Executing Under Pressure
Insurance Networking News, April 1, 2009
Moving forward on a forbidding economic playing field, most insurers hoping to modernize their policy admin systems are running flat. Yet CIOs who already allocated funds for core system upgrades are proceeding as planned, albeit under extreme pressure. Like a quarterback facing a blitz, they must maneuver around outdated code, vendor mergers and acquisitions, budget constraints and the integration of new tools and technologies. Those CIOs who put together a successful drive know that the end zone holds great promise.
Against a dire economic backdrop, most insurers entering Q2 are running flat. Yet those insurers that had already allocated funds for core system upgrades are proceeding as planned, albeit under extreme pressure to manage their spend efficiently. This means dealing successfully with outdated code, a changing vendor landscape, and entirely new tools and technologies that must be integrated in advance of switching to the new system.
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"In this economy, more of insurers' attention is paid to 'show me the cost savings' versus 'show me revenue benefits,'" says Donald Light, senior analyst with Boston-based Celent.
Despite the sheer scale of such undertakings, the most popular modernization projects are taking place in the policy administration area. StoneRiver, previously Fiserv Insurance Solutions, West Des Moines, Iowa, surveyed IT leaders at P&C carriers in the United States in July 2008. When companies were asked to identify their next three large-scale projects, policy administration or service came out on top - rising from 69% in 2006 to 75% in 2007 and to 87% in 2008.
RIP, REPLACE
As core systems solutions, policy admin systems have been modernized, and so has their value proposition, says Chad Hersh, principal with New York-based insurance analyst firm Novarica. "Once viewed as tremendously risky projects, we are seeing differences in the competitive landscape, differences in carrier attitudes toward IT and differences in these types of available core systems as having a positive effect on the decisions being made to modernize," says Hersh.
Nevertheless, the value proposition may seem elusive to carriers choosing to rip and replace core systems that hold as the norm hard-wired rules buried deep within the code.
Separate policy admin systems supporting separate lines of business, each with their own front ends, add to the complexity, and integration with other core systems creates a challenge of almost overwhelming proportions. The "fix" often requires working with a host of vendors and consultants to create a well choreographed mix of feature-functionality that will work together to get the job done.
"Even if you do everything right, the replacement of a policy administration system is the single biggest IT project that can happen inside of an insurance company," says Light. "Every step, from deciding whether to move forward with the project, to integrating with other core systems and finally moving into production, has to be done in such a way that takes into account the tremendous risks and ultimate benefits of this very big, very expensive project."
Even with those risks in mind, given the option, most carriers are replacing legacy policy admin systems, claims Susan Hutt, SVP, Services, with Camilion Solutions Inc., Markham, Ontario. "It's an imperative driven chiefly by the competitive landscape. And insurers know that to get the full benefit they most often need to replace what they have."
For Andy Edwardson, VP of information technology with Farmers Alliance Mutual Insurance Co. (FAMI), McPherson, Kansas, the replacement of its policy admin system was part of a larger overhaul of some of the company's other existing core technologies (billing and claims).
Partly a matter of cost of ownership and the need to move off their legacy systems, Edwardson also points to the realization by the company's leadership team that modern technology would make FAMI more competitive. Insuring rural Americans since 1888, the company writes property and casualty insurance through a network of 650 independent agents in nine states.
Andy Edwardson
"Senior management recognized the fact that we need to become more customer focused and have the ability to change with the market," he says. "It's about ease of doing business and being a nimble company."
FAMI took a unique approach to this undertaking, choosing to replace its policy administration system using a phased approach by line of business and state, and its other two core systems in a big-bang manner. By enlisting the support of components, the creation of a FAMI object model and an enterprise service bus designed to help the myriad new systems talk to each other (see "FAMI's Winning Game Plan," p. 16), this custom approach earned the company the 2009 Model Carrier of the Year award from Celent.
"It comes down to having the right strategy for implementation," notes Hutt. "Celent says that between 30% to 80% of all large IT projects fail. The biggest reason for failure in our experience is when an insurer bites off too much in one phase, so it's not humanly possible to manage. If you can break it down to manageable chunks and control as you go, you can build on those successes."
To move the first LOB business owners policies (BOP), the carrier worked with OneShield, Westborough, Mass., to conduct a manual conversion of its existing BOP policies over to OneShield's Dragon product. The carrier’s other lines (homeowners, personal auto and then farmowners) will be converted at renewal to an in-house-developed policy admin system, automated through processes integrated into the FAMI Object Model.
The insurer's IT team looks out 120 days in advance and designates a certain weekend to convert all the policies that fit into that window, says Edwardson. "It's a way to manage the risk."
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