A window of opportunity has opened in the marketplace for buyers of policy management systems, analysts say, as business-process re-engineering by carriers has freed up more information-technology reinvestment dollars. At the same time vendors have retooled their software applications to make them more useful.
That's good news for buyers of policy administration systems, and they'd better act fast before the C-suite titans tighten the purse strings once more.
"Insurers have always known that in the last couple of years they've needed to replace their systems," says Stephen Forte, an analyst with Gartner Inc., an IT consultancy. "They just needed to get the processes in place first because simply replacing an old system with a new system and following the same old processes just exacerbates the problem."
While IT budgets have generally remained flat for the past couple of years, falling between 3 percent and 5 percent of revenue, carriers have improved their processes, which has allowed them to release dollars that can now be spent on IT systems, he says.
Tier-2 carriers, those with less than $2 billion in gross written annual premium, are looking hardest at replacing their policy management systems entirely. The nation's largest carriers, who tend to build their systems in-house and own the source code, will most likely look to only upgrade parts of their systems, says Forte.
Forte's analysis and Gartner's surveys were underscored by a survey last year of members of the Association for Cooperative Operations Research and Development-Life Office Management Association.
When asked which areas would be getting the most investment dollars, 46 percent of the ACORD-LOMA respondents pointed to policy systems, 20 percent pointed to enterprise architecture, 15 percent to distribution systems and 9 percent to regulatory compliance
Consultant Chad Hersh, an insurance industry analyst with Celent Communications Inc., writes in a report published last May, titled "Policy Administration Systems 2005: Commercial Lines Vendors," that it's a "great time" for property/casualty carriers in the market for new policy management systems as prices have dropped while "features critical to return on investment" are more common.
In addition, the systems are cheaper to run and maintain, and vendors can install them far more quickly than was the case three or four years ago.
REACHING A CYCLICAL PEAK?
Looking back, 2005-2006 may well turn out to be a peak in the spending cycle for policy management systems since the Sarbanes-Oxley Act was passed into law in 2002. While the 66-page law itself has not driven carriers to replace their policy management systems, nor will a policy management system alone bring a carrier to be compliant with Sarbanes-Oxley, the law has raised the floor on the importance of keeping a paper trail, vendors and consultants say.
Prospects, says Paul Griffiths, vice president of product management, policy solutions, for The Innovation Group, are asking, " 'Are we Sarbanes-Oxley compliant? Are we fully auditable?' Whereas two or three years ago, it was, 'We don't really care about it.' "
For IT managers with B-tier carriers and the largesse of a budget fat enough to revamp their entire policy administration systems, buying a system built with an architecture flexible enough to change with future needs is paramount.
One such architecture, the so-called "service-oriented architecture" model, allows carriers to integrate bits and pieces of disparate policy management systems relatively cheaply and easily, without changing source code. Carriers, says Forte, are "just starting to get their hands around" the service-oriented architecture model.
Such models will prove their worth, perhaps sooner than even their most ardent apologists would have believed, as regulators have proved aggressive in raising their expectations of the insurance industry.
"This last year with Eliot Spitzer has taught us that we need to be worried about tomorrow and the day after," says Hersh. The National Association of Insurance Commissioners has also talked about requiring Sarbanes-Oxley-like requirements for mutually owned insurance carriers, he says.
Auditors, themselves on the defensive after a rash of high-profile accounting scandals, are also beginning to insist on tougher controls.
Whatever IT departments decide, one of the most important pieces of advice Janet Farris, director of accounting services for CGI, a Montreal-based IT services and management consulting firm, can give is also the simplest: Make sure systems can talk to one another.
When systems can't communicate, companies can find themselves spending tens of thousands of dollars trying to combine disparate data into a central database. "That makes it a lot harder on the insurance side," she says.
"Usually what happens is a lot of (loss ratios) have to be pulled in from another system because when you are doing the ratios, you're actually doing more than just loss information," she says. "You're having to pull the earned premium and different things like that."
And finally, IT managers in the policy management realm need to make doubly certain that any new systems are ironclad when it comes to security.
"From a policy administration side, the concern is always 'Am I secure?' " says Randy Schuldt, alliance manager with Instec, a Naperville, Ill.-based software vendor.
Schuldt has the following advice for companies looking to spend the hundreds of thousands of dollars on a competent policy administration system: "Insure that you can reliably predict if your system offers you the kind of flexibility to be able to change, that you need to be able to reliably predict who has control over those numbers."
So, carriers can look for 2006 to be a busy year in terms of replacing policy management systems, says Forte.
There are about 40 vendors prepared to meet their needs. "Some offer very specific areas like quoting or rating, and others offer the full end-to-end policy management," says Forte. "It all depends on what the insurer is looking to replace and what currently about their systems is no longer meeting their business needs."
Buyers beware, however. Some vendors here today will, as usual, be gone tomorrow.
"I think you're going to see a lot more policy deals in 2006, and you're probably going to see some consolidation in the vendor market too because the market can't support 40 vendors," says Forte. "The usual big guys will still be around, the gorillas of the marketplace."
is managing editor of Risk & Insurance®.
January 1, 2006
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