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Insurance Networking Magazine - March, 2002
By: Matthew Josefowicz
It may be an old joke, but it’s not a laughing matter:
The only people who really understand the legacy policy administration
systems running at most insurance carriers have either retired
or passed on.
Nonetheless, most carriers are reluctant to replace these systems,
preferring to live with the devil they know, even though their
systems may impose limits on their operational flexibility.
As the money—saving advantages of Web—based communication
become more obvious, many carriers are trying to bring their legacy
systems into the 21st century using various front—ends,
translators and middleware systems. However, a growing number
of insurers are taking a bolder step by replacing their legacy
systems with new platforms.
Although the desire to reap the Web’s benefits in agent
management and customer service is prompting many of these decisions,
updating policy administration systems can benefit other areas,
such as improving outdated workflow processes, making it easier
to add new products and providing better access to company and
customer data.
Spending Spree
Driven by these factors, U.S. and international carriers will
spend an estimated $1.65 billion on these next—generation
systems over the next five years, according to "Profiling
the Vendors of Web—Enabled Policy Administration Systems,"
a report published by Celent Communications in October 2001.
And more than half of the $990 million in domestic spending is
predicted to be spent by mid—tier firms–those with
annual direct written premiums between $100 million and $500 million.
Despite the fact that mid—tier carriers are expected to
spend two—thirds less per installation than top carriers,
the large number of mid—tier firms–and their appetite
for new technology–will make them one of the most important
segments of the market for technology providers over the next
few years. Their projected strong adoption rate is due to these
factors:
§ Lack of previous action. To date, many mid—tier
carriers have been reluctant to upgrade their core systems. Some
of the top—tier insurers have already implemented aggressive
internal initiatives or engaged outside vendors. The mid—tier
carriers are just now addressing this issue, and will take action
within the next several years.
§ Lack of internal competition. Mid—tier carriers
have smaller IT staffs than top—tier carriers and are more
likely to use an outside provider to implement a Web—enabled
policy administration system.
§ Fear of the top tier. As the top—tier carriers move
aggressively to capture the efficiencies of Web—based workflows
and the flexibility of newer systems, mid—tier carriers
that want to compete will be more aggressive in their efforts
to catch up.
Priorities Differ
Top—tier insurance companies–those with more than
$500 million in annual direct written premium–will be less
aggressive in implementing Web—enabled policy administration
systems, focusing their activity on new business lines or start—up
units where their legacy systems are not yet entrenched.
In some cases, these projects will serve as test cases for an
eventual replacement of legacy systems. However, a few top—tier
carriers are forging ahead, replacing their legacy systems with
next—generation, Web—enabled systems without this
intermediate step.
At the other end of the spectrum, small carriers share the same
motivations as mid—tier insurers, but they will move more
slowly and will focus on less—costly systems. Small carriers
also are more likely than mid—tier carriers to outsource
their entire IT function to a business process outsourcer (BPO),
and therefore have a lower anticipated conversion rate for installing
their own systems.
Significant Consolidation
As a result, system providers that serve the lower tier will
need to offer an application service provider model to compete
with the BPO model.
Providers of policy administration systems have recently undergone
significant consolidation. Some of the most familiar names have
merged with, or been acquired by, other players during the last
two years. The positive reason for these consolidations is: Hungry,
expanding buyers–such as CGI Group Inc., Computer Sciences
Corp. (CSC) and IBM Corp.– are always looking to expand
their offerings and product lines to maximize their existing relationships
and distribution channels.
On the negative side, many smaller independent companies had
difficulty convincing conservative insurance companies to take
a chance on a newer provider. In addition, many players were hurt
by the capital crunch of the past two years.
Current strong players in this market include industry giants
such as CGI, CSC, FiServ Inc., and SunGard–as well as other
well—known names such as Allenbrook Inc., Castek Inc., NaviSys
Inc., Sherwood International and Rebus Systems. There are also
several interesting emerging companies with unique offerings.
Choosing a provider for a policy administration system is never
simple. Carriers must examine their own strategic plans closely
before starting to evaluate vendors. In addition to technical
concerns such as integration with other systems–including
customer relationship management or enterprise resource planning–carriers
must consider their long—term product expansion plans and
whether the skills of their IT staff will be able to support the
new system.
Although it may seem a daunting prospect to some carriers, the
potential benefits are enterprisewide. Updating core systems with
more modern database designs and more flexible and easier—to—integrate
architectures can give carriers more information about their own
businesses than they’ve ever been able to extract before.
This new information about customer, agent, and staff behavior
can be used to streamline operations and increase cross—selling
and up—selling opportunities.
In a tightening market, the new opportunities lie in increasing
efficiency, and carriers would do well to consider next—generation
policy administration systems as means to that end.
Matthew Josefowicz is an analyst with Celent Communications,
Boston.
This article orginally appeared in the March, 2002 issue
of Insurance Networking
Magazine. Reprinted by Permission.