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Midtier Insurers Getting Big Technology Appetites

Michael P. Voelker | February 16, 2015

Policy administration modernization is becoming an imperative for smaller P&C insurers whose total written premium is dwarfed by the IT budgets of their larger competitors.

“We can’t beat the big guys’ ‘black boxes,’ but we have to be able to compete,” says Kentucky National Insurance Company CFO David A. Combs. Competing means achieving straight-through processing on the vast majority of simpler accounts, automating and standardizing workflows, and presenting a modern interface to the outside world.

“Our agents and customers have to see something that’s similar to what larger companies are offering,” Combs says.

Appetite among small- to mid-tier carriers is strong for modernization.  “Vendors are reporting wins with heavy emphasis on larger companies as always, but they are also reporting more activity among the tier-3 companies below $1 billion in premium,” says Jeff Haner, principal research analyst in Gartner’s insurance industry advisory services.

“In our research we’ve found that over 50 percent of smaller carriers are going through policy administration vendor selection and modernization planning right now,” says Karen Furtado, partner at research and advisory firm Strategy Meets Action. “There is a wave of modernization projects still to come among that sector of insurers.”

Picking Priorities

There are many systems from which to choose. “We track 62 different P&C policy admin solutions in the market, which goes to show there’s a fit for everyone,” Furtado says. “The lion’s share of the market is definitely held by the top 20 or so companies, but it’s not a ‘one size fits all’ market.”

Although one size doesn’t fit all, small insurers tend to look for an all-in-one solution. “The extensiveness of the capabilities of the solution, conjoined with the needs of the company, will indicate the solutions each insurer will consider,” Furtado says. “The number of deals has gone up this year for suites that include policy, billing, and claims administration. Even if carriers won’t implement all at the same time, they are planning for modernization of all three capabilities.”

“By definition, smaller insurers are typically challenged with fewer resources in terms of budget or personnel. Fortunately, you don’t need to buy ‘development platforms’ any more. You can buy a full-featured product that has prebuilt processes and templates that you can use with very little change,” Haner says.

In addition to the desire for an all-in-one solution, smaller carriers share a common appetite for core features in those solutions: efficiency gained by rules-based processing; document management and workflow; rating; business income and analytics; and mobile capabilities top the list. In contrast, larger carriers may put less importance on several of those areas due to standalone platforms or an existing best-in-breed component selection strategy.

“Upmarket carriers will generally already have a data warehouse strategy and business intelligence solution in place. They have business rules engines and document management platforms. Those items are more of a pain point with smaller carriers,” Furtado says.  

All-in one was important to Dryden Mutual Insurance Company. Its homegrown, FoxPro-based policy admin platform hadn’t been significantly updated since its development in the 1980s.  

“When Microsoft ended support of FoxPro [in 2007], our shelf life was coming to an end,” says Peter Thorp, senior vice president and marketing manager for Dryden Mutual. He oversees the IT operations of the carrier, which wrote just over $56 million in written premium in 2014 primarily insuring small commercial lines accounts.

The insurer had begun a modernization project in 2008, but abandoned that effort when the vendor went out of business. In 2011, Dryden revisited the effort.

“We really needed a modern, stable environment. Our expansion capabilities were limited not only because FoxPro was being sunsetted, but also because we didn’t have the staff to build the system out any longer. It was a manually intensive system, with no real ability to automate processes and no easy way to provide functionality to agents and policyholders that they desired,” Thorp says.

The company chose ISCS’s SurePower Innovation platform for its ability to deliver core functionality of policy, claims, and billing administration as well as extended capabilities such as document management, accounting, and agent/customer portals. “We wanted a comprehensive suite,” Thorp says. “We didn’t want to take the risk of buying best-of-breed components and rely on others to integrate them.”

Dryden completed a two-year implementation of the SurePower system and went live for new business in 2014. Existing business will be migrated to the new platform as policies renew, and all commercial lines are expected to be on the platform in 2015. The insurer will convert personal lines thereafter.

The impact of modernization was immediately apparent: 200,000 transactions a year that had previously been processed manually are now automatically handled by the system. “Quoting has become easier. It’s easier to get a complete picture of a customer and provide service to customers and agents. A modern interface has made data entry easier,” Thorp says.

Dryden targets a 90 percent automated pass-through rate on both new business and renewals. Because underwriters are taking a last look at the company’s 52,000 commercial lines policies before converting them to the new platform, Thorp expects further productivity gains in underwriting once the one-year conversion process is complete.

“We’ve had massive growth in the past, and the only way we have been able to handle it is by adding more staff. With SurePower, we can grow to $100 million [in written premium] in the next several years without adding underwriters.”

After personal lines business is complete, the company will roll out an ISCS-based portal that will include inquiry, new business, and endorsement processing for agents and online bill payment, policy inquiry, and claims reporting for customers.

“It’s a 24/7 world, and we’ve been behind the curve. This will bring us light years ahead,” Thorp says.

Aloha to Modernization

Straight-through efficiency was also a goal for Hawaii’s Island Insurance, a $120 million P&C carrier based in Honolulu. 

In 2011, the company began a project to replace a homegrown client-server based system with Guidewire’s PolicyCenter. “The driving force revolved around automated decision-making and rating. Our previous policy admin system didn’t handle that well. Our processes had gotten old, and we had multiple systems that required dual data entry. We were trying to drive efficiency through modernization,” says Jeff Fabry, senior vice president, CIO, and CSO at Island Insurance.

There is a high level of homogeneity among Island Insurance’s personal and commercial lines books of business. “Only in about 20 percent of the cases are there risks that require underwriting expertise. Our goal is to take the simpler risks and tasks, come up with processes and rules to automate them, and allow our underwriters to apply their experience to cases that fall outside the boundaries,” Fabry says.

Yet despite this business homogeneity, Island Insurance faced challenges in its automation initiative. “Our biggest challenge through the whole process was understanding our business processes in enough detail to implement those in a new system,” Fabry says.

“Having an in house system that has been in place for many years, a lot of the expertise involved in implementing that system had been lost or forgotten. When we began implementing the Guidewire system, we had to uncover the answers to basic questions. What are the forms we are writing? Where are the templates? How do we do the rate calculation? There was a lot of reverse engineering because that knowledge didn’t exist in the company,” he says.

Gaining that understanding and implementing the new system required, in Fabry’s words, “bridging the gap” between underwriting and IT and replacing its traditional waterfall development approach with a modified agile process. “We worked hard to create ongoing collaboration between business and IT and work hand in hand, instead of having handoffs,” he says.

Overcoming implementation challenges set back the project timetable. The system went live for commercial auto in December 2013 and for garage liability in 2014. General Liability is in progress, and remaining lines of business are expected to be completed in the next three years. Despite time overruns, however, Fabry reports that the project remains on budget.

The impact seen on converted lines is that automation of up to 80 percent of business has allowed underwriters to focus their attention on cases that demand expertise, and having rules-based processing has delivered underwriting consistency

“Prior to implementing Guidewire, business wasn’t always written consistently. Also, by having different systems for rating, rules, and policy administration, there was a lot of room for error. We’ve addressed both of those problems,” Fabry says.

Policy Admin on a Budget

Although small carriers seek a wealth of capabilities in their policy administration system selection, their ultimate decision must consider budget realities.

“Not all of the enterprise solutions on the market will fit insurers that are $250 million [in written premium] or less simply because of the cost to purchase or maintain them,” Furtado says.

Cost was a key consideration for personal lines insurer Kentucky National Insurance Company. When Combs joined the company in 2011, it was in the midst of a conversion project from a 1980s-vintage, mainframe COBOL system, but there was a significant problem with the destination platform chosen.

“The system we had chosen to convert was a good system, but it was one we couldn’t afford. As a $12 million insurer at the time, we would have needed to write hundreds of millions of additional premium to make the purchase economically viable,” Combs explains.

Kentucky National abandoned the effort and began a new search of the marketplace. Ultimately, the company chose the web-based Stingray system from Maximum Processing and began implementation in January 2012, starting with renewal business.

While declining to cite specific costs of the platform, Combs says the switch was an affordable solution for Kentucky National. The carrier also took cost-saving steps during implementation, such as electing not to enable the processing of infrequently occurring out-of-sequence endorsements. 

“Without that ability, we need to cancel and rewrite a policy to process those endorsements, which is a hassle. However, there’s no way we could justify the programming cost to obtain that capability for the few times per month that scenario happens,” says Combs.

Kentucky National also had to simplify its billing process. “We had ‘gunked up’ the previous system with a large number of complicated billing plans that were infrequently used. On a mainframe-based system, you can get by with some inefficiency because of the sheer calculating capacity of a mainframe. On a web- and PC-based system, you have to realize you’re pushing capabilities if you want to offer 12 different billing options,” Combs explains.

The company cut back to a single monthly-payment option on the back end. “We found that 90 percent of our customers paid monthly, and 80 percent use recurring ACH or credit card payment. Customers can still pay ahead if they want to. Also, we can now upload several times a day to our credit card processor, which we weren’t able to do with the previous batch system,” says Combs.

Stingray provides Kentucky National with the black-box processing capability the carrier sought to compete in the marketplace. “I can’t put in as many rating variables as some companies can, but our system gets 95 percent of customers through automatically and at the correct rate,” Combs says.

Kentucky National’s underwriting results have improved 20 points due to reduced premium leakage gained through rules-based consistency. “We’re still getting rid of insureds that shouldn’t have gotten through underwriting before and wouldn’t pass through the system now,” says Combs.

He believes the company has also reduced “opportunity leakage” by right-pricing accounts at inception.

“If we uncover information in the underwriting process that causes a premium to increase from the agent’s quote but do that when the policy is first written, we have a better chance of retaining the account than if we do it later,” Combs says.

Feedback from agents has been positive about the new platform as well. “Getting the right price up front is important for agents,” says Combs. “Even if we end up not being able to write the account, agents stand a much better chance of retaining the customer in their office if they know that right away. The worst thing that can happen to an agent is that they write an account with us and we cancel it later—they will most often lose that business.”

Stingray’s agent portal provides a number of common administrative functions for agents that Kentucky National had not been able to provide under its previous platform.  “Agents can print off declarations pages, policies and insurance cards. They can change cars, mortgagees. Overall we’ve gotten very positive feedback from agents,” Combs says.

Elimination of manual tasks has allowed the carrier to grow to $30 million in premium while adding just two people to its total staff. With Maximum Processing hosting the platform, Kentucky National has also been able to reduce its IT staff from five to one.

“We can’t compete with the cost savings of the cloud,” Combs says.

In addition to having different policy admin priorities and budget realities than their larger counterparts, small- and mid-tier companies face different challenges in their modernization efforts. This includes assessing whether they have the manpower to manage today’s generation of configurable policy admin platforms.

“Insurers want configurable systems, but configuration does change the way you’re organized in both business and IT and the skill sets you need,” Furtado says. “We see people struggle in the new world of modern systems in that they don’t have the skilled resources in the right positions. They may find a businessperson that has a slight bend to technical or vice versa, but those people have not been trained to have the needed experience and expertise to handle configuration.”

Given the choice between cultivating that expertise and looking to the vendor, many small- to mid-tier carriers choose the latter.

“The irony is that carriers still want the configuration tools in policy admin systems that would allow them to be self-sufficient, but because of their resource limitations they often rely on the vendor to use those tools,” Haner says.

“Smaller companies also know they are more susceptible to turnover—if they lose people it can really hurt them. So, they tend to prefer a full-service model where they work closely with the vendor, often choosing a vendor that doesn’t have dozens of very large customers so that they don’t get lost in the weeds.”

“Finding a vendor that was committed to working with us was one of the things we were looking for,” says Thorp. “We are limited in IT—I have two programmers on staff, a business analyst, and myself—so working with ISCS is a necessity in deploying and maintaining the system.”

Small companies may also have a more difficult journey to modernization because they haven’t laid the groundwork for core conversion that larger carriers have.

“Although they have more admin systems to contend with, many larger carriers have modernized and externalized key capabilities, such as rating. They’ve addressed data management at an enterprise level. Small- and mid-tier companies often have a tightly coupled rating engine and their data tied up a single policy admin system that’s been there for 20-plus years. You can’t deal with data modernization after the fact, so they need to go through that process at the same time as policy admin modernization,” Furtado says.

Hearty Appetite for Admin

Companies can’t put off modernization indefinitely. “Companies have to go through this change because they’ve put duct tape on these old systems as long as they can and it is putting a damper on their ability to compete in the market. These systems are fundamental to doing business,” Furtado says.

“The first objective for most carriers of policy admin modernization is simply replacing a system that has become competitively unworkable—putting in a new core to get more flexibility. Once that is done, however, they start looking at what they can do with a modern core in place. How can they leverage telematics; how they can create real-time interactions with customers and agents; how they can improve the service they provide and grow their business,” says Haner. “Core admin solutions become essential as a foundation to those efforts because they provide access to data and the ability to support modern capabilities—they are becoming a means to an end rather than an end in themselves.”

Smaller carriers will continue to find plenty of choices on the policy admin buffet. “There is a lot of great technology in the market compared to a few years ago. These systems are more complete—enabling you to be flexible with your channels and markets, improve time to market, deliver insights, and stop you from dealing with inflexible legacy systems—and there has been a greater track record of implementation success,” says Furtado.

Combs advises his small-carrier counterparts that, in deciding how much to put on their plate, they should carefully assess needs versus wants. “All of us, especially IT people, try to do too much,” he says. “If the system gives you the right premium and you are getting the right rate, you are where you need to be.” 


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