Everybody remembers the back office, that place deep in the organization where numbers get crunched, reports get produced and data gets warehoused. Nobody admits to working there but it's where everything happens. At least, it used to be where everything happened, and for insurers, policy administration systems were the engine that made the back office business run.
They still are, although yesterday's engine no longer has the power to keep the business humming. The needs of today's stakeholders for information and speed of execution, and the demands of regulators for transparency have stressed legacy policy systems and the IT organizations that support them.
In the past the need for processing power and line-of-business specific business functionality spawned legacy administration solutions with monolithic, end-to-end processes for rating, issuing and administering policies as well as functions for claims, commissions and billing for common insurance products.
In larger companies these systems were constructed from a patchwork of vendor and custom-built solutions that became more complicated as consolidation increased the number of systems within the organization. In smaller companies the systems tended to be either vendor solutions or custom applications built to address specific business lines and company-specific organizational structures and processes. In all cases the gears of these engines are now grinding slowly and competent business and technical mechanics are hard to find.
Property/casualty insurers have many needs that are unmet by in-house legacy systems and vendor solutions, even though many technologies needed to implement them are now generally available. The reason these needs remain unmet is that, although they may seem like obvious gaps, they require huge investments of time and a willingness to explore organizational change that cannot be ordered or orchestrated by the IT department.
These needs include the need to efficiently market and grow the book of business, the need to expand, manage, measure and tune distribution channels, the need to transparently manage producer compensation, the need to mine the existing book of business for growth opportunities, the need to bring new products and services to market quickly, from product forms, rates and filings to communications and service capabilities to support them once live, and finally, the need to marshal internal and external resources to close opportunities faster.
How these needs are met in any company depends upon its current business model, its future business objectives and strategy and its structural, resource and financial constraints, which serve as the context for critical system and process change. It also means expanding the context to include the needs and objectives of stakeholders looking for front-office access and support.
Industry response to changing business conditions has varied by business sector, although virtually everyone reacted to the obvious need for improved user interfaces by Web-enabling their applications and attempting to push rate-quote functionality to the agent to increase speed of service. A necessary first step, this tweak provided organizations with a semblance of front-office capability without changing the core applications and processes that managed the business, fully addressing the needs of agents and brokers or addressing the information needs of customers, third parties and reinsurers.
For the last decade there has been reluctance to replace these core systems for reasons everyone knows well: dirty data needing cleansing and conversion, high project cost and risk, opacity of embedded business logic, difficulty of accurately defining business needs several years into the future, fear of changing cross-silo business processes, time to receipt uncertainty of expected benefits. Arching all of these issues has been the property/casualty industry's dissatisfaction with software application vendors and their off-the-shelf solutions, which have also lagged behind changing business models.
A TECTONIC SHIFT
That dissatisfaction still exists, although many companies from the larger midtier through Tier 1 have decided to replace their legacy policy administration applications. For several years the IT focus was on claims automation in the name of customer satisfaction and retention. The change in focus to efficient revenue growth has shifted attention from claims to the full policy administration function suite. This shift has also brought, for many insurers from midtier to large organizations, a renewed focus on custom-built rather than vendor predeveloped and heavily customized solutions. The impetus for build over buy has both business and technical components.
On the technical side, the technology components to build new systems that meet the business need for speed and flexibility are now available. Many carriers have purchased horizontal tools such as rules engines and business process management suites and are integrating them into their application portfolios. Insurers with insufficient in-house technical expertise are renting it from system integrators and IT outsourcers. Also, pressure for Sarbanes-Oxley compliance has at least brought about a higher level of documentation within the IT organization, a necessary first step to any core system replacement.
On the business side, insurers are being pressured to compete by adequately addressing the various and sometimes contradictory needs of all stakeholders, from regulators demanding compliance to agents and customers looking for better, more comprehensive products to reinsurers seeking more consistent and profitable underwriting.
In all cases these groups are demanding front-office treatment, seeking to be handled as critical business partners rather than back-end receivers of back-office results. Underlying these expectations is the need for better intake, handling and analysis of data.
Sorting through stakeholder demands and understanding what it would take on a system level to address unmet property/casualty industry needs is difficult for most organizations and the responsibility is frequently outsourced to business consultants, whose organizational knowledge is not as deep. What consultants bring to the table is a defined process, a broad understanding of the industry landscape to help them facilitate the analysis, and the ability to translate the results into manageable process and system requirements.
Whether done in-house or by consultants, this analysis is a baseline for any core system replacement, whether a custom build or a packaged solution purchase. It should be done before any RFI or RFP is issued to the vendor community. This gives the insurer an opportunity to add innovation and fresh thinking to an otherwise pedestrian recital of the past.
To consider, for example, building future capabilities using publicly available data and GIS software not only to manage the after-effects of a catastrophe but to develop, preunderwrite and market products based on selected geographical risks and desirable demographic characteristics. Such capabilities would help companies build what everyone wants--a competitive differentiator.
Replacing a core system is difficult, expensive and risky. Changing a business process is problematic. With the right resources, a company can manage the project budget, hold down the timeline and minimize the risks. It can communicate through thorny process problems. If--at the end of the day--the organization doesn't get a competitive differentiator, why undertake such a painful ordeal? Companies replace legacy policy administration systems not to tune an aging back-office engine but to build the platform that will power the future front office business network. It's the only outcome that justifies the cost.
JUDY JOHNSON is vice president and principal solutions architect for Patni Computer Systems Inc.
DENNIS A. STECKLER is senior solutions architect for the company.
March 1, 2007
Copyright 2007© LRP Publications