Technology & Commercial Markets

Over a tough three-year “hard market” period of pricing, commercial lines insurers and brokers have had to show quick, adaptive skills. Obviously, prices increased across the board, but policy wordings changed dramatically as well, with the emergence of an “exclusion culture” and the imposition of restrictive terms and conditions.

Thin margins, low investment returns and poor loss experience prompted insurers to exit risk-prone lines of business, re-underwrite key accounts, and focus on profitable customer segments. New policy wordings, endorsements, underwriting and rating rules put industry professionals to the test as they scrambled to ensure their systems were up to speed.

EVER-EVOLVING

Today, as evidence of market softening accumulates, we will likely see even more change. Rates are steadying, or even declining, for preferred business. Insurers are “retargeting” key lines of business, are competing selectively on price and looking at premium growth as the market turns. Thus the industry will continue to be cyclical, not static.

While brokers and underwriters adapted successfully to changing market conditions, the question remains whether their technology kept pace? Was it responsive and nimble? Could policy and rating changes be made without more programming and data? Were underwriters spending their time on actual underwriting (versus data input)? In short, could company systems cope with commercial change?

For those companies that rely on legacy systems and mainframe computers for back-office processing, the answer to all these questions is an overwhelming, “no”. That, however, does not mean the technology failed its purpose. Mainframe systems were designed and implemented decades ago to handle thousands of routine transactions daily. They are the “workhorses” of the insurance industry and play a valuable role. But, these monolithic systems were never designed to be interactive or nimble. The rules of the game have changed for how companies need to meet evolving market conditions.

MODELING FLEXIBILITY

The current environment driving the insurance marketplace requires a new approach to policy management – one that balances the benefits of existing legacy systems with more contemporary, progressive software technologies. Notably, insurers do not have to rebuild mainframe computers and relational databases – a costly and risky proposition.

Instead, innovative “modeling technology”, together with objected-oriented programming, can create policy management systems that integrate front and back-office functions. These provide flexible technology solutions that enable distribution and exchange of data within the company and to business partners, such as brokers.

The new technology surpasses traditional software development practices, which are expensive, slow and error prone. Companies need to find a way to make continuous policy changes in response to market conditions, evolving industry practices and new regulations. And there are ways to do just that.

First, insurers have to break out what kind of processes are required in both front and back-office systems. They need to put the “right technology” in the “right place”. For back-office processing, it makes sense to retain mainframe systems and relational database technology. It is typically the front-end that needs work at most insurance companies.

STARTING POINT

A good place to start in such an evaluation is with the “business rules”. A commercial insurance policy embodies an insurer’s underwriting, marketing and business rules. What coverages does the company offer? What restrictions are placed on its coverages? Which coverages are “options” versus “required” cover? What information is needed before determining the coverage rate? These rules change frequently in response to market conditions. Automating such a complex and dynamic process is a lot like changing the tire on a moving vehicle. You need to have a flexible, adaptable technology to facilitate such changes.

That is where modeling comes in. Traditional software development practices can build a policy management system, and this works fine for a while. But as changes in the commercial market take place, you have to modify the program code. This approach is expensive and complex – and frustrating for the many insurers that have gone this route.

Modeling, however, is a different, but proven approach. It divides the problem of building a commercial policy management system into two parts:

A modeling and production environment. The modeling environment provides a way for insurance experts (not computer programmers) to interactively build models for each of their commercial insurance products.

The production environment then “loads” these models to enable front-line staff to produce commercial policy documents that conform to the rules in the models. Instead of changing the car’s tire on the move, this process splits the two functions so that you can change the tire (or any other component of the car) in a modeling environment and test it before it goes on the road (or into production). Changes to rules and models can be made quickly without programming code or production delays.

MODELING APPROACH

For any modeling approach to work, it has to understand specific issues in commercial insurance product lines and policy production. For example, modeling has to represent the complex relationships between coverages and rules, account for regional differences in regulations or availability of coverage, verify the completeness and accuracy of policies, enforce underwriting controls (especially at point-of-sale) and respond quickly to changing market conditions.

The insurance expertise has to be there for any type of modeling solution. For example, the process has to include policy types, wordings, declarations, schedules, as well as corporate image, underwriting rules, rating structure and operational procedures. For the model to work, the system should mold itself to your business, not the other way around.

Building a modeling system costs more upfront, but it pays for itself in the long-term. Insurers recoup their investment not just in costs, but also in the freeing up of IT resources previously spent modifying or reprogramming software codes. The biggest benefit is the bottom line – the ability to rapidly change product lines to keep up with competitive market conditions.

SETTING OBJECTIVES

So, can it work in a live insurance environment? Today, there are dozens of diverse commercial product lines that are automated through a modeling environment. Some examples include a rental home program, a dry cleaner’s package, a farm program and a small business package for a national insurer. Use of modeling technology makes the most sense when commercial insurers:

Continue to use existing legacy and relational database technology for back-office processes;

Apply object-oriented technology and a modeling environment to distributed front-office processes; and

Use XML formatting to exchange data between front and back-office systems.

This approach works for those insurers and brokerages that realize the limitations of current systems and the opportunities of modern technology. Their expectations for speed and responsiveness to changing market conditions were not being met by an outdated approach to technology.