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Hold on to your policies. Are you ready for this factoid? The first company, outside the U.S. government, to buy the UNIVAC 1 computer was the Prudential Insurance Co. That was back in 1952. And that was just the beginning. Metropolitan Life, with more than 44 million policies, followed shortly thereafter, when it ordered its first UNIVAC machine in 1953.

And critics have the gumption to call insurers laggards ... well, OK, yes, maybe. But carriers are nowhere as laggardly as critics would have you believe.

In those days the machines weighed hundreds of pounds and filled rooms, floors even, of insurance companies. The magnetic tapes on which data were stored weighed as much as three pounds.

"People were standing inside the computer, they were so big," recalls James Cranwill, a former punch card operator who started at Franklin Life in 1950 and worked for the carrier for 37 years before retiring as a vice president.

Franklin Life's Big Iron didn't come cheap. Buying and installing the UNIVAC 1 cost about $1 million, says Cranwill. The machine also required a 50-ton air conditioner to keep it cool.

In those days, he says, the programming language known as COBOL, implemented in 1960, hadn't been invented yet. Computer operators talked about a programming language known as C-10, developed in 1949.

Yet, even in postwar decades, insurance carriers, the large ones anyway, were aware of the importance of upgrading their computer systems. In 1962, Franklin Life bought a second UNIVAC 1 mainframe for $87,000.

The machine measured 25 feet wide by 50 feet long. Its memory could hold 12,000 characters, or about 1,000 words.

Then, in 1964, the life insurer bought two second-hand UNIVAC machines for $1 apiece, says Cranwill. They cost $40,000 to install and were twice as fast at processing data as the UNIVAC 1. Franklin Life was later bought by American General and in turn American International Group Inc.

From the start, big insurers and carriers that could afford it recognized the importance of computing technology. Carriers, who even then were managing tens of millions of customer policies, quickly adopted IBM as the standard-bearer for mainframe machines.

Big Blue still maintains a dominant position in market share for mainframes among insurance carriers, consultants say, as carriers upgrade their reliable machines with new operating languages and more memory.

A used IBM S-390 mainframe, which is light-years more advanced than any hardware dating back to the '60s, can be purchased over the Internet from IBM for a minimum of $47,000.

As IBM progressed over the years, so did the carriers, adopting IBM's 7000-series data-processing system beginning in 1960 and then, over the past four decades beginning in 1971, the 360-, 370- and 390-series machines.

With each new generation of mainframe, the carriers rushed to upgrade or tweak their systems. With each new system, carriers were able to process more data in more finely sliced segments.

What did it all mean for risk managers? On the pricing side, it meant that carriers were better able to price their risk with each new generation of hardware. And on the policy administration side, it meant carriers were able to process policies more efficiently, lowering fixed costs.

According to one Georgia-based managing general agent, insurance is cheaper today than it was 30 years ago, which is more than can be said of the cost of many goods and services when compared with 30 years ago--cars, for example.

"And that's because there's been this ability to spread the risk, reinsure the risk, and parse it out into finer and finer slices with the help of technology," says the agent, who's been in the industry more than 30 years.

ECLIPSED BY SOFTWARE

Computing hardware has made steady gains in terms of memory capacity and processing speeds over the years, thanks in part to the technological prowess of IBM, the insurance industry's leading mainframe vendor.

Hardware, like printers, adding machines, punch-card units and even unitypers, used to make news at insurance technology trade gatherings.

"Adding machines were big news," says William B. Hampton, president of Colonial Life Insurance of Texas and Colonial Lloyds, the property/casualty arm of the company. "I could add the debits in one column and in the memory, and I wouldn't have to go through the book twice."

But now, mention the words "adding machine" to a 25-year-old graduate weaned on Internet search engines like Google and spreadsheet applications like Excel, and it's likely he or she wouldn't have a clue about what you're talking about.

At trade gatherings like the Insurance Accounting and Systems Association, the Association for Cooperative Operations Research and Development and the Risk and Insurance Management Society Inc., hardware vendors are engulfed by a sea of software companies serving every imaginable insurance and risk management silo.

Software vendors sell applications for agency management, claims administration, imaging, loss reserve analysis, billing and accounting, document management, policy management, reinsurance, subrogation and workers' compensation.

Some applications even handle multiple lines. And that's just the insurance side of the business. The risk management side of the equation brings to the table its own set of specific software applications.

"Now it's practically all software, and everyone's come up with their own version for the same process," says Hampton, who began attending the Insurance Accounting Systems Association in 1967, when the show had only half of the software vendors that now crowd the show floor.

And it's a "changing animal all the time," adds Hampton. More applications are Web-based, as are trade-show registrations and sessions.

Modeling software, developed by vendors like AIR Worldwide Corp., Risk Management Solutions Inc. and Eqecat Inc., have injected a new dimension to managing catastrophe exposure, as have mapping applications developed by companies like MapInfo Corp., ESRI and CDS Business Mapping LLC.

Catastrophe models have become the "stock-in trade of all renewal negotiations," says John Phelps, director of business risk solutions with Blue Cross Blue Shield of Florida in Jacksonville. "Everybody's trying to get lined up with their own CAT model to prove their side of the table."

Top carriers and industry vendors don't lack for technical talent. Innovative personal lines underwriters like Progressive and GEICO lead not just the sector, but the nation, in their ability to innovate.

You want to talk about innovation? Progressive, in less than 60 seconds, displays the quotes of competing carriers, even if they are lower than Progressive's. How innovative is that?

Two decades ago, says Mark Jablonowski, an assistant vice president with Conning Research & Consulting Inc. and former risk manager with United Technologies, the industry was lagging in terms of applications.

Not anymore. Even down to the level of field operations, where adjusters can assess damage using adjuster note-taking applications loaded onto tablet computers, carriers have made big strides.

In the wake of two devastating hurricane seasons in 2004 and 2005, it was not uncommon to see commercial property adjusters cradling laptop computers into which they tapped damage estimates.

The recording and wireless transmission of data using PDF documents has left Jablonowski "stunned" at how far the industry has bolted into the electronic and Internet age. "To see insurance going that way, they've actually sprung ahead," he says.

To be sure, technology adoption among carriers, brokers and buyers has ebbed and flowed with the expansion and contraction of information-technology budgets, which in turn rise and fall with premium trends in the insurance marketplace.

The more the industry can spend on new technology, the greater its gains.

Rising and falling markets aside, the industry, once the leader without peer in the adoption of computer hardware at a time when there was no Silicon Valley, has retained its ability to embrace technological tools and innovate.

CYRIL TUOHY is managing editor of Risk & Insurance®.

ALSO: READ THE OTHER PARTS TO THE INNOVATION SHOWCASE ISSUE.

September 15, 2007

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