Responding to the Triple Whammy

The insurance industry has been hit with a triple whammy over the past couple of years: a bad economy that hurts investment income, more scrutiny on financials from regulators, and more regulations in all lines of business. And things are not likely to get any easier.

These economic pressures have forced insurers to cut costs and have limited IT budget growth. But one technology area where observers are seeing insuranceexecutives pay greater attention are the financial systems that can give insurance companies a complete view of their business.

"CFOs and CEOs want to see one set of numbers so they can get a grasp on the performance of the company," says Brian Hartlen, senior vice president at Ann Arbor, MI-based Comshare, a provider of software applications for corporate performance management. "They also want one set of numbers to send to stakeholders."

Consolidate Financial Data

In order to see a consolidated set of numbers, most insurance companies must first come to grips with the number of disparate systems they have—each with its own set of sometimes conflicting numbers. And, not surprisingly, much of the drive for these changes is coming directly from the CEO, CFO and boards of directors, since these are the executives who are on the hot seat and will ultimately have to sign off on financial reports. That's because of the Sarbanes-Oxley Act—legislation recently passed by Congress that requires CEOs to sign off on all financial statements, among other requirements. "We are seeing a big C-level change in the industry as many executives really want to use their data strategically," says Jack Plunkett, president of Millbrook, Inc. (Lehigh Valley, PA), a provider of consulting and business intelligence solutions.

But in order to provide the financial information that high-level executives need, IT is going to have to find a way to accurately provide the data. "The systems have to be able to provide data quickly to senior executives," says Comshare's Hartlen. "If it takes six months to analyze the data, you lose six months of competitive advantage."

Having access to complete financial data can produce benefits in a number of areas. One area that is top of mind is for financial reporting. "Most companies are looking to improve financial reporting," says Frank Siderio, financial services industry strategist at PeopleSoft (Pleasanton, CA). "To do that, the data needs to be accessible and transparent."

Also, simply presenting financial information in systems will not suffice. "Companies are focused on the consistency of financial and management reporting," says Dirk George, managing director, insurance practice, financial systems segment at New York-based BearingPoint. "The technology needs to be able to drill down to bring the underlying management and detailed data to the surface for analysis."

Unfortunately, when insurance companies begin to consolidate data, they sometimes do not like what they see. "With the magnifying glass on financial data, executives are seeing some cracks in the company's foundation," says Michael J. Bernaski, managing partner in New York-based Accenture's Insurance Industry Group for North America, adding that many times data from different systems is conflicting. "The enhanced scrutiny is exposing flaws in the infrastructure. Even seemingly simple things like trying to determine which product makes the most money is very hard to do."

This requires "cleaning" data to improve quality, says Todd B. Calhoun, assistant deputy director for the New York State Insurance fund (NYSIF, $8 billion in assets, New York). "Data has to be timely and accurate," Calhoun says. "Inaccurate reports don't do anyone any good." NYSIF consolidated its data in a Millbrook Beacon data warehouse, which now provides consolidated views of data to the business.

Managing Risk

Another area where insurers will be using consolidated financial data is for measuring risk. "Many insurers found out the hard way about how important it is to have an enterprise-wide view of risk," says Jim Errant, director of PeopleSoft's financial services product strategy, referring to the events of 9/11.

NYSIF's Calhoun agrees. "9/11 caused a major change in how you look at risk," he says. "Insurers are carefully trying to quantify where there is exposure. To do that, you need a good concentration of data."

Adds Errant, "An enterprise-wide view of a company's exposures is the only way that an insurance company can get a complete view of risk. Without that view, companies will be taking on too much risk in a certain area and not know about it until it is too late."

Another area where insurance companies can gain financial efficiencies by getting better access to data is in determining reserves. "Reserving is a key issue because investment income is down," says Tom King, solutions architect, SAP (Newtown Square, PA). "Insurance companies have to manage their finances properly. Similar to the way companies are closely watching how they are spending money, insurance companies have to look closely at how they are investing it." King says that one carrier he recently met with had no idea about how much it needed to keep in reserves to pay claims. "They were keeping vast amounts of money in basically a checking account so they could cover the claims. If they had a better idea of what they needed for claims, they could take some of that money and invest it in higher-return areas."

In order to deliver the information to business leaders, insurance companies will be relying on enterprise resource planning (ERP), enterprise application integration (EAI), extract transfer load (ETL) and data warehousing technology to consolidate financial information. And most carriers will deliver technology directly to decision-makers through management information portals, also called CEO or CFO portals. Companies are using management information systems to put information in front of and "include as many decision-makers as possible in the supply chain," says Mark Ruddock, president and CEO of INEA (Toronto), an enterprise analytics software provider.

"Companies are looking at CFO portals and executive dashboards that are linked in real time to the performance metrics of the company," concurs John L. O'Connor, partner in Accenture's insurance industry group. "They are analytical tools that sit on the desktop" and provide meaningful information about the business.

Most analytical portals will also be delivered through Web-based technology. "Everyone we speak to wants information delivered through their Internet architecture," says PeopleSoft's Siderio.

NYSIF's Calhoun reports that Internet-based applications are providing a number of advantages for his organization, including thin-client functionality, where software does not have to be installed on the desktop, ease of use and hands-on capabilities for business users. "People can pull their own reports through an interface that is familiar to them," he says. "We are putting more and more information in the hands of the users every day. Everything we are offering the users is now browser-based."

However, moving to a completely Web-based management information system will take time and money. "Don't go for the Holy Grail at the start," or try to accomplish everything at once, says INEA's Ruddock. "Find an area where you have a lot of pain, get the information and deliver value. Then take the next piece of data that may be harder to get, and so on."

This approach is especially important as insurers are zeroed-in on ROI. "Many companies are pushing off purchases, because ROI out of a financial system environment is hard to quantify, but that is very dangerous," since an insurer's competitive advantage lies partially in its financial data, BearingPoint's George says.

Improving financial information systems also helps take the guesswork out of strategic planning—a nemesis of ROI. "Empowering decision-makers to make fact-based decisions, not gut-based decisions, will improve ROI," says Comshare's Hartlen.

And although there has been serious belt-tightening, says Andrew Ferguson, executive vice president and co-founder of SRC, a provider of sophisticated financial planning solutions for the enterprise, "if insurance companies are not able to do serious financial planning, they are in trouble. They have got to figure out how to dramatically strengthen financial analysis and reporting."

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FINANCIAL SYSTEMS:

KEY TRENDS & CHALLENGES

- Increased scrutiny of financial reporting by regulators.

- C-level execs want increased transparency of financial data.

- Carriers must gain an enterprise-wide view of financial data to assess risk.

- CEOs/CFOs demand dynamic access to financial data

- Insurers will use Internet-based tech to deliver financial data to key executives.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio