Cover Story: Insurer Technology Solutions Take Root

In light of last year’s financial performance and the pressure to reduce costs, the common assumption is that insurers will be backing away from technology investments. However, a study conducted by Tillinghast-Towers Perrin at the end of last year shows that of the 248 financial services companies – largely insurers – surveyed, the majority did not plan to back off from technology investments. In fact, 91% felt that the changes promised by technology in the next three years would be “dramatic”.

This also comes despite results suggesting that only about half of the companies surveyed feel they have seen returns in net operating results, growth or return on investment (ROI) from technology solutions. However, over 80% say employee productivity and turnaround times have improved as a result of technology investments.

One issue raised by the study is the need for better metrics to understand the success of investments. “Over a third of companies say that over the last three years they don’t know about or don’t measure such things as channel profitability or customer profitability,” says Jenny Emery, global e-business leader for Tillinghast-Towers Perrin.

But, she observes, companies expect to start looking at these kinds of metrics moving forward to better understand the returns they are, or are not getting from the money they spend on information technology (IT). Respondents expect technology to start paying off in terms of profitability, marketshare, revenue/premium growth and expense ratios in the next three years.

One interesting note is that property and casualty insurers in particular saw the events of September 11, 2001 as an indication of the need for technology in business processes, rather than using the largest loss event in insurance history as a reason to back away from such expenditures. “P&c insurers were the hardest hit by September 11 and more than other respondents indicated new technology was helping them manage the impact of the attacks in their underwriting, pricing and products,” notes Emery.

MIXED REACTION

Of the insurers and technology vendors CU approached, there was mixed reaction as to whether insurers were increasing or decreasing their technology investments. Overwhelmingly, there is a sense that insurers see the value of technology in areas such as distribution and claims, as well as overall data management. Many insurers are preparing systems to deal with brokers online, most of which will be compatible with the Center for the Study of Insurance Operations (CSIO) broker-company portal in time. As well, companies are beginning to look at claims systems, although this process may not be as far advanced as that on the distribution end.

Many companies began several years ago to look at web-enabling their broker distribution. For example, Royal & SunAlliance decided to rewrite its policy systems to be accessible in real-time five years ago, says Grace Webster, the company’s vice president of business solutions. She adds that they have increased technology investments year over year, with a 10% increase this year compared with 2001.

CGU Group Canada started two years ago to work on its web-enabled broker system, and CGU’s head of e-commerce, Doug Hewitt, says there are several other companies ready for a 2003 roll-out of their broker systems.

ING is very much in the “building” phase of its broker application, which should be rolled out in the next 12 months, says Alister Campbell, the company’s vice president of financial services and e-commerce. As projects are tested and rolled out, companies are seeing what can be successful. “There is definitely a growing sense that these tools can be effective.”

“It’s one thing to say ‘this will help us’, they [insurers] are now looking at implementation,” says Rob Gow, vice president of Castek, which runs the Insurocity claims portal. “The education phase of understanding the business value of technology is nearing its end. Companies now clearly see the advantages.” He predicts companies will, in the next 12 months, move into the “buying” and implementation phase if they have not done so already. However, Gow is among those who still see some skepticism about technology solutions.

“Right now I think a lot of people are sitting back when it comes to web-enablement of the industry,” says Ken Clarke, partner in Pictech. This may not be surprising given the number of policy management systems that came and went during the 1990s. Insurers may be waiting to see what really works in the long-term and what does not. “They are dipping their toes in, but they are not jumping in whole-heartedly,” he says. Hesitancy to invest is directly linked to the desire to see the “proof in the pudding” where technology solutions are concerned, say insurers and vendors. There is a “fear factor’ among insurers, says Michelle Mollineaux, principal marketing analyst for claims system vendor Correlation Technologies Inc. “You’re asking them to change their business model, and there has to be trust there.” Vendors need to show through pilot testing that their systems are capable of doing what they promise and of bringing efficiencies.

There is a greater reluctance to “experiment” with new systems, says Steve McNeice, vice president of consulting services for CGI. Insurers are looking for systems with a proven track record, as well as vendors with financial stability who will be in the business long-term. “Having come through the ‘dot.com mania’, where companies and initiatives have failed, they [insurers] are being less adventurous.”

Another factor causing hesitancy is insurer financial results. “What we’ve seen in the last seven to eight months, unrelated to September 11, is that insurers’ budgets [for technology] have been cut back for 2002,” says McNeice. With insurers’ poor financial performance, any project considered “nice to have” rather than “have to have” is likely on the back-burner. “There is promise, because they [insurers] do see the ROI, but they are being very careful [and understandably so] about what they spend their limited resources on.”

WHAT IS SUCCESS?

ROI is the key, the ultimate “litmus test” for whether an IT solution will be implemented or not, comments McNeice. This view is supported by Gow, who points out that insurers are looking for tangible returns for the technology investments. “There was a time when they were saying ‘we’ll spend the money and look at the business case later’.” Now, a strong business case must be made, and insurers want to know when and how much cost savings they can expect to see from solutions. In this respect, Gow notes, insurers are often conservative in their expectations.

For HB Group’s foray into claims technology with Insurocity, the metrics were clear – to increase internal productivity and reduce adjusting costs and indemnity, says Keith Dalgleish, vice president of e-commerce for HB Group. Harder to measure was another factor, the desire for better customer service.

If ROI is king, there are a host of other benefits insurers expect to see from technology, whether it be aimed at distribution or claims. “Re-usability”, consistency with the rest of the industry, broker buy-in and ease of implementation are important, says Webster. Reduction of duplication of effort between brokers and insurers and increasing accuracy are also goals, adds Claude Smith, vice president and CFO for Kingsway General Insurance. His company is developing a proprietary Internet site for brokers that is currently at work in the company’s U.S. operations and now “piloting” in Canada. They are also looking into claims solutions which he says are not solely about bottom-line savings, but also about moving to a paperless transaction environment to be more efficient and serve customers better.

A broker portal project under way with Custom Software Solutions Inc., in partnership with Wawanesa Mutual, is as much about efficiency as increased sales, says CSSI president Scott Andrew. He notes that the majority of broker transactions are policy changes, “60% of the transactions we do net us [as brokers] zero dollars in
revenue. Customer and broker expectations have a key role to play in technology implementation. “There comes a time when this is expected, this level of service,” says Hewitt. “It’s not necessarily revenue-driven, but it helps.”

BROKER INCENTIVE

The big push for web-enabled broker systems has come from the distribution chain itself, sources agree. Smith notes that the pilot test currently being conducted by Kingsway in Canada was done at the urging of the broker involved.

“What we’re doing is listening to our brokers,” says Hewitt of CGU’s plans. Webster adds that 75% of Royal’s technology investments are aimed at enabling its broker distribution force. CGU, Royal and ING are all involved with the CSIO portal as well as their proprietary sites. These companies say they want brokers to have easy access to information, not only for quotes and sales, but also for policy changes. CGU and Royal will be using the preliminary quoting system being provided by vendor Insurance Systems Inc. to offer quotes in Ontario through the CSIO portal before becoming fully-functional in the system.

Still another insurer, Wawanesa, is taking a different route, through its partnership with CSSI. This portal, in use with 300 western brokers, offers quoting capability and will offer further functionality including policy change, says Wawanesa president Gregg Hanson. He notes that after the failure of Synchron, the industry’s first stab at single-entry, multi-company interface (SEMCI), his company sought out a broker solution throughout North America.

Andrews, who was a broker-designate on the Synchron project, says he understands why that project failed. “What we kept losing in the design process was a broker-centric service.” Systems need to be able to deal with companies in a variety of formats, to allow brokers to communicate in whatever way a company is prepared to communicate, be it paper-based or fully electronic. “In order to effectively communicate with each company, you have to interact differently with each one.”

Broker-distribution companies need to be able to compete with the most efficient service, says Hanson. “We don’t know where the competition is going to come from.” It could be banks, stores, online sales. “Will somebody like Wal-Mart be selling insurance in the future?” In this respect, Webster agrees. “The independent broker channel needs to change the way it does business for both of us [insurers and brokers] to survive.”

ING has among its projects a plan to help brokers develop their own websites in order to market, cross-sell and better service customers, says Campbell. Both this and the ING proprietary site are attempts to make the broker channel as effective as possible.

Smith notes that much of his company’s push to automate broker transactions has come from its U.S. operations, which face heavy competition from direct writers.

Whether companies operate on a direct writing basis or through brokers, more and more are prepared to interact in the online environment, says George Small, co-founder of Kanetix, an online quoting site that deals with both direct writers and broker companies. Kingsway General, HB Group, Royal, CGU and ING’s Western Union are all part of the service. With the increasing willingness of consumers to seek out information online, insurers are looking for a way to get quotes to consumers and drive them to either a broker or direct sales channel. Insurers should be able to stick to their core business of underwriting risks, and using an online “host” platform for consumer quotes is one way to do this. “Our feeling is that we’re probably better positioned to give the public information [from a variety of insurers]. Where insurers have the advantage is in the service side of their Internet sites.”

SUPPLIER “SAVVY”

If brokers are pushing web-enabled distribution, likewise the supply chain is pushing online claims management. Insurers seem to be just now looking into claims seriously in terms of web-enablement, although some have already put wireless and laptop technology to use with their adjusters.

There is an enormous focus on claims for insurers, says McNeice, adding “that focus is only going to increase”. This relates to the need to address claims expenses, including in areas such as fraud, and technology solutions may play a role here. His company’s use of data management to reveal fraud has been well-received by insurers, he adds.

Fraud control is one factor in claims automation, agrees Matthew Turack, supervisor of special projects for Kingsway General Insurance. “We’re really putting a high importance on the use of technology in the claims environment,” he says, noting that his company is investigating several different claims solutions, with an emphasis on fraud control as well as other aspects of loss control and efficiency. “Claims is really coming to the forefront,” says Mollineaux, pointing out that auto claims service, and the speedier closing of claims files, has become a top priority for many insurers.

However, as Webster notes, there is still a need to see proven solutions in this area. When Royal investigated vendor management systems two years ago, they found the technology was “very new and very expensive. The business case was not there at the time.”

That said, external vendors are mounting a push to get insurers involved in online, paperless communication, says Turack. “Everyone acknowledges that this is the route to go.” Furthermore, Gow notes, “there is a perception that these small [supplier] operations aren’t technology-savvy, but that just isn’t the case”. Many vendors are better prepared than insurers for online transactions, and are eager to jump online. “They [suppliers] really want to know how to market the technology to insurance companies,” Mollineaux points out. “They really recognize the need.”

ENTRY BARRIERS

Mollineaux says that insurers may be overwhelmed by the number and variety of new technologies out there to learn about and choose from. “There is so much new technology, so many new phrases. In terms of hubs and collaboration technology, there is a lot of confusion about what these mean.”

There is also concern about the length of time to implement systems, says McNeice. Insurers fear buying a system that will be almost outdated by the time it is fully-functional. For this reason, many insurers are looking to component systems or solutions that can be implemented in stages rather than all at once. And, there is also the question of compatibility with existing company systems. Andrew notes that dealing with insurer legacy systems remains a challenge, and solutions must work on a variety of levels because of this.

“Out-of-the box” solutions rarely take into account the vast differences in company operations, underwriting rules and rates, and service needs. “Packaged software for this industry is very difficult given the operational differences between companies,” says Clarke. Companies continue to seek out long-term applications that are flexible and robust, he adds. If they have not found these “holy grail”, all-in-one systems, companies are at least moving towards a paperless environment with document management and imaging solutions that are bringing efficiencies.

But, the biggest challenge facing technology implementation may be the “business culture” itself, many sources say. “Operations has to buy in,” says Dalgleish. Insurers will have to change their own processes to become more efficient, as well as that of suppliers and other stakeholders. “Technology by itself won’t produce big productivity gains, it’s the change to process that does.”