Insurance: Reduced Risk Through Innovation

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Insurance: Reduced Risk Through Innovation

By Bruce Caldwell
Issue date: Sept. 9, 1996

nsurers have always worried about their customers' troubles. Now, they also have some troubles of their own to worry about. New competition through deregulation, shifting consumer demands, high administrative costs, inefficient work processes and sales distribution channels, and the strange new world of electronic access to products and services are just a few. To survive, today's insurers must innovate, innovate, and innovate some more.

Sounds good--but just try it with the legacy mainframe computer systems that saddle the insurance industry. Big iron takes too long to change for today's business environment. It's too costly to replace. And its millions--perhaps billions--of lines of Cobol code are riddled with ticking time bombs: date fields that can't count past the year 1999. If the insurance industry were applying for computer insurance, it would probably get turned down.

Information technology isn't the only tool insurers have for responding to industry-shaking changes. Some companies sell off some lines of business and make acquisitions to expand in others. But to a large degree, even those decisions are driven by the cost of IT: Insurers cannot afford to invest in technology for marginal business lines. Also, insurers are investing ever more dollars in IT to reduce costs, enhance profitability , and improve customer service, says John Freeland, managing partner of Andersen Consulting's insurance practice.

How much more? Life and property and casualty insurers spent $19.5 billion on IT last year, an increase of 12% over the previous year, according to G2 Research Inc., a market researcher in Mountain View, Calif. "The industry is undergoing white-collar automation on a scale that the manufacturing industry underwent 50 years ago for blue-collar automation," says Michael McKeon, a senior VP and CIO of Alexander & Alexander Services Inc., an insurer in New York.

More of that money will be going to client-server systems, G2 predicts. Last year, slightly more than a fifth of all insurance industry IT spending went to client-server systems; G2 expects that figure will hit more than 40% of all spending by decade's end.

Driving insurers' growing spending in client-server is the need for them to quickly develop new products. That need, in turn, is driven by new competition from banks and bro kerages. Also, insurance regulations change constantly at the national and state levels. Risks need to be controlled through better understanding of local conditions, with products tailored specifically for those conditions. Routine, paper-based tasks need to be automated to reduce costs. Knowledge-based systems, data mining, and collaborative technologies increase the expertise available to everyone whose work touches the customer at some point.

Hovering over insurers' heads is the year 2000 problem, which will force hard decisions on IT investments. Some systems could start showing problems as early as next year because of system logic triggered by events in the future. "The industry is frustrated in anticipation of spending anywhere from $30 million to over $100 million making year 2000 fixes without any incremental gain in business functionality," says Freeland.

Flawed Scenario
Yet important as the year 2000issue is, insurers must contend with even more fundamental flaws. "The No. 1 is sue is that systems were not built around marketing to an individual customer," says Pam Fredette, president of Horizons Consulting Inc., a unit of software services company Computer Horizons Corp. in Mountain Lakes, N.J. Instead, systems were built around processes, such as claims administration.

Today's systems need to be built around data, such as demographic profiles of customers. That's because more customers look to mutual funds and other market-based investments instead of life insurance for security. As a result, Fredette says, "Insurers have to change who they are, focus on the customer, and redo core applications."

To meet these challenges, insurers are turning to a long list of hot technologies. The list includes: data mining and warehousing, decision-support tools and methodologies, object-oriented technology, the Internet and intranets, imaging, workflow, document management, and computer-integrated telephony.

Among the innovations under way:

Metropolitan Life is piloting video kiosks at two hospitals to provide employees with live video links to Met Life customer-service agents. The kiosks also provide data on employee benefits.
Cigna has automated its claims adjustment and underwriting processes with knowledge-based systems that feature context-sensitive links to an online reference library. Cigna also is connecting the two systems and building imaging capabilities so that claims adjusters can access underwriter files, and vice versa.
Prudential is building customer-service call centers with sophisticated computer-integrated telephony, imaging, and workflow capabilities. The goal: improve processes in sales, underwriting, and claims handling.
Alexander & Alexander Services is piloting secure, individual Web sites customized to meet the needs of institutional customers for insurance brokerage services.

These new technologies aren't simply being plugged into existing operations. Instead, insurers are restructuring and reengineering their business processes. Both their IS organizations and IT infrastructures are changing dramatically, too.

At Met Life, for example, reengineering efforts begun in 1994 made IS employees part of a shared services organization last May, explains James Logan, the insurer's CIO. Before the move, application developers were assigned to the various business units. Now business units can buy IS services within the limits of their budgets and corporate standards, just as they do other shared services such as human resources.

Big changes are under way at Prudential, too. Before William Friel was hired last October as the company's first corporate CIO, "the governance model was one of autonomous, individual business units without any particular concerns about sharing," he says. That changed last December: Prudential brought its multitude of businesses together into five business units, and it created an operations and systems unit that serves all five groups. Each of the five groups also has its own CIO, and Friel is working with them to develop standards, governance models, policies, and an enterprisewide IT architecture.

Insurers still have a long way to go before reengineering and new development pay off in increased profits or streamlining efforts cut costs. Premium income is still flat and costs are still rising, according to a study of 24 property-casualty insurers by Tillinghast-Towers Perrin, a management consulting firm in New York. Averageindustrywide expenses rose to 40.8% of each premium dollar in 1994, up from 40.3% in 1993. Employee salaries and benefits rose, as did commissions paid to brokers and sales agents. IS costs rose to represent 2.8% of each premium dollar, up from 2.6%.

Insurers are trying different approaches to controlling IT costs. Alexander & Alexander, which spends more than 10% of its $1.3 billion in revenue on IT, tried to assimilate the operations of companies it acquired in the United States, while at the same time letting its overseas acquisitions run more independently. By working with both domestic and overseas business units toward a global IT architecture, the company reduced transaction-processing costs. The savings have been invested in client-server and other technologies, says McKeon.

Shopping Spree
Also, during the last 18 months, Alexander & Alexander has taken advantage of volume purchasing agreements with Unisys Corp. to upgrade 3,000 PCs and 2,000 notebooks to Pentium, multimedia-equipped machines running Windows 3.1.1 or NT, with Microsoft Office and Microsoft Mail. A rollout of Windows 95, scheduled for this year, has been delayed while the merits of NT are considered for both clients and servers, many of which run Novell's NetWare.

The new distributed environment will run a policy-management system based on packaged software, but modified in Visual Basic by Alexander & Alexander's team of 120 developers. Already in production at 11 offices, the system should roll out to all branches next year. When that's done, McKeon will retire fi ve legacy policy-management systems. "We're very focused on investing technology dollars in connections with clients and carriers on the reinsurance side, and between us and the market," says McKeon. "We want an open environment where it's easy to share information."

Insurers have a coalition, the World Insurance Network Ltd., to increase the use of electronic data interchange. Members include Aon, Johnson & Higgins, Marsh & McClennan, and Alexander & Alexander. The latter's Web sites will provide information to its brokerage customers, including Bechtel and Philips Petroleum. The sites will provide customers with a range of services, including access to policy data, risk-management data, custom information feeds, analytical tools, E-mail links, closed chat groups, and document transfer to their account team. "This enhances relationship management," says Mia Shernoff, Alexander & Alexander's director of online services. "Our client now points and clicks for policy data, saving the account executive time for more consultative endeavors."

Though several insurers have established presences on the World Wide Web, Met Life has gone one step further. At the request of Microsoft--a major customer for its property-casualty lines--Met Life has become an icon on Microsoft's desktop. Microsoft employees can log on and access data about Met Life auto and home insurance, for example. On Met Life's regular Web site, populated with the Peanuts cartoon characters, customers can get advice on every major life event between cradle and grave.

The insurance industry continues to invest in new technologies, finding ways to remain competitive in a rapidly changing business and technology environment. An underwriter might even rate the insurance industry a good risk.

To view the IW 500 Insurance chart in PDF format click here

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