Insurer Technology Solutions: To the Rescue?

By 2006, Canadian property and casualty insurers will be putting a combined $1 billion towards information technology (IT) investments, predicts IDC Canada. This is despite 2002 being the worst year on record for insurer returns. With an industry return on equity (ROE) of 1.6%, and combined ratio of almost 106%, the natural conclusion might be that insurers would pull back on capital investments of any kind in an effort to reduce expenses.

But, experts say this is not the case. CIOs (chief information officers) and technology vendors say that insurers are maintaining their investment levels as they focus on technology as a means to reduce claims costs, streamline distribution and underwrite better. Certainly, there is a paradigm shift in the face of the hard market as insurers are forced to make money on their core business – underwriting – unable to count on investment income in the wake of the equity and bond market malaise. “The main reason why p&c insurance is under pressure is that the base business of issuing a policy and gaining a premium on that policy is running at a loss. This is a business under tremendous pressure,” observes James Sharpe, director of customer segments for IDC Canada. While other financial services are looking at technology to help them gain and retain customers, “in p&c this is so far from the truth”, he says.

P&c insurers are looking which customers in which lines they should not be doing business with, and who is costing them money – and using technology to help sort the bad apples from the good in their books of business. Also, demand from neither customers, nor from the distribution chain, has dwindled for faster, better service. With 71% of Canadian homes Internet-enabled, “there is no question that the Canadian population and the Canadian government are far along the [information] highway. In turn, they’re pushing the providers,” says Dan Trajman, president of Sapiens Americas.

Indeed, insurers have been investing heavily for several years in technology, largely aimed at distribution projects to web-enable transactions with brokers, agents or even direct online. “2003 is the year for fruition of a lot of these investments across the industry,” comments Doug Hewitt, head of e-commerce for Aviva Canada. It will be a daunting year for those companies who have not kept pace, he adds.

Now, as insurers turn their sights to other areas of business automation, that same pressure to keep pace is still present. When the market turns, as it surely will, those who have pulled back from technology investments may find themselves left lagging.

BARE NECESSITIES

“People are still continuing to invest heavily in technology, but where they’re investing is more focused. There is concentration on the necessary projects rather than the ‘nice to have’ projects,” says Grace Webster, vice president of business solutions at Royal & SunAlliance Insurance Co. of Canada. She echoes not only the IDC projections, but also studies in the U.S. market that show p&c insurer technology investments are on the rise (see Chart 1). Overall, although technology spending by corporations worldwide was down in 2002, growth is expected this year to the tune of 3.5% despite an almost global economic downturn.

Insurers who have a solid capital base and have attached realistic cost-benefit analysis to past IT projects are in the best shape to carry on with investments, notes Hewitt. The sudden drop in insurers’ investment income means they must squeeze out costs where they can – namely distribution, claims turnaround time, and underwriting, he says. “If there has been a change in attitude it’s the reduction in investment income” and technology investments are now seen not just as a means to efficiency, but as a crucial part of the return to profitability.

That said, insurers may be expecting to see real returns from their technology dollars more quickly than in the past in the current under-pressure market. The market “may force other companies to invest more carefully or look for faster, more tangible return on investment”, notes Denis Poirier, senior vice president of technology for ING Canada. Although he has not felt this kind of pressure, he says there is danger for the companies who do rely too heavily on short-term gain from technology. “We look for a more balanced approach. We have not really shifted our ratio of strategic [long-term] to short-term projects.” What technology departments and vendors must do is demonstrate “infrastructure robustness”. “We’re asked to develop better, faster. Old systems are not going to work,” he adds.

Charles Gudaitis, regional sales manager at Sapiens Americas, sees many insurers pushing for greater ROI from their technology purchases. “These [insurance] organizations are getting squeezed so much in the marketplace, they’re looking at any way they can to squeeze money out of their systems.”

They are looking at various methods of assessing ROI, beyond a customer headcount, including hard costs such as maintenance, retiring old systems and people costs. Also, soft costs such as improved customer service. “That soft dollar has got to be reflected in the way insurance companies deal with their customers.” This reflects findings in the Tillinghast Towers Perrin “E-Track” survey in late 2001, showing that North American insurers rely on a variety of metrics to measure success, both subjective and quantitative (see Chart 2).

Realistically, insurers are looking at “10-times benefit minimum”, says Gudaitis. “They want to be able to see benefits within the first fiscal year of some kind. If I put something out in first quarter 2003, they want to see benefit by the fourth quarter.” Trajman agrees that timelines are being pushed tighter. “They [insurers] cannot afford to fool around anymore. They want a vendor with a track record.” This may represent a challenge for newer providers as they struggle to prove that their system can be delivered in less time and provide shorter-term gains. In a survey of clients, Sapiens found that most want the speed of purchased solutions with the power and customization of built solutions. They seek baseline functionality, rapidly deployed, with add-ons, says Trajman.

“In the old days it would take three years. You would sign a contract and say ‘see you in three years’. That doesn’t happen anymore,” says Wayne Beck, vice president of consulting services for CGI’s Insurance Business Solutions practice. He notes that companies are looking for projects produced incrementally showing returns at each phase, and that can respond quickly to changes in the business, for example the new privacy legislation. There is also a change in who is making the decisions, he adds. “There is a lot more emphasis on business people driving technology decisions rather than technology driving business issues.”

Trajman sees a similar trend. “More than ever the decision is moving to the business side from the IT department and it’s going higher up in the organization.” Part of this relates to the significant impact technology spending has on the bottom-line.

Business intelligence

For the last several years, insurers have devoted a large part of their technology spending to distribution, and this challenge still remains, says Poirier. “There is room for improvement in how we do business with our intermediaries. We have not solved that.” However, Hewitt notes that while many portal-type projects are being launched this year, some companies still lag behind in providing their distribution force with online policy change. Others have “quote and issue” for only specific lines in specific provinces.

Nonetheless, he says, as insurers come to the “tail end” of these projects, many are looking at underwriting as the next step for technology. Sources agree that as insurers look to underwriting to provide profits, they are more focused on how technology can be used to make this happen.

This is reflected in Tillinghast’s E-Track survey, which shows that p&c insurers are more focused on technology investments in underwriting, products and pricing than life and health insurers, and expect to remain so through 2004 (see Chart 3). “They [insurers] want to get back to basics,” says Beck. “There’s a lot of information available to the insurance industry that they haven’t used yet. There’s so much information, how do you keep people from getting buried in it?”

Insurers are looking at predictive modeling and scoring systems, so-called “intelligent underwriting” or underwriting filters combined with claims scrutiny. “There is a lot of interest in having technology help the industry get back to basic business decisions.” Webster agrees that there has been a shift to more “knowledge capabilities” now that some companies have begun implementing their distribution capabilities. Data has become the focus – in other words, how to harness and use it more effectively in underwriting and claims management.

Sharpe says insurers he spoke to for the IDC study rank business intelligence and data warehousing as top priorities. “It’s about trying to find customers who are not profitable and dropping them.” Insurers are looking at data and business intelligence from an actuarial point of view, using analytical risk processing. As such, insurers want to make better decisions from the information they already have, but are also looking at increasing external data points, at ‘tweaking’ the underwriting process with information pulled from outside databases, Sharpe observes.

As well, insurers listed among the top business challenges to deal with claims costs and specifically re-engineering the claims process to drive out these costs. “Three or four years ago when we were in the soft market cycle, distribution was much more important. It was all about issuing more policies and getting as much marketshare as possible.” Now, he says, the challenge is that “claims costs are going through the roof”.

“Speaking with a CIO of a major p&c organization in Canada, he said that 70% of their total costs are in claims paid, 20% is roughly in staff and other expenses and about 10% in technology. What are the technology opportunities which in essence, will shrink the amount of claims paid out?” For example, insurers are looking at cutting claims cycle time through mobile devices for adjusters, so that the insurer pays less for a rental vehicle for the claimant. “By contracting that cycle, they drive down their costs,” Sharpe explains.

Multiple solutions

Many challenges still remain in the implementation of technology projects, sources say. “Challenges will always remain in that we exist in a marketplace of many brokers, many companies and many customers,” says Webster. “There will be no ‘silver bullet’, no single solution. There will be multi-solutions.”

“A lot of large insurance companies have got these massive systems in place and they’re just hitting a wall,” notes Gudaitis. Insurers are having support issues, synchronization issues and many have been disappointed by the unrealized promise of these large-scale projects. As a result, insurers are turning more towards multiple vendors providing specific business needs flexible enough to change with the business, rather than all-in-one or once-and-done solutions, he adds.

Trajman notes that insurers continue to express concern over modernization of systems and being tied down by legacy systems. There is also concern about the impact of technology changes on corporate culture, with each new technology bringing as much as 50% staff turnover rate with it. “People who have legacy systems, the value is in the 15 years of knowledge they have invested in that system,” comments Beck. Many insurers are now looking to “plug in” replacement parts, for example a new billing program, compatible with their old legacy system, he points out.

And, Webster notes that even the systems of today will become legacy systems soon enough, so there must always be an eye to the future viability and adaptability of any technology project.

Outsource value

Given the disappointments, delays and in some cases disasters of the past for insurers in the technology game, many companies have taken a skeptical view of the vendors they choose to partner with, specifically in outsourcing arrangements. While it is now easier to interface with outside providers, there are inherent risks, says Poirier. “There was a big wave in the 1990s about outsourcing a large part of business processes. There have been some failures, then there was a reaction with some companies bringing those services back inhouse.”

Webster sees the same trend to what might be called “back-sourcing”, where some companies burned by outsourcing relationships are bringing those processes back for in-house departments to provide them. “We have been down that same path,” she admits. However, outsourcing is still a viable option when handled correctly. “Our philosophy is that outsourcing provides some value if you do not have the core competency or capability in an area.” She gives the example of document design and printing, a process that can be provided more effectively and at a better cost by an outside vendor specializing in that area.

As Hewitt notes, “if a company just doesn’t have the knowledge [and the capital] and they have to get out there quickly [with a project]… what else can they do?”

Poirier terms the current movement “selective outsourcing”, where a variety of providers are used for specific business processes, while other projects are maintained inhouse. “We believe solutions are not all-or-nothing. I would be hesitant to put all of my business processes in any one provider.”

Part of this hesitancy comes from the “dot.com meltdown” which saw the mass exodus of vendors, leaving companies with “technology solutions” that were no longer supported by vendor help desks, upgrades or maintenance. “They [a vendor] may have the best technology, the best software, but they have to be there in five years,” says Poirier.

“One change is people almost blindly trusted dot.com companies to handle all their concerns,” notes Hewitt of the current technology environment. “Dot.coms could do it quicker and easier.” Now there is a certain level of skepticism of any one vendor or even the tech sector as a whole being able to provide all the answers.

“They [insurers] are risk averse. They look at dealing with a vendor with the same kind of risk aversion,” says Gudaitis. Insurers must not only look at the financial stability of vendors, but also their commitment to this specific marketplace. “There are people [vendors] who are still in business, but they are no longer in business with the insurance industry,” notes Beck.

Companies have to do due diligence, have proper contracts and technology that is open enough that someone else can come in and build on it if a vendor becomes insolvent, Hewitt advises. “You have to own responsibility for what you deliver to your broker or your customer,” agrees Webster. “You have to know a [vendor] partner extremely well if you’re going to have confidence in what you’re doing. You need to manage that situation.”

Skepticism aside, insurers do see promise in the future role of technology in the business. While it may not represent a “white knight”, rescuing the industry from its current balance-sheet woes, there is no doubt insurers feel they can take technology further into the business process to do make their core business more efficient and, ultimately more profitable.