By Paul Camille Bentz, former CIO, AGF-Allianz
Three primary factors together shape the current insurance business environment.
First, a precipitous drop in investment income due to the recent liquidity crisis has put intense pressure on insurance companies to find new sources of revenue and margin growth. Second, and related, the new (and evolving) capital reserve regulations for financial institutions severely constrain earning potential by restricting leverage. Third, the crisis has left us with plenty of regulatory uncertainty. In the United States, there is uncertainty about health care reform and regulation over banking and financial services. In Europe, the debate on how to apportion the public and private burden of health insurance continues to evolve, causing business and regulatory uncertainty.Intense M&A Pressure
A reflexive response to uncertainty is to keep a tight rein over costs, placing a premium on margin growth, not simply revenue growth. In such an environment, companies that have the scale and are fortunate enough to be cash rich will continue to grow revenue and margin through M&A. Scale is vital to penetrate new networks of customers across geographies and along value chains, handle the more stringent capital requirements, manage the regulatory uncertainty, and squeeze out costs.
As the insurance industry experts at Towers Perrin observe, "We expect insurers to consolidate for scale and diversification, adding product lines and management talent. However, given the well-publicized difficulties companies are having borrowing and raising capital, deals are likely to be limited to those that are already cash rich or have special access to financing."
M&A, while essential for meeting business objectives, adds a substantial amount of complexity to an already complex set of insurance applications. When companies merge their systems, they usually end up with multiple systems for the same product. The reason for this unwanted multiplicity of systems lies in the nature of insurance contracts. Contracts for the same product are written differently by different companies. Even minor differences in contract period, legal covenants, or other details can mean substantial differences in administrative, legal, and claim management processes. This means maintaining separate systems until one of the products can be "run off," in other words, stopped from being sold further.
The Promise of Untapped Organic Growth
Another promising avenue for increasing revenue and profit margin is to increase the cross-sell ratio - i.e., the number of products sold per customer - based on known customer preferences and behavioral patterns. Applications that mine customer data for these patterns are already widely used in claims management and pricing applications. This information provides insurers with intelligence that enables them to better segment and market their products to existing customers.
Cross-selling requires ties between different applications, each with their own hardware, databases and application servers. This increases the dependencies that applications have on others in the portfolio - dependencies on data, interfaces, functionality and infrastructure.
What This Means for the IT Portfolio
To support these business initiatives, insurance IT must rapidly develop new products and open connections (data, transaction documents and business functionality) between existing products.
However, certain characteristics of the existing insurance IT portfolio make it very difficult to do what's necessary to achieve business goals.
In Part II of this three-part series I will describe these characteristics and explain how they impede the achievement of the pressing business goals.
About the Author: Paul Camille Bentz joined AGF in April 2000 to head the IT organization following the merger of three insurance companies acquired by Allianz. The merger was followed by a rationalization program to reduce dramatically the costs of IT while delivering new solutions. He then served as Regional CIO for Allianz, advisor to the Chairman of AGF, and member of the Allianz Executive Board. Before AGF, Paul was CIO of Paribas, where he implemented a global organization with more than 2100 staff worldwide to support all the business areas of the Investment Bank. Paul also served in IT leadership roles for Credit Lyonnais and Air Liquide in several European countries over the course of ten years. He retired from Allianz in 2007 and now runs his own consulting company, while spending time with his wife, three children and three grandchildren. He can be reached at [email protected] .A reflexive response to uncertainty is to keep a tight rein over costs, placing a premium on margin growth, not simply revenue growth. In such an environment, companies that have the scale and are fortunate enough to be cash rich will continue to grow revenue and margin through M&A.