What impact has more than 40 years of information processing automation had on the insurance industry? One could argue that the computerization of an industry that relies almost entirely on the processing of data and information would have produced a significant level of success in that amount of time. To be sure, carriers have made use of a wide range of hardware and software innovations to automate the processes that are the mainstays of insurance operations. The speed improvements in some operations were dozens if not hundreds of times faster than previous manual processing speeds. However, as previous TowerGroup research has shown, simply automating existing procedures will generate some improvements, but not necessarily optimal results.
It has been said that insurers operate in business models that protect them from the broader impacts of their business decisions. The repetition of the underwriting cycle in the P&C industry basically supports this observation with each subsequent hard market. And the inevitable decline of those markets into soft ones also raises the question for insurers of what can be done to prevent the cycle from occurring again. And yet, as soon as the tide rises again, the concerns seem to go away.
In the life insurance business, the ascent of investment-oriented products has made carriers much more susceptible to the rise and fall of markets than they used to be when whole life and term insurance were the rule of the day. Thin margins are perpetuated as products are sold through an increasing number of channels, and efficiency must be achieved in product development and distribution in order for carriers to be able to compete.
Where would the industry be if the nature of its business kept it less shielded from travails of modern economic pressures? Would the insurance industry be considered the laggard of the financial services marketplace? Industry outsiders could argue that the rate of technological uptake by insurance carriers appears to be inadequate as compared to the general rate with which other industries take advantage of technical innovations. This seems to be most apparent when considering the rest of the financial services industry and the rate at which it adopts technological change.
An External Comparison
While the following comparison with automobile manufacturing lies outside of the service industry in general, which might not be fair, the general observations are noteworthy: Basically, it can be said that if the automobile industry had operated like the insurance industry, we would still be driving cars that used carburetors and had AM radios, and we would think that they were pretty neat, as well. Actually, a more apt comparison would be to consider how cars are manufactured today versus 40 years ago. Changes in management, process, competition, technology and materials science have all contributed to marked improvements in the automobile industry. The result is a safer work environment, a better product that is more efficient and safer to operate, and a greatly reduced time to market.
Within the same time span, the insurance industry has allowed the extension of business and automation paradigms that are ultimately the root cause of many problems associated with legacy systems. Even when changes were sought, the solutions often attacked components of the problem and failed to approach solutions systemically. This created the "organic" nature of insurance information systems that are sometimes referred to as kludges, spaghetti code, or worse.
This analysis of the insurance industry's automation history can be expanded and more data uncovered as to the root cause of many of the challenges that face carriers and consumers alike. Such efforts are critical if the industry is to benefit from the capabilities that technology affords it. The question remains, however, as to what the prescription is for meaningful change for carriers that want to survive and prosper in the coming years.
The second part of this article will address the challenges to achieving the next level of transformation in the industry and why technology is not the real challenge for insurance.
Jamie Bisker is director of the insurance practice at Needham, Mass.-based TowerGroup. Part II of "Pilgrim's Progress: A Long-Term View of Insurance Automation" will appear in the August 25 issue of Insurance & Technology's Newsletter.
Pilgrim's Progress: A Long-Term View of Insurance Automation By Jamie Bisker Topics: P&C, underwriting, life, architecture/infrastructure Keywords: TowerGroup, P&C, underwriting, life, architecture/infrastructure, automation.