July Market Acquisitions

Catherine Stagg-Macey

In a recent blog on the evolution of core software in London market, I suggested that changes were afoot. (http://blog.novarica.com/?p=2470/) And so they were.

At the beginning of July, Xchanging acquired two insurance software companies within a week of each other –
AgencyPort Europe *(http://www.xchanging.com/news/xchanging-acquires-agencyport-europe/) and Total Objects. (http://www.xchanging.com/news/xchanging-acquires-total-objects) A week later, HG Capital, a private equity firm, announced a co-investment in Sequel Business Systems. (http://www.hgcapital.com/news/hgcapital-announces-investment-sequel-business-solutions)

Whilst the deals are very different in nature, they speak to the buoyant view of both software companies and private equity firms alike. With the consolidation of vendors, it also offers a more distinct choice for insurers.

The Xchanging acquisitions fill out their portfolio of offerings with the addition of a cloud based bordereau management system (TotalObjects), MGA systems (TotalObjects and AgencyPort), a risk aggregation tool (AgencyPort) and a system for Health Insurers (AgencyPort). The deals bring with them some duplication – two broker systems, two reinsurance systems, two MGA systems and two underwriting systems for both syndicate and company’s.

Xchanging has made it clear to all users of all these products that they will continue to support all products for the foreseeable future. That said, we would expect to see some consolidation of the product portfolio in the coming years. At a minimum, this is needed to streamline the market messaging and at an operational level, it would not be surprising to see some reduction in duplication to reduce current operational costs and future product investment.

The co-investment in Sequel Business Systems, a competitor of AgencyPort and Xchanging, will bring with it an injection of cash. No details have been published on where this might lead the company, but in conversations with clients of all these software companies, initial responses were mixed. A spate of deals like this always introduces uncertainty and it takes time for customers and prospects to embrace and understand the impact of these deals on their own technology investments.

One of our critiques of this sector of insurance software over the years has been the underinvestment in the solutions. These deals suggest show this is changing and insurers can be optimistic in the future evolution of London market software.

NOTE: Agencyport Europe has been separated out from Agencyport NorthAmerica in the recent years. This acquisition does not impact AgencyPort NorthAmerica.

Business and Technology Trends: Individual Annuities

Rob McIsaac

This week, Novarica released the most recent of our Business and Technology Trends reports, focused on the Individual Annuity market segment. The report is available for immediate download from Novarica’s research library or directly via the link http://www.novarica.com/b_and_t_trends_indv_annuity_2014.

The individual annuity space remains highly competitive for carriers in the United States, with cost pressures remaining high and low interest rates keeping margins compressed. With alternative investment and protection vehicles in the marketplace, demographic shifts underway and consumer preferences for how they engage with financial services providers changing, carriers face important investment prioritization decisions. Novarica’s latest Business & Technology Trends report explores all of these issues in detail. This is particularly timely for organizations that will be starting their 2015 budgeting efforts in the near future.

Consolidation in the industry is both creating more concentration of business among a smaller number of carriers, and forcing acquirers to consider a variety of options for managing multiple blocks of business tied to aging technology platforms. At the same time, carriers are looking for ways to bring product to market faster, which may include implementation of both TPA and BPO alternatives to internal hosting.

This may be a particularly opportune time for Annuity carriers, however, with the key Baby Boomer generation now reaching retirement age at a pace of 10,000 individuals per day, which accelerates a range of changes in their financial needs. For younger Boomers, the key to future financial health is tied to the final push in the accumulation phase of their lives. For the older segment of the generation, the transition is already underway to move from accumulation to preservation and payout. In either case, properly engaged carriers, who have the ability to deliver products and services effectively, can be positioned for success. With end user experiences now well established by both mutual fund complexes and Defined Contribution retirement plan providers, annuity carriers need to be considering how to create compelling and effective engagement models in order to remain competitive.

This report also confirms what has been seen in other Novarica research: in the current business climate, CIO’s and their teams are being asked to do more without much more funding. This report can be used to both confirm existing priorities and refine future investment plans.

Small commercial insurance moves online…because it’s too low margin to do offline?

Matthew Josefowicz

There was an interesting article today on PC360 about the state of small business online. The article echoed many of the themes and issues we raised in our report last summer, Direct Online Small Commercial Insurance.

The article had some interesting quotes from direct players like Insureon and Hiscox, both of which were featured in our report. But it also contained this quote, which raises an issue we didn’t mention last summer:

“The Hartford is committed to a multichannel distribution model in its small commercial business and independent agents are at the center of the distribution strategy,” says Ray Sprague, senior vice president of small commercial insurance at The Hartford, but adds that the vast majority of small businesses operating in the U.S. today are often too small for many independent agents to profitably acquire and serve (emphasis added).

This resonates with several comments that small commercial CIOs made at a meeting I attended last week. There’s a big SOHO small commercial market that’s too small for most agents to care about. I believe insurers will increasingly look to the direct channel to be able to meet this market demand.

Related research and blog posts:

Business and Technology Trends: Individual Life

Rob McIsaac

This week, Novarica released the most recent of our Business and Technology Trends reports, focused on the Individual Life Insurance market segment. The report is available for immediate download from Novarica’s research library or directly via the link http://www.novarica.com/b_and_t_trends_individual_life_2014/

Five years after the official end of the Great Recession, this is a segment of the insurance industry that continues to face significant challenges. Low interest rates and heightened levels of competition continue to cause economic pressure for companies involved in the sector. Slowing sales in 2013 exacerbated that pressure even as demographic changes in the market highlight future trends which carriers can ill afford to ignore.

There are, however, opportunities for the future, as carriers consider concurrent preparations for both the maturing of the Baby Boomer cohort and the rise of Millennials. Baby Boomers are now reaching retirement age at a pace of 10,000 individuals per day, which accelerates a range of changes in their financial needs. The latter group represents a larger, more diverse and technically more astute generation that has seen relatively low penetration by traditional life carriers. This is a discerning demographic group that has had expectations for services and information transparency heavily influenced by experiences with entities like Google, Apple, Facebook and Amazon. In order to take advantage of these opportunities, carriers should be carefully rethinking operational processes and the underlying technology investments that enable them.

This report explores the range of business trends, including changes in the regulatory environment, which are framing the market for Individual Life products. It also highlights the technology trends, and illustrative examples, for the investments decisions that carriers are now making in preparation for the future.

This report confirms what has been seen in other Novarica research: in the current business climate, CIO’s and their teams are being asked to do more without much more funding. This report can be used to both confirm existing priorities and refine future investment plans.

Commercial/Specialty Underwriting Automation: Cui Bono?

Matthew Josefowicz

Good article recently in I&T on Commercial Insurers and Underwriting Automation., covering some recent studies by various industry analysts. Here’s a quote:

Complex risks are still much more hand underwriting and will be for the foreseeable future,” says Matt Josefowicz, managing director at Novarica. “It’s all about empowering those underwriters with more communications tools and more data. A lot of the tech investment for underwriting in the specialty and large commercial side involves bringing all the information needed to make decisions to the underwriter’s fingertips as quickly as possible.

Complex-risk underwriters present a challenge when implementing new technologies, Josefowicz explains. “The individual underwriting desks have a lot of political power,” he says. When dealing with high-value cases, these experts have a great deal of specialized knowledge and tend to call the shots for which technologies they want to use.

One of the main questions in automating commercial and specialty is in answering the question Cui Bono? – “to whose benefit?” As we discussed in our report on Centralized and Federated IT Models, it’s hard to drive IT strategy centrally when the political power in an organization is federated. Commercial and Specialty CIOs need to work closely with their business leaders to make sure they are addressing their key data and technology issues. If the P&L heads can’t be convinced of the local value of an IT initiative, appeals to a weak central power are rarely successful.

For more on business and technology trends in Specialty Lines, see our recent report.

Crowdsourcing Predictive Models: Who Wins?

Martina Conlon

Analysis of data, creation of predictive models, and the ability to take action based on the outcome of those models have always been at the core of the insurance industry. However, there seems to be a peak in interest in the predictive modeling space right now from our research council and clients. Carriers are realizing how effective these scoring models can be across the insurance lifecycle and want in.

From our research (http://www.novarica.com/analytics_big_data_2013/) we know that predictive models can help marketing departments in lead development, cross selling and campaign targeting. R&D departments can use custom or standard predictive models as part of rate making and distribution can use predictive models to better target prospective agents and geographies. Predictive risk models can improve underwriting consistency, transparency, automate segments of the underwriting process, and ensure that the right underwriter sees the right submissions, all the while driving profitability. Using predictive models for claims triage and expert adjuster assignment can have a big impact on claims severity. Insurers use scoring models to gain insight into which claims are candidate for fraud investigation, subrogation, litigation, and settlement as well as more accurate and automated loss reserving.

Although the opportunities abound with predictive models, obstacles slow down adoption, especially for small and mid-size insurers. Potential high cost combined with uncertain return, priority given to other projects, limited internal data volume, the lack of data scientists, and the lack of business sponsorship are among the biggest challenges. Luckily, the vendor community servicing the space is active and expanding, and they are here to help insurers overcome these obstacles. A variety of insurance specific data warehouses, analytics tools, third party data and predictive models can be purchased. Actuarial and specialized consulting firms offer data scientists with insurance domain experience to provide you with the expertise that you lack in house. These vendors are also communicating their successes to business stakeholders and they are paying attention.

And today – a colleague asked me, “Have you heard of Kaggle?” Kaggle is predictive analytics solution provider for the energy industry, but Kaggle also hosts a marketplace for data science competitions for all industries, data science forums and job posting boards. Allstate has an open competition with them for development of a predictive model to predict which quote/coverages will be purchased when a prospect is presented with several options. Data scientists from across the world are working on this right now, competing for $50,000 in prize money. Allstate conducted a similar competition last year around claims with a much smaller prize where they gained substantial benefits and insights from the submitted models, feedback and concepts. And many other Kaggle competitions have no cash prize, just recognition within the community or a job offer.

So one may think – here’s an option to make predictive modeling more accessible to smaller and mid-size insurers. But to date, crowd sourcing of predictive models has been most successful with companies that have a strong analytics practices already. According to industry press, Allstate’s predictive modeling team felt that the infusion of new ideas and approaches was extremely valuable and enabled them to significantly improve their models. Unfortunately, Kaggle won’t likely be a silver bullet for smaller insurers. Kaggle doesn’t offer solution to many of the obstacles mentioned above. However, it does offer one more way for small companies to gain access to a predictive modeling community and skilled data science resources – which may level the playing field just a little bit.

Goodbye, Old Friend

Rob McIsaac

Well, we are at the end of a mighty 13 year run. Microsoft will be pulling the plug on Windows XP life support early next month. All indications are that this is no April Fool’s joke.

All indications also are that someone would have to be fooling themselves to think that continuing to use it now would be a good idea. I have a solitary machine running the venerable OS. It refuses to run Win-7 and so the end has come. In a few weeks the network interface will be disabled and it will revert to being a glorified, isolated, word processor. The sneaker network lives on via a hacker proof thumb drive.

Of course I’m fortunate. I only have one machine to worry about and no dedicated apps that are tied to antique software stack components. The Windows 8.1 machine I’m now running is great and wasn’t much more expensive than 2 year’s worth of extended support from Redmond. Most insurance carriers don’t have such an easy set of choices.

The migration from Windows NT to XP was slow and painful, carrying with it some notable challenges and costs. The journey wasn’t engineered in the shadow of a financial crisis that has had a long, lingering, hangover; it simply faced normal cost headwinds and technical challenges on non-portable code. The contrast between old and new was also stark, with improvement galore, which generally excited users.

This time around, the improvements are significant but harder to see from the UI. In fact the UI is polarizing, so it alone does not create a big push to bring it into use. Perhaps worse, given the long and successful run of XP, is the sheer number of applications that run on it natively and won’t transition smoothly or cheaply. Reliance on old browser version, old software, old databases and other incompatibilities make it daunting to explain why migration is a good idea. It also makes the transition expensive to execute.

Good luck making all those old Access databases, for example, work in a new environment.

Of course, hand wringing won’t be helpful. Developing and delivering on a migration plan, in concert with key vendors, is really the only possible path forward. A range of solutions are possible, including isolating equipment and virtualizing some “legacy” applications. There won’t be a silver bullet on this, however. Looking at this, and a range of other security related concerns, was highlighted in a recent executive brief (IT Security Issues Update) published by my colleague Tom Benton.

One thing for CIOs and their teams to consider, if they haven’t done it already, is building an educational program around this issue. Making remediation part of a broader effort to improve functionality, reduce risk and reduce support cost over time, can also help win critical organizational and executive support. Mixing in some sugar may make it easier to swallow some strong medicine. This one is worth it since failing to address it now could lead to a much bigger problem in the not so distant future.

New Report: Insurer IT Services Providers

Thuy Osman

Rob McIsaac and I recently published a Novarica Market Navigator report on Insurer IT Services Providers. The report gives an overview of some of the major IT services providers to North American insurers and contains a brief profile of each provider, including information about the company’s experience with different types of clients in different functional areas. Providers profiled in the report are: Accenture, Agile Technologies, Capgemini, CastleBay Consulting, CGI, Cognizant, CSC, Dell Services, Deloitte, Edgewater, EY, HCL, HP, HTC, IBM, iGATE Patni, Infosys, L&T Infotech, MajescoMastek, MphasiS, msg global solutions, NIIT Technologies, NTT Data, PwC, Return on Intelligence, Slalom Consulting, Syntel, TCS, ValueMomentum, Vertex, Virtusa, Wipro and Zensar.

With the market becoming more competitive, having a technology partner that can provide the right level of resources to support business initiatives is a crucial tool for CIOs. Novarica’s recent report Insurance IT Outsourcing Update (January 2014), based on a survey of 95 insurer CIOs, found that outsourcing is a part of nearly every insurer CIO’s toolset. 85% of respondents report at least some IT outsourcing. Instead of simply outsourcing for cost reduction, which was the trend in the past, insurers are now outsourcing to meet peaks in demand, get specialized skills and enable new capabilities.

This makes it even more important for CIOs to evaluate service providers not only on the number of resources available, but the type of skills and level of experience the provider has in a particular functional area. Careful evaluation will ensure that CIOs find the right partner to support the organization’s strategy for growth going forward.

Please note that this report is focused on North America, and presents only North American (US/Canada) resources and client experience numbers from these vendors, most of which are global. Each profile gives a summary of the provider’s capabilities and experience to help insurers sort through their many potential partner options, and Novarica’s team can help insurers assess potential partners in more detail through our retained advisory service.

Unintended Consequences

Rob McIsaac

An article in this week’s Business Week magazine reminded me of the impact that unintended consequences can have on projects and programs throughout financial services. Regardless of how one views the Affordable Care Act, one of the clear points of debate and discussion has related to the speed and breadth of program adoption. Following the decidedly flawed rollout of the Federal exchanges late last year, it seemed that the pace of “uptake” would have been considerably slower than program sponsors had anticipated.

A reality now, however, is that adoption is running along at a pretty good clip. One of the drivers helping this along now are professional tax preparation companies like Jackson-Hewitt and H&R Block (http://www.businessweek.com/articles/2014-02-20/obamacares-arms-length-allies-h-and-r-block-and-jackson-hewitt)

How can that be?

Well, it turns out that most of the info required to apply for health insurance is included in the tax return preparation process. Once the IRS forms are completed, it only takes about 6 minutes to apply for insurance, which these companies offer as a service to their customers. It isn’t a political judgment on their end, just actions driven by the economics associated with providing good service to their customers. As they are quick to point out, it is also part of the tax code, and their job is to get the best returns possible for their clients.

Didn’t see that one coming!

Which begs the question how many other good things, that may be unintended consequences, do we miss in managing technology for insurance carriers? Once when deploying customer service capabilities for life and annuity clients at a major carrier, we also deployed the portal into call centers to allow CSR’s to see the same screens that customers could. Nice idea. The unintended consequence, however, was that we dramatically improved our Business Continuity capabilities.

How? We achieved this by taking a variety of systems on different platforms and with different user experiences, and browser enabling them. It was a remarkable, if accidental, addition to our technology capabilities, which created real and measurable long term value.

Are there other unintended consequences that can appear as technology projects unfold? Absolutely there are. One of the challenges that CIO’s and their teams need to keep in mind is how they can foster the appropriate level of situational awareness, and openness of mind, to recognize these opportunities when they emerge.

This isn’t to say that all unintended consequences are “good things”, of course. There are many instances where the result of changes turns into poorly performing systems or capabilities that fall far short of the original objectives framed during the design phase of an initiative.

The key point remains, however. Not all surprises have to be portents of bad news. As new technologies emerge and business processes evolve, there may be new opportunities to see multiplied value for carriers making the appropriate investments in new and innovative ideas. This is potentially an area for IT organizations to add significant, strategic, value.

The Target Data Breach and Lessons for Insurer CIOs

Rob McIsaac

While the Target stores “hack” was not the biggest in recent history, it is certainly one of the most visible and offers some important object lessons for insurance company CIOs. As we have now learned, malicious software was installed on company servers in late 2013, providing a gateway through which hackers were able to gather significant personal and confidential data on Target’s customers. The theft of this data has had significant adverse consequences for the company’s earnings, the trust of their customers, and the career plans of a number of high-profile individuals. The full scope the damage will be hard to quantify and the period over which recovery takes place will likely be measured in years rather than days or months. This is all pretty significant for a company that appears to have been ahead of the curve in thinking about these issues and had made significant investments in both people and technology to inoculate themselves from attacks prior to last year’s holiday shopping season.

What went wrong?

The origins of the issue of course extend well beyond Target’s environment. The debit and credit card infrastructure in the United States is substantially behind what is used in other markets (e.g., Europe). This problem has been well known for a number of years but participants in the ecosystem (e.g., retailers, card processors, banks) believed that this was someone else’s problem, certainly not their own. Since the issues emerged most obviously during the Great Recession, the natural tendency was to kick the issue down the road and hope, in the meantime, that the security risks could be otherwise managed. The sense seemed to be that it would take some future, seminal, event that would create a cause for action. That time may be upon us with this incident, although that is little consolation to impacted customers. As noted in a recent Business Week article, Target had actually made significant investments to get ahead of security concerns. Unfortunately, it also appears that they made notable errors in implementation which allowed the events to unfold with shockingly adverse consequences.

Are insurance companies immune to these kinds of events? Of course not … and they increasingly will face these types of challenges as transaction volumes grow and the speed of transaction processing accelerates. Implementing tools that allow for transaction analysis of varying types is increasingly the domain of all players and financial services, banks and insurance companies included. As the systems are deployed one of the issues CIOs and their teams face is the need to install them so that they effectively operate within their own environments. Failing to tune these systems may produce false positives that will overwhelm the staffs responsible for final intervention in determining whether or not activity is malicious. This issue applies across all monitoring systems used by carriers, including things such as financial transactions, e-mail traffic and security access. Just having expensive software installed is of little comfort if it has not been effectively tuned and is being appropriately monitored in order to assess results. Fine tuning these systems can be as much art as science but is critical if a financial institution is going to achieve a project’s operational objectives.

One of the interesting aspects of the Target case is that these were apparently lessons that the company had learned. The solution they implemented for transaction monitoring was very sophisticated and the company had spent considerable money both implementing it and in creating supporting infrastructure to analyze the results. According to the BW article, they had created a sizable organization in India to monitor the activity. The article goes on to note that this team did their job, effectively creating the appropriate level of alert and communication back to the corporate home office. The corporate home office was also well equipped to handle these types of incidents having created a command center that was specifically designed to deal with security related incidents.

For some unknown reason, however, the communications between the teams in India and the United States went unnoticed or were ignored. What has become clear in recent weeks is that the failure had nothing to do with technology and everything to do with the process and human beings managing the process that were created to support that technology.

There are a range of possibilities for why this happens; speculation on those causes is of little value at this point. The main message is that any process is only as good as its weakest link. This is hardly new news but it does reiterate the importance of real testing, in real world circumstances, to understand how components will react and interact. The parallels between incident management, such as this case illustrates, and disaster recovery events are reasonably significant. Practice exercises get people and technology working together to understand both the “happy path” toward resolving issues as well as to highlight areas where real world circumstances may deviate from a carefully crafted script. The magic for IT organizations can be in understanding those unanticipated events, and creating the mental shelf space for teams to be able to deal with those events by freeing them from needing to focus on relatively simple or mundane tasks. It remains to be seen exactly how the process in this incident broke down.

One element to consider is how tools are used in separate geographic locations as well as how communication process loops can be “closed” to assure confirmation of high priority concerns. Another to consider is the difference in cultural norms which can exist between teams in different parts of a country (to say nothing of different parts of the world) when they are attempting to share information. The nuance and subtlety which are an embedded part of the English language are important for CIOs and their teams to consider, particularly as they move to take advantage of resources in different geographic locations. While this is hardly news too many organizations, the importance of making sure this is well understood throughout the chain of command is directly correlated with the practical importance of the information being shared.

Target is hardly the first company in financial services to learn this lesson, but their logo made for a Business Week cover that will be hard to forget.

For insurance company CIOs, this is also a reminder that there are a range of security threats which need to be dealt with in the near-term. With Windows XP now in the final weeks of support, many CIOs face the unenviable task of selecting from a series of less than optimal choices for risk mitigation. Doing nothing is not an option! Recently, my colleague Tom Benton published a brief on IT Security issues specifically related to insurance carriers. In light of the targeting of Target, this is something that carries renewed important for all of us.

Information security is a messy business. It is not something that can be ignored, given the costs both financial and reputational terms. Even as plans for expanding channels and touch points became clear in our Survey of 2014 Carrier IT Budgets, the security challenges may be expanding faster than oeverall spending levels. We live in interesting times. Good hunting!