THE COMPLEX PATH TO POLICY ADMIN MODERNIZATION
The business environment in which insurers (both property/casualty (P&C) and life/health (L/H)) must compete has become as fast moving and as complex as the technologies necessary to manage it. The speed of information flow, combined with the upsurge of mobile and social technologies, have changed the way in which policyholders interact with their insurers, resulting in increased expectations for 24/7 accessibility, usability and self-service. These factors, combined with security risks due to outdated systems, inefficient processing of policyholder information, lagging response times, and the increasing number of IT staff with proprietary knowledge nearing retirement age, point to the need for policy administration modernization.
“One of the biggest challenges facing insurers is how to remain relevant in today’s digital economy,” says Karen Furtado, partner at Strategy Meets Action and author of SMA’s “Insurers’ Core Systems Buying Trends” report. Furtado points to the issues related to that challenge: products not evolved enough to be consumed and a lack of data available for real digital consumption.
“We still have old transactional paradigms,” adds Furtado. “We are being called in to help with digital strategy--how to be digital in and out. Internally you have to have rules/workflows and mobility for your internal workers, and you have to be digital
In order to successfully compete and remain relevant, insurers must evolve and modernize their policy administration systems.
externally to those consuming that info along the chain. Core has to support that. That’s the shift – that’s why we are seeing the buying trend, for example, of portals being sold with core policy admin systems.”
The decision to modernize a core policy administration system, the lifeblood of an insurer’s operations, doesn’t occur overnight, nor does it occur in a vacuum, and for some carriers, it’s a decision that is still on the back burner, because the prospect of approaching the host of upgrade options available is overwhelming.
A TOP PRIORITY
Yet insurers recognize the importance of policy admin modernization: SMA reports that to date, 74% of insurance companies invested in core systems replacements this year, and it continues to register as a top priority, notes Furtado. And there is a new sense of urgency: In the early part of 2015, SMA research showed that personal lines were the farthest behind in policy administration modernization efforts, as published in “Policy Administration: P&C Plans and Priorities.” Two-thirds of insurers writing personal lines had not yet begun to implement a modern core policy administration system, notes the report, and only 8% had a modern policy system online.
Of the 139 core systems purchased by insurers in 2015, 35 were policy admin standalone (See Figure 1) and 60 were suites (which include policy admin, billing, claims, etc.), notes Furtado. “The smaller the insurer, the more likely they are to purchase a suite. In fact, this is where the trend toward suites is really playing out. Note that Tier 4 insurers are purchasing suites at a staggering rate: 72%--one out of every four core purchases--of all core transactions in 2015 was a suite for a Tier 4 insurer,” she says.
“This makes sense when you think about the largest personal lines insurers, which control 80% of the market,” notes Donald Light, director of the North American Property & Casualty Practice at Celent, a research and advisory firm. “The top 5-8 insurers are working with 15 to 30-year-old systems—most with several of those systems on-premises, and so they are slower to modernize. Plus, these recent core purchases are replacing those implemented 1015 years ago, during the first core modernization wave.”
Consulting firm McKinsey agrees, stating that the P&C industry lags in digital sophistication. “Our analysis suggests that the top 20 or 30 processes can account for up to 40 percent of costs and 80 to 90 percent of customer activity. Digitizing these processes can take out 30 to 50 percent of the human service costs while delivering a much better customer experience,” say the authors of McKinsey’s new report, “Making Digital Strategy a Reality in Insurance.”
NO SIMPLE, QUICK FIXES
Life and health insurers are even farther behind than P&C, notes Tom Scales, Research Director with Celent, who cites approximately 12 policy admin deals a year in the life line of business. “Even with drivers such as Internet-enabled consumer sales, conversions are complicated for life carriers, so their deals are designed for greenfield opportunities or for new business only. And with health exchanges, they are still running old systems but with snazzy front ends.”
“The fact is, there are no simple, quick fixes,” says Furtado. “True transformation takes resources, dollars and time.”
Even after the decision is made to modernize, the existing systems that maintain policyholder data must continue to run efficiently and reliably during such an initiative, regardless of a rip/replace, develop and built or upgrade option.
Indeed, industry leaders are concerned about costs and the challenges associated with transforming their systems. But, argue the McKinsey authors, the penalty for doing nothing or moving too slowly could be far greater.
It follows that the looming demand for performance improvements in support of increased business results have some insurers looking beyond mere upgrades to digital transformation of their core policy administration systems.
“Advancing their business to a modern core platform is a major step toward becoming a Next-Gen insurer – not only because it increases speed to market, efficiency, and effectiveness, but because it provides the foundation for truly digital interactions,” says Furtado. “We are always looking for insurance to move faster, but we seem to be holding at our first attempt to be digital, and we are not optimizing yet. We could do this in claims and with claims adjusters, for example, making that experience much more disconnected from laptops and more mobile.”
Furtado’s view of what SMA calls a “Next Gen” insurer equates with market leadership, and involves moving beyond modernization of policy administration to optimization and innovation for the future (see Figure 2, SMA Business Value Maturity Model).
THE MOVE TO DIGITAL
Digital is very much a part of the next generation of policy admin systems, and from Celent’s perspective, includes a distinct path toward enhanced digital optimization that
embodies functional/operational and technical/architectural development (see Table 1) and includes integration of the following as a minimum:
Reporting, business intelligence, and analytics integration Modern user interface (UI) design Agent, prospect, and policyholder portals Product configuration capabilities outside of IT department.
“Very few insurance IT shops say ‘next year we won’t do anything new or different.’ So, for all lines of business, the goal is continuous improvement,” notes Light.
For some insurers, it will mean a full rip and replace of their policy admin system(s); for others it will mean a wrap and extend, which means keeping the old system but providing more agility via integrated add-on’s such as a BPM system interface, new portals or a rules engine. For many, notes Light, the digital path will also include evaluation of hosted/ cloud based services. “Most current [cloud] implementations require the vendor to support multiple releases, across multiple platforms, which increases their overall costs,” says Light. “The nirvana to a Policy Admin System provider is having all of their customers running on the same release of the system, and as PAS implementations move into a multi-tenant, cloud-based implementation, this nirvana may ultimately be achieved.”
Furtado maintains that policy admin systems need to be future-ready. “This means it must support the organization as it adopts new business models, new technologies, and a culture that looks beyond core applications and more at executing on enterprise goals that support changing market conditions.”
Celent’s Scales, who specializes in the life and health lines of business, agrees. “For the first time, we are asking actuaries to look beyond mortality and morbidity data and focus on actual behavior. Using John Hancock’s Vitality program, which rewards policyholders for healthy living behaviors, as the example, the policy admin system they employ links a variety of additional sources, to third-party data, and to data scientists who can analyze it and create real-time flows to underwriters based on all the data that’s coming into the system.”
McKinsey asserts that although the traditional insurance business model has proved remarkably resilient, digital has the power to reshape the industry. “As new opportunities emerge, those insurers that evolve fast enough to keep up with them will gain enormous value; the laggards will fall further behind,” notes the McKinsey authors. “To succeed in this new landscape, insurers need to take a structured approach to digital strategy, capabilities, culture, talent, organization, and their transformation road map.”
SMA’s Furtado believes policy administration transformation lies in the insurer’s ability to have the agility necessary to both adopt and adapt. “Our research shows that 80% of insurers now view themselves in a transformation or growth mode. Insurers realize that it will be continuous change – not a one-time pass-through with this. The journey we’ll always be on. We just need to get out of our own way and be more innovative.”