Turning Insurance Outside-In

Matthew Josefowicz

Across the great formal presentations, panel discussions, and roundtables at our 7th Annual Council Meeting this week, one theme kept jumping out for me: the need for insurance to become more demand-led in market, operational, and technology strategies.

As an industry, we have a tendency to view the world from the inside out. We need to reverse that perspective and look at the our industry and our operations from the outside in. We need to start from market and operational needs as we plan product, service, and technology strategies, rather than starting from our own understanding of capacities.

Our keynote speaker, data and analytics expert Adam Braff, hit on this theme in his opening presentation on “Cooking with Big Data,” with the first of his 5 guidelines: “Figure out what people want to eat before you go shopping.” Too many analytics efforts start with gathering data rather than thinking about how insights might be operationalized to drive better business results. The supply of data and analytical capability is leading in too many cases, rather than the demand for insight.

My presentation on Trends in Information Technology and Insurance focused on how changes in the ability to access, communicate, and analyze information means that buyer and distributor expectations about speed, flexibility, and even value propositions, are diverging from insurers’ own understandings of the world. The supply of risk analysis and distribution is leading in too many cases, rather than the demand for coverage.

In our CIO panel, a common theme of the panelists from AFLAC, The Hartford, Great American, and New York Life Investment Management was re-orienting IT organizations to be more focused on the creation of business value. This involves educating IT staff about business needs and goals as well as educating business leaders about the implications of their requests. The supply (and cost) of technology is leading in too many cases, rather than the demand for capabilities.

This will be a massive shift for the insurance industry, but one that is necessary to undertake. Access to information, communications technology, and analytical capability is democratizing the ability to price and sell risk. Insurers (and insurer operational and IT executives) that focus on the demand for coverage and capabilities will be better positioned to meet that demand. Those that don’t may soon find themselves with much less demand for what they have to offer.

The 7th annual Novarica Insurance Technology Research Council Meeting was held in Providence RI on April 30-May 1, and was attended by more than 70 insurer CIOs and senior IT executives. A report based on the discussions at the meeting will be published shortly.

Other recent Novarica reports on this theme include:

 

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.

New Report: IT Security Update

Tom Benton

IT security has been a hot media topic during the past year;  NSA program revelations, retailer credit card breaches and password hacking at popular websites, just to name a few. These high-profile news stories are just the tip of the iceberg - the Identity Theft Research Center recorded over 600 data breaches, including mandated reporting from healthcare entities.

Novarica recenty completed a survey of 95 Novarica Insurance Technology Research Council member CIOs with questions about top security concerns, mobile device security, frequency of external audits and budget/spending levels.  The results are available in a new report, IT Security Update.  Among the key findings:
  • Most insurers plan to increase spending on IT security in 2014
  • External threats are the primary concern
  • Some insurers still don’t do annual external security audits
For more information on the survey results and the report, please contact me at tbenton@novarica.com.

More than 25% of insurers increasing IT outsourcing in 2014, but some heavy users scaling back

Matthew Josefowicz

Our latest CIO survey report on IT Outsourcing shows that while more than a quarter of insurers are increasing their use of outsourcing in either application development and maintenance, specialized IT skills, and IT Infrastructure, some heavy users of ADM outsourcing are planning to scale back in 2014.

Over the past decade, there has been an important shift in the business drivers for outsourcing. There are few pure cost reduction initiatives undertaken today. More and more of the demand centers on enabling new capabilities rather than just reducing the costs of current capabilities. Few organizations have the ability to meet peaks in demand or to attract and support staff to meet specialized needs. In addition, many insurers find that infrastructure and commodity tasks can be done more effectively by partners.

Outsourcing is an important part of CIOs’ toolkits. Like any good tool, it can deliver great value when used effectively, and cause great pain when used recklessly. Outsourcing decisions should involve careful consideration of business goals, current capabilities and skills, how external partners will be managed, and how external staff will integrated into the culture of the company as part of any cost/benefit analysis.

The full report is online here: http://www.novarica.com/it_outsourcing_update_2014/ (a free preview is available to non-clients as well).

CIO Wish List

Matthew Josefowicz

If you subscribe to Best’s Review, check out this month’s Technology article on pages 70-72, which features interviews with CIOs Kate Miller of Unum, Greg Tranter of Hanover, Michael Fergang of Grange,  Rick Roy of CUNA Mutual, and myself, as well as stats from our US Insurer IT Budgets and Projects 2014 report.

The article notes, “Data, analytics, mobile, and self-servicing capabilities are among the items on insurance chief information officers wish lists.”

Here’s a couple of my quotes from the article:

Underinvested business resources needed to develop and implement new systems continue to plague carriers, [Josefowicz] said. “Even if you have all the IT dollars you want, you can’t deliver an effective system unless you have a time investment from users and those who will benefit from it.

 

 

The question shouldn’t be how much are carriers spending on IT, “but rather what effect is it having and how is it driving down the overall expenses and the expansion of the business,” [Josefowicz] added. “It’s a challenge for many business leaders to think that way because they’re used to viewing IT as purely an expenses. But it’s really an enabler, just as expert staff is an enabler.”

Check out the full article in the December issue of Best’s Review.

Project End Zone: Business and Tech Trends in Workers’ Compensation

Karlyn Carnahan

Years ago, a carrier I worked for launched a project called Project End Zone whose goal was to move Workers’ Compensation into the profit zone. That project could easily be initiated at many carriers today as the Workers’ Compensation combined ratio has been above 110 for several years now according to AM Best.

Today, with premiums starting to recover and rates increasing 9 quarters in a row, carriers are continuing their efforts to grow their books of business while driving down the loss ratio and doing that in a way that delivers operational efficiency. Most carriers are moving down multiple paths. Investing in agent portals continues to be a high priority to drive ease of doing business and enable multiple channels. Policy administration system replacement is becoming more important to WC carriers in order to enable straight through processing of small policies. Claims administration system replacement continues to be a high priority to assure consistency in claims handling. And analytics, especially predictive modeling, is becoming a critical enabler for WC carriers.

While these are the highest priority initiatives, WC carriers are investing in a wide variety of other initiatives. Whether CRM solutions, Pay-As-You-Go, or enabling mobile a wide variety of creative initiatives are in progress and more are planned for 2014.

You can read more about the latest business and technology trends in my most recent report Business and Technology Trends: Workers’ Compensation.

2014 Insurance IT Budgets and Projects: More of the Same, Plus Increased Activity in Mobile and Big Data

Matthew Josefowicz

We’ve just published our fifth annual study of insurer CIOs’ budget and project plans for the coming year. The good news is that more insurers are increasing their IT budgets slightly, although with IT spending ratios are still within historical norms, which indicates budgets are tracking projected growth rather than being dramatically expanded. We’re also seeing more activity at least at the level of pilot projects in mobile and big data (real big data, not just analytics).

In general, the story for 2014 is one of continuity rather than change. Project priorities are the generally the same as 2013 — for more than half of respondents in this year’s survey, the top two priority projects for 2014 are the same as for 2013. The most common top priorities continue to be policy administration systems, business intelligence/analytics, portals, and (for property/casualty insurers) claims. There are slightly more CRM, more GL/Financials projects in insurers’ top-three priorities, and we believe investments in both areas are being driven by data/analytics strategies.

Self-assessment of current capabilities continues to be modest, and while self-assessment does not distinguish between one respondent’s high standards for itself and another’s delusional self-satisfaction, fewer than half of insurers consider themselves to have strong capabilities in most areas. Which is to say that most insurers are primarily investing in IT to get up to the bar, not over it.

The full report has 17 charts analyzing survey responses by size and sector of company. It is online at http://www.novarica.com/InsIT_2014

Paradigm Shift

Rob McIsaac

We are all, to a significant degree, products of our own experiences and environments. We “learn by doing,” incorporating a personalized version of the Scientific Method to identify what works (and what doesn’t) in order to build a more complete set of facts and impressions that can inform future decisions. Each time we engage in a task, we have an opportunity to learn new things and better prepare ourselves for future ventures.

Hopefully touching a hot stove but once clarified the need to take safety precautions. As insurance carrier CIOs, understanding the joys and challenges associated with policy administration system conversions can also be the result of experience acquired by tackling hard, but solvable, problems. One potential issue with acquiring knowledge this way is the potential to develop a form of tunnel vision, which presumes that changes are both evolutionary and linear. Staying a course can theoretically be a lower risk, and more predictable, path forward. The challenge is that this may keep us from understanding and embracing changes that can be truly revolutionary. These types of changes can dramatically alter normal cost / benefit calculations. The challenge may be that are experiences may make us, at least, initially blind to them.

At one point, having an appreciation for music, I was on a path that suggested that bigger, more powerful and much more expensive equipment was the way to achieve a better experience. Experimentation had confirmed this was true. Of course, along the way, a series of technology advances effectively changed the game. Compression technologies created music files that were of lower quality but dramatically more convenient to use. The paradigm shift for how music is acquired and consumed has been profound. Convenience and cost have trumped other characteristics (e.g., quality) in a change that has been fundamental. Today I can consume a much broader, cheaper and more flexible music library than I could have conceived a few years ago. The jump from a linear improvement in quality in a confined space has been overwhelmed by a fundamental shift that allows me to listen to music that is “good enough” on a device that is incredibly convenient and, as an added bonus, fits nicely in my pocket. It solves a different problem than my original concern, so long as I was open to an idea of a shift in paradigms.

So what does this have with insurance technology? Plenty, it turns out. For example, our general picture of Policy Administration Systems represents a fairly linear progression from solutions that first came to market during the Nixon Administration. Yes, the systems use new languages, run on better hardware, use different operating systems and database structures, but the essential idea follows a pattern that our grandparents would recognize. Dedicated hardware in a company owned data center, likely in a company owned building, represents a solid and time tested approach. Layer on peripheral systems run in the same environment with a set of talented and dedicated company employees, and you have an immediately recognized model for insurance IT. It isn’t bleeding edge but it is also managing down risk, albeit without regard for the opportunity costs embedded in the model. Since everyone else is doing the same thing, more or less, it must be the way to go. Right? In reality, the answer is quickly becoming no, not really.

Of course there was a time when American businesses were so dependent on electricity to keep their operations running, that making your own could become a competitive advantage. That model ended a long time ago.

Part of the issue is that as fundamental changes in technology and business are taking place, we may be unaware of them or, more likely, unable to fully appreciate their implications. Senior managers and executives have built their careers by learning and understanding the current paradigm and being particularly adept at getting things done within it. Understanding the difference between a “fad” and a “shift” can be difficult, particularly of the latter happen infrequently. Since fundamental change is both uncomfortable and disorienting, there can be a natural tendency to hold back and wait for a definitive verdict. In fact, there can be intransigence at that point because of the angst over having part of one’s identity become obsolete.

For insurance technology, make no mistake: fundamental and profound change is upon us. Policy Admin Systems can run effectively as SaaS apps; CRM can easily be delivered as a cloud based solution. Other core technologies can be acquired in ways that trade capital expense for operational costs…and with these changes the role of a CIO can be changed forever. And that change can be a good thing too: more able to focus on strategic issues and the delivery of competitive advantages that make sense in the market; less focused on how well the batch cycle ran last night and when to squeeze an OS or database upgrade into a delivery schedule that is more crowded than the landing pattern at O’Hare on a Friday afternoon.

Some carriers are already onto this idea. A year ago when we asked insurance CIO’s if they would put e-mail into the cloud the response was an emphatic “no way.” Twelve short months later, a small majority said they would consider it; fully 30% of our respondents said “it would be done in 2013.” By freeing resources from the provision of a utility function, these CIO’s are freeing finite assets to focus on things that can bring real advantage to their carriers. The paradigm shift for them is underway and the new question becomes “how fast can we embrace other things like this?”

As a card carrying Baby Boomer, I posses a series of skills and abilities that are both interesting and a bit quaint! I still have audiophile stereo equipment and remember how to turn it on to play CDs and LPs. I can still wind my own watch and know what that does. I still drive a car that has three pedals on the floor and a gear shift in the console. I actually like all this stuff, but I’ve made a conscious decision to live nostalgically by using it.

It is hard to imagine being effective in a senior IT leadership position today by being similarly nostalgic. New paradigms exist. The real question now is how to embrace them!

You Get What You Pay For–Choose Wisely!

Rob McIsaac

I’m often struck by the notion of getting a “good deal.” What does that mean in practical terms, when we make decisions in our personal and professional lives? Many of us contend with this daily, whether it is in deciding small things (where to have dinner tonight), big things (which car to buy), or things that will have a direct bearing on the direction of our career (so, how much is that policy admin system in the window?). We need to make thoughtful calculations that get us to a better place by balancing risks, rewards, excitement and the fear of the unknown. And we need to do it with speed, given the pace of our experience today. Economic advantages can indeed be fleeting things.

So what is the difference between “cheap” and “value”? In short, they are very different ideas when it comes to making investments. Confusing them can have many dire and long-lasting consequences.

I came to this realization honestly enough. I grew up in a family that laughed about how my grandfather “could squeeze a nickel so hard that the buffalo would cry.” We all got the message: it was a lot easier to spend money than to make it, so have your wits about you when making important financial decisions. Being a smart, well-educated investor makes a huge difference when final outcomes are assessed.

It is that outcome component that is really at the core of the difference between “cheap” and “value.” A low initial price tag may only represent the down payment on what may prove to be a decidedly poor investment. “Cheap” may mask ongoing support costs, issues with operability, or even the viability of the vendor bringing a product to market. If a price appears to be too good to be true, then one of two things is true: either you have supernatural negotiating skills, or there’s something hiding under a thin veneer that needs to be peeled away. I start peeling every time something fails a basic sniff test.

Value gets at a different dynamic. It doesn’t look at the sticker price so much as it does the economic “puts and takes” over a lifetime of use. Understanding what that useful life might be, and how the investment is going to earn out over time, is critical to getting this calculus right.

Some of the worst cars I’ve ever owned were the cheapest to acquire and the most miserable to own. Conversely, I got some of the best value from vehicles that had a higher sticker price, but were more engaging to use day-to-day, based on comparable functionality.

Technical investments work much the same way. To get to a real “value” conversation you really need to understand both the TCO and the usability of the solution concurrently. At a recent ACORD conference, a presenter ruefully noted that we “overvalue what we can measure while undervaluing what we cannot.” This is why value calculations can be such a challenge. Moving forward, we will find ourselves grappling with issues that are difficult to put hard edges on today. On the other hand, presuming that our planning horizons extend beyond next Tuesday, that’s exactly what CIOs and their teams need to do. They need to help business partners bring the future into somewhat clearer focus and facilitate seeing around corners, while helping to quell the systemic noise and determining how finite investment pools can create best value for their carriers.

Value is a much more exciting concept than cheap is. It requires real thought and the ability to demonstrate thought leadership in difficult economic times. The Great Recession may be over, but the competitive environment of the future shows no signs of lightening up. As the budget battles of 2014 start to heat up, it’s a great time to beware of the cheap–and extol the virtues of value.

On Bad Decisions

Rob McIsaac

Bad decisions are not like fine wine: they don’t get better with time and they very likely carry with them hidden costs or risks that may emerge in the future. Frequently, they will make their presence felt at the most inopportune point, maximizing the “pain” and forcing another decision under less than ideal circumstances. Ultimately, bad decisions can lead to a non-virtuous cycle of suboptimal results, with every future decision becoming a potentially “bigger bet” required to make up for lost ground.

This reality was long ago elucidated for me when I bought my first car after graduating from college. The shiny, sparkly promise of a new ride was intoxicating. The promise of car payments, however, was not! so a car that didn’t leak oil, was unlikely to catch fire, and had a heater that worked seemed to be ideal. In an effort to save a few bucks each month I convinced myself that avoiding expensive options, like air conditioning, was the way to go. What I failed to consider was that driving during a NJ summer while wearing shorts and tee-shirts was a different user experience from driving in rush hour traffic while wearing a suit and tie: I focused on an immediate remediation of current problems, rather than truly considering where I wanted to be in the future. This led to a few years’ worth of very unpleasant commutes. Having our first child gave me an excuse to recast that decision, and I bought a slightly bigger car with air conditioning. That worked well for a short time–I hadn’t considered the impact of a second child’s arrival. I went back to the dealer a third time; that purchase was a charm. Reflecting upon this led me to think about the technology decisions carriers make as they prepare for a potentially uncertain future. How do the requirements get framed for making critical investment decisions for technologies that have a long potential useful life? What criteria are used for making these decisions? Is upfront cost the overarching driver, or is appropriate consideration given to future flexibility and the changing needs produced by an ever-evolving marketplace?

Making good decisions by looking out the windshield to see the future can ultimately be less costly than looking through the rear-view mirror to study the past. It was once famously said that “nothing is more permanent than a temporary solution.”An analog to that may be that bad decisions are simply gifts that keep on giving: they can dig a technical hole that may take years to get out of. Forcing hard dialogue around what the requirements really are, and how they will evolve through an understanding of the future, seems like a no brainer. The magic for CIO’s and IT organizations can be in finding ways to incorporate the flexibility to address the unforeseen. Business and technical changes are rarely linear so this can be an especially exciting–and anxious–prospect. Good hunting!