Property Casualty 360This copy is for your personal, non-commercial use only. To order presentation-ready copies for distr...
User-based insurance (UBI) offers one possible example of a game changer, but like all shifts it comes with itis own set o...
If Not Legacy…Memorable messaging. Variable benefit customizable products. Effective distribution. Informed riskassessment...
with auto, one with rental, and one with specialty. One child is in medical school and one is in law school.Typical claims...
In blending the enhanced services and agility of a new orimproved policy admin system with the predictive and modelingcapa...
Upcoming SlideShare
Loading in …5

201302 Tech Decisions: Changing the Rules


Published on

Article discussing the potential for realignment of insurance strategies to focus on differentiating factors that may or may not include legacy systems replacement. Should legacy systems be outsourced and insurance resources reapplied to strategically unique areas?

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

201302 Tech Decisions: Changing the Rules

  1. 1. Property Casualty 360This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers,click the "Reprints" link at the top of any article.FROM THE FEBRUARY 2013 ISSUE OF TECH DECISIONS • SUBSCRIBE!Changing the RulesOnce insurers began ditching their legacy systems, the game changed for allinsurance carriers. As competitive advantage threatens nearly every business in theindustry, the policy administration system remains the system where all eyes shouldbe focused.Uncertainty over election results, the fiscal cliff,and economic direction appear to have beenaddressed, allowing industry leaders to focus ona return to competitive advantage andsustainable profitability. Even with gradualimprovements in the economy, companiesremain faced with increasingly costlycatastrophe losses and near-term minimalinvestment returns.Profitability and rate competitiveness remainhard earned, as noted by the InsuranceInformation Institute findings that showreaching a combined ratio of 100 no longerdelivers the same returns as before. In 1979, acombined ratio of 100 led to a roughly 16percent ROE; this dropped to 10 percent in 2005; 7.5 percent in 2009/2010; and an estimated 7.0 percent in 2012. As a corollary,the industry has not delivered an ROE above itscost of capital since 2007, implying thatinsurance is not a profitable industry for newmoney.Further complicating the challenges leadershipfaces are continued increases in consumer expectations for products and service, an increasingly diversifiedmarket, distribution challenges, and nonstop technological advances. Bottom line, the insurance industryrequires game changers to improve performance in any meaningful manner.BY STEVEN M. CALLAHANFebruary 1, 2013 • ReprintsPage 1 of 5Changing the Rules | PropertyCasualty3602/1/2013
  2. 2. User-based insurance (UBI) offers one possible example of a game changer, but like all shifts it comes with itis own set of challenges. It is likely that most of the other innovations will come with their own complexitiesas well.Is PAS Passé?Legacy replacement to improve product flexibility, speed-to-market, serviceability, and quality has been anagenda item for at least 10 years now and from all indications will continue to be an agenda item far into theforeseeable future. In fact, if you combine continued rapid technological changes with shifts in markets anddemographics matched by much needed innovation, the term “legacy replacement” will likely fade from thevocabulary to be replaced by a continuous cycle of modularized enhancements ad infinitum.Cafeteria-style policies, integrated big-data analytics, wrapped external service interfaces, influentialregulatory changes, distribution shifts in practices, recurring operational optimization, globalized servicedemands—the rate of change is not likely to slow down nor simplify, leading to the conclusion that policyadmin systems will remain in flux as their new default state.Policy administration from a technological perspective is, for the most part, a very expensive commodityfunction. One recent interview with an expert noted that while new systems sales per year were in the tens,there were thousands of insurance companies, implying that it would be a decade before all the companieshad begun systems replacement.In this same discussion, it was also noted the number of legacy projects that took well over five years, andsometimes ten. Reflecting on all of the aforementioned information, one has to wonder whether or not atsome point the industry might recognize the exorbitant amount of human, financial, and physical capitalbeing invested in minimally competitively advantageous processing capabilities. Even the innovations arerapidly duplicated, begging the question of whether or not they provided a market advantage long enough torecover implementation costs.Will these fluid and complex demands combined with a talent shortage (let’s not forget about the shrinkinglabor pool) and a limited payback period as other companies come up to speed very quickly drive the leading-edge companies to hand off the mundane aspects of policy processing to an external service provider so thatthe people-money-plant investments instead can be focused on competitively differentiating and financiallyleveraged call centers, product designs, distribution practices, agent training and support, underwritingrefinements, claims fraud and pattern analysis, and other higher payback capabilities?An objective analysis of asset utilization might support the argument that the accelerating rate of change andcomplexity is enough of a shift to warrant a new look at an old solution. The most agile organization mightend up being the one that contracts out the huge management and resource load associated with policyadmin systems implementation, enhancement, and maintenance, instead focusing their intellectual capitalon market- or performance-differentiating capabilities.Not to say that a policy admin system isn’t critical, only that itsfunctionality is marginally different across companies, making itpredominantly a commodity function. Unfortunately, theperception of overwhelming uniqueness combined with parochialdesires to “own” the mechanics and supporting resource of policyadministration systems tend to take purchased service approachesoff the table for many companies. Also, these factors often drive companies to decide to write their ownsystems despite the rich field of solutions.Page 2 of 5Changing the Rules | PropertyCasualty3602/1/2013
  3. 3. If Not Legacy…Memorable messaging. Variable benefit customizable products. Effective distribution. Informed riskassessment. Enhanced claims handling. Engaged service staff. Efficient operations. These are the capabilitiesthat will drive tomorrow’s leaders. Unfortunately the often decade-long legacy system projects, with theirassociated start and stops, vendor changes, and conversion flip-flops consume massive resources.Addressing the above needs involves optimizing the use and understanding all available data, from what isinternally stored on policy admin systems to externally acquired supplemental data. Tools and solutionshave advanced to the stage where application is much less of an effort than it was a few years ago, andvendors have matured in both their service offerings and business understanding to help companiesaccelerate implementations with real paybacks.Analytics’ solutions have progressed beyond mining policy admin systems to the concept of “big data” encompassing tremendous amounts of information coming from multiple sources in a variety of formats.Finding small pockets of rate reductions that provide a competitive advantage with profitable customers, theuncovering of a multistate “three degrees of separation,” organized fraud, refocusing retention efforts on themost likely to stay/highest profit customers only, generating a top producer profile from a blend of internalhistorical data and proven seemingly unrelated external data, these all represent the positive impacts fromapplying analytics to data and big data.Layering a strong analytics solution on top of policy admin data and other data sources allows carriers tofocus on four areas where analytics can bring significantly amplified results. In priority order based onpotential impact, they are:Risk assessment (underwriting), including rate assignment, achieved by modeling at a more discrete levelbased on deeper individual and categorical risk data. ISO has introduced a tool that allows companies tomove from a territory-based average rate, say at $812.50, to loss-based rating with specific policies at $1,187and some at $438 (averages to $812.50). Homeowner rates are integrating a magnified view of theneighborhood along with supplementation by external vendors with community and additional individualinformation collected across a variety of modes from rewards programs to purchasing patterns.Claims handling (claims) incorporates analytics in fraud detection, litigation management, subrogation,salvage and recovery, repair coordination as well as work distribution across staff expertise of specific claimstraits, concurrent triggering of requirements, and automated escalation. Fraud referrals would come at thetime of assigning claims or updating it, looking broadly at organized multi-state fraud—which is hard tocatch manually—while using data to minimize claim padding and reducing false positives. This also is wherefast-track claims can be identified, routed, and paid with minimal intervention, reserves set more accurately,litigation probability estimated and, if needed, reserved.Agent effectiveness can be addressed by looking at saturation levels of agents to prospects within a discretegeography. Predictive analytics also works with prospect identification and customer retention. Anincreasing use of analytics looks at propensity to lapse based on historical as well as current data. Post-purchase activity is mapped for a specific client, including—where possible—integrating the performance ofother similarly situated individuals. This is incremented by time-of-purchase demographic information.Mapping propensity against LEV indicates where to put the most time.Customer awareness, which looks at the lifetime economic value (LEV) of a customer across product linesand distribution channels, while adding in spouse, child, business and ancillary line revenue to give a bigpicture. John Smith has homeowners, auto and liability policies along with his wife. He also has three kidsPage 3 of 5Changing the Rules | PropertyCasualty3602/1/2013
  4. 4. with auto, one with rental, and one with specialty. One child is in medical school and one is in law school.Typical claims analysis looks at the given policies performance; LEV looks across all current policies as well as “predicts” future possible profit from the children.Are You Listening?Two relatively new fields of analytics that have been growing rapidly in importance and use—especially withthe rapid adoption of social media—are sentiment tracking and social intelligence. In both cases, solutionproviders have rapidly moved to fill the need with advanced technologies targeted specifically at the socialmedia world.Sentiment tracking involves the development of a dashboard of indicators to show what the general“sentiment” is toward a company based on monitoring what is being said across a variety of social mediaplatforms including Twitter, Facebook, blogs, LinkedIn, and other publicly-available information.There are measurements of mention counts as a trend; red-yellow-green lights for whether comments areneutral, complimentary or critical; historical perspectives to provide context; and reply or escalationmechanisms to allow rapid intervention—a critically important aspect of participating in the social mediaworld.The social intelligence analytics are a bit controversial as they provide a means for acquiring and using non-domain, publicly-available personally-specific information for hiring, claims or underwriting purposes. Theinformation includes atypical data, for insurance, such as shopping habits, rewards programs, magazinesubscriptions, travel habits, hobbies, and anything else legitimately acquired electronically.Individual investigations might include looking for proof of health on workers’ compensation claims,validating non-smoking status, trying to find out if a person has any dangerous habits that might cause abenefit to be rated, and other similar reviews of publicly-available data. The analytics portion involves theaddition of the acquired data into models being built to determine if they have any indicative value thatwould enhance the models’ accuracy.Companies not leveraging the sentiment tracking are ignoring a strong source of brand commentary.Whether or not a given company has a social media strategy or presence is irrelevant; they are being talked about in the social media space, and as a result should at least be listening. This one is almost a given,especially given the amplification that social media brings.Unlike the across-the-fence or over-coffee complaints, social media gives individuals the power to talk tothousands of people about a service experience or problem. Companies not monitoring those exchanges at asentiment level at the least are letting mini train wrecks damage their brand. The social intelligence end ismore discretionary, although the number of fraudulent claims being discovered by these types of techniquesis significant and profit-impacting.Tying It All TogetherLegacy policy admin system replacement is, for many companies, fast becoming more of an ongoingenhancement project than a single major push. To best realize the full potential of new or enhanced systems,and to stay on top of an increasingly complex and competitive business, wrapping the policy admin systemswith a feature-rich analytics solution is necessary.Page 4 of 5Changing the Rules | PropertyCasualty3602/1/2013
  5. 5. In blending the enhanced services and agility of a new orimproved policy admin system with the predictive and modelingcapabilities of a recent analytics solution, pay careful attentionto the data. The entire process should be reviewed as each line ofbusiness is brought forward into a new processing environment.A thorough policy admin and analytics systems implementation should review the process from end to end.What forms are used to indicate what data is needed? Have these forms been reviewed for clarity of layoutand use? Have extraneous fields been reviewed and validated against current needs? What about theprocesses, are they streamlined, with minimal redundancy, limited handoffs, and a focus on “once anddone”? Is appropriate quality checking and input review integrated into the process? More importantly, havethe processes been built around the new system’s capabilities versus making a new system comply with anold system’s processes and constraints? Do you have a shared data dictionary that will help clear up anydefinitional issues? What kinds of checks and balances are in place? Are the interfaces self-checking and welldocumented?Clean data has always been important; however, with analytics bringing this same data into the significantlylarger roles of pricing, claims, agency, and customer, the need to ensure that the people and processeswrapping around and using the new systems for key decisions like rating, claims, agency services orcustomer relationships, is even more critical. While perfection is not necessary, accuracy and quality remaincritical—along with a strong team with solid business knowledge. LSteven M. Callahan, CMC, is a practice director for the Robert E. Nolan Company, a managementconsulting firm specializing in the insurance industry. He can be reached at© 2013 PropertyCasualty360, A Summit Business MediawebsitePage 5 of 5Changing the Rules | PropertyCasualty3602/1/2013