice the enterprise information to perform "what if" analysis.
Achieving these capabilities allows a carrier to proactively handle risk, Holtzman affirms. But, he says, it can take nine to 12 months to build the systems. -Anthony O'Donnell
Mobility Goes Mainstream
Last year, the remote worker program at AT&T saved the company more than $180 million in operating costs. Subsequently, AT&T predicts that the construction of virtual offices through the use of broadband and VoIP technologies will drive the adoption of mobile technologies in coming years. "Telework is something that should be used as a business continuity tool," says Joseph Roitz, telework director, AT&T. "It is a smart idea for any business to go remote rather than rely on tying the operation to a building." Savings can come from an upsurge in productivity and a downsurge in real estate costs for companies that can run smaller offices.
"Through VoIP technology, for the first time remote employees may actually have more voice functionality than in-office employees, at a cost savings to the companies," relates Roitz. "IP is the Pac-Man that'll eat everything."
In coming years, AT&T sees VoIP transforming into "services over IP," relates Joyce Van Duzer, an AT&T spokesperson. "We see a natural extension to unified communications, including integration of data, video and voice over the IP network.
HUB International Barton Limited (formerly Barton Insurance; British Columbia) prefers the mobility of a wireless network for sales benefits rather than general worker productivity or real estate savings. "Our sales team can take our point-of-sale process on the road to car dealerships, log on to the corporate VPN wirelessly and process an auto insurance sale within five to 10 minutes, while the customer waits," explains Brad Henry, the carrier's director of IT. Through the use of a Sierra Wireless AirCard 555s operating on a CDMA 1XRRT network, with IBM ThinkPad notebook computers, HUB has increased its overall revenue by 7 percent to 10 percent, according to the insurer.
"Our technology is specifically targeted at securing new car insurance transactions on the spot, allowing the customer to drive away from the dealership fully insured," says Henry. In the future, the wireless technology may facilitate new product and servicing opportunities for the insurer. "With the ability to go to the customer and complete a transaction, we are able to leverage many more opportunities, including a future consideration: construction insurance," says Henry. -W.T.
Insurers of all types and sizes will face new compliance challenges in the coming year. In response, they will need to ensure their abilities to find and deliver accurate information. "We've seen scrutiny being applied to commercial insurance through large brokerage firms and believe that will extend to all aspects of personal and commercial insurance," says Dan Oakley, director of thought leadership for Ernst & Young's (New York) financial services practice. "All companies should be prepared to examine their distribution systems and their incentive and compensation programs, and be able to demonstrate that there are no conflicts of interest present."
According to Oakley, insurers already are overwhelmed by information requests from state attorneys general and departments of insurance. As a result, he predicts that insurers will spend much of 2005 catching up with existing requests.
Since they can't change the law, points out Lenore Marema, vice president of industry and regulatory affairs, Property Casualty Insurers Association of America (PCI; Des Plaines, Ill.), insurers should look for technical and operational efficiencies by implementing a common platform across states. Her solution: the National Association of Insurance Commissioners' (NAIC; Kansas City) System for Electronic Rate and Form Filing (SERFF), which offers a decentralized, point-to-point, Web-based electronic filing system among regulators and insurance companies through a platform provided by Integrated Corporate Solutions (ICS; Overland Park, Kan.). "The drawback," says Marema, "is that a large part of the industry doesn't use it." Many insurers are unwilling to pay licensing costs and point out that this system is simply a "speed to destination" system rather than a "speed to market" system, according to Marema. "This system is designed by and for regulators, so it allows insurers to automate the state filing system without wasting front-end time or shifting resources," continues Marema.
More than state-level filing, E&Y's Oakley explains, distribution systems will require more transparency because the burden of providing downstream clients with information will shift away from national brokers to the insurance companies. "Brokers aren't going away, but distribution systems are going to be less opaque than before, due to this surge in regulatory scrutiny," says Oakley. "Insurers should think about how to have better insight and awareness of their networks and payments thereof." -W.T.
The idea of analyzing customer behavior to increase revenue-generating opportunities, or customer relationship management, is far from new. But advancing technologies are helping to update the business standard. "I see some revenue-generation progress as insurers look to do a better job of developing a customer by finding ways to generate better leads and to help producers seek and acquire new clients," says Rick Berry, principal, Tillinghast-Towers Perrin, a New York-based adviser to the financial services industry. The biggest challenge may be adapting to new channels.
Acting on the belief that, in addition to relying on the Internet as a research tool, consumers are increasingly using the Web to make purchases and manage their finances, Progressive Insurance (Mayfield Village, Ohio; $11.9 billion in written premium) hopes to attract and retain customers with a reliable, functional online tool for insurance. Progressive, which also markets to consumers through independent agents with the Drive Insurance from Progressive brand, launched driveinsurance.com, which allows consumers to obtain a rate quote and find a local agent to finish the sale.
The site, run on a Microsoft .NET platform, allows customers to access their policies; view and print documents and quote changes; and track claims. "However, customers are prevented from making significant policy-level changes, such as changing liability limits," says Matthew Collister, spokesperson for Progressive. "Instead, the site refers them to their agent, because agents have told us that they prefer to counsel their customers personally before making that type of change."
Another Progressive site, for-agentsonly.com, is agency-dedicated and allows desktop-based agency systems to access policy information in real time, according to the insurer. "We've worked closely with management system vendors to provide links to policy information for our vendor Web site and look to expand such functionality to help agents save time and effort when they sell and service," says Progressive's Collister. -W.T.
Secure Identity for Secure Data
As technology and security become exceedingly sophisticated, the people in charge of them become increasingly vital to their success. "Even though we tend to look at technology as a compartment within itself - the underlying issues, the integrity issues - are the people," says Jim Wade, former president and director of the board for the International Information Systems Security Certification Consortium (ISC; Palm Harbor, Fla.) and former CSO for the U.S. Federal Reserve System. "Within the PATRIOT Act, we have to know who is accessing our system, from customer, employee and strategic-partner standpoints." The key to secure control, he suggests, is authorization of access.
"One technology solution that we have seen grow in the past two to three years and [which] should continue to grow over the next decade is identity management," notes Wade, who uses "Three I's" to highlight the areas of information security that financial companies should concentrate on in 2005: insiders, integrity and infrastructure. Wade explains that as companies continue to address fraud down at the account level, criminals will look to exploit insiders who may know where the holes in the system lie. Wade also emphasizes the integrity of operating systems, applications, network components and security mechanisms. "This is what we've been struggling with in the area of patch management; worms, Trojan horses and viruses continue to slip by as we continue to become increasingly dependent on the interconnectivity of the Internet," he says.
The third "I," infrastructure, presents a challenge because it is ever-expanding, Wade says. "Within corporate America, we've gone away from what we traditionally felt we had a handle on - a hard perimeter," says Wade. "Corporations and government oraganizations have been working toward hardening their perimeters so they can protect things at the boundaries of their infrastructures. But due to relationships with partners, employees and customers, our infrastructures are interconnected and almost without boundaries."
This is leading companies to protect information on the data level. While Wade declines to mention specific vendors, he says that "Enterprises should be looking for a solution that identifies which data is most critical or sensitive and protects the data on different levels across the enterprise." One solution, he adds, is identity management technology, which allows insurers to raise the integrity level of their data by limiting access to it. -W.T.
The Insurance Software Market - Who Will Survive?
As technology spending rebounds and insurers move to update or replace legacy systems, the structure of the insurance software market is changing. "There is a shift in business process management (BPM) software vendors from a horizontal to a vertical" focus, says Kimberly Harris, vice president and research director, Gartner (Stamford, Conn.). "BPM vendors are now going into insurance-specific areas or offering applications for things like claims management or exception-based underwriting."
This new market activity is attracting startups like Guidewire (San Mateo, Calif.), which has gained traction in the past 12 months, according to Harris, and larger companies like SAP (Waldorf, Germany) that have never truly been insurance applications providers but have taken their expertise in financial processes and HR and have built insurance applications. "Companies specializing in niche areas like underwriting and predictive modeling tools are under pressure to look at whether they should continue on as a free-standing product provider or become part of a larger comprehensive suite," relates Harris. "This means pressure in the next 12 to 18 months for consolidation, so some of the smaller players may be engulfed into larger companies."
On the other end of that dynamic is pressure for large applications providers to offer components of their suites so that customers do not have to buy tools they don't need. "We are expecting suites to be more componentized than ever before, so customers have more options to buy what they need and will not have to overbuy," says Harris.
The other big pressure on software providers is the need to use open standards to improve their ability to integrate with existing technologies and systems, according to Harris. "Vendors need to invest in underlying technologies to ensure that they can integrate with insurers' systems or other vendor technologies ... so that it is almost creating cooperation rather than competition among some vendors," she says.
One of these vendors is PureEdge Solutions (British Columbia), an e-forms solutions vendor. "We get a lot of inquiries from other vendors looking to build our electronic forms platform into their products to help grow their companies," says Paul Chan, vice president of marketing for PureEdge. "That means we need to make sure we are plug-and-play with open standards for all of these systems to be integrated easily," he adds. "No one would want to deal with us otherwise." -W.T.
Automation: The Underwriting Frontier
Even as effective underwriting has become more important to insurers' bottom lines, conditions for achieving it have become less favorable. In addition to declining investment yields, forces such as war, terrorism and natural catastrophes have conspired against profitability in the P&C industry. At the same time, the ranks of experienced underwriters continue to dwindle. However, emerging technologies give reason for optimism.
"Predictive modeling applied to underwriting practices offers carriers a way to utilize and preserve the knowledge of current underwriters before they retire," argues Dax Craig, CEO of Denver-based Valen Technologies. "Carriers who use predictive modeling software have already seen dramatic loss ratio improvements in excess of 10 points." The guts of predictive modeling are high-level algorithms, Craig explains. These algorithms automatically build risk models using historical policy, claims, underwriting, loss control and application data.
Predictive modeling gives underwriters a "fighting chance" to price risk consistently, says Gary Kaplan, chief underwriting officer of Zurich Financial Services subsidiary Zurich North America (Zurich; $9 billion in 2003 net written premium and policy fees) and head of the carrier's underwriting Technical Center (see article, page 50). But, through the use of technology, Zurich aims to give its underwriters more than just a fighting chance.
"We're working hard at looking at information in the context of the overall underwriting process and how to insert a systematic method in a way that makes it efficient for the underwriters," says Rick Harold, director of workstation development within Zurich's Technical Center.
"There's more of a question of making the relevant pieces of information that are part of the process easily accessible so that underwriters can effectively access all sub-parts of the analysis that deal with the question of price," he says. For the remaining tasks, Harold adds, users can "then apply their underwriting knowledge to the rest of the information to draw conclusions in a more efficient way." -A.O.
Intelligent Workforce Growth
IT staffers can expect steady growth in hiring, "but not an explosion," according to Terry Phillips, branch manager, Robert Half Technology (Menlo Park, Calif.). The firm's 2004 IT Hiring Index and Skills Report, which includes responses from more than 1,400 CIOs from a stratified random sample of U.S. companies with 100 or more employees, found that 17 percent of executives polled in the financial, insurance and real estate sectors plan to add IT staff early next year; just 6 percent anticipate cutbacks.
"A lot of what is happening is because of the recession we were in for the last few years," says Phillips. "During those years companies stopped upgrading technology. But, with the recent uptick in the economy, we've seen a paradigm shift."
In the past, Phillips says, most firms would have built proprietary, customized enterprise planning technology, or put time and money into restructured software. But manufacturers have helped shape a more recent trend by building customization choices into their software. "More firms are changing their systems to comply with software more than vice versa," says Phillips. This presents both cost savings and competitive advantage opportunities to companies that reengineer toward the business process rather than legacy technology.
"What flexible software brings from a demand standpoint is an increased need for workers to have business analysis and functional skill sets, like business intelligence with decision support, systems querying, data mining and statistical analysis reporting instead of just programming," says Philips. This need will cover architects and project managers, and will possibly open up solid contracting possibilities to installation workers and consultants that can assist companies looking to roll out new technology quickly.
Skills in demand, according to Phillips, will include knowledge of viruses and security as well as "specific platforms that are catching fire, such as Linux and open system computing." The continued development of systems on .NET, Java and J2EE platforms means companies are expected to reinvest in Web-based technologies and in employees with the ability to expand and support them. "Top skill sets for the coming year are those that have the ability to impact the bottom line and can be traced to either a revenue-generating process or to cost savings," relates Phillips.