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We’re Nothing Without Data

George Grieve | June 13, 2017

Reflecting on last month’s column, my “fireside chat” with Larry Fortin of Millers Mutual, I decided to follow up on one of the important strands of that conversation. I haven’t written much about ROI (Return on Investment) in relation to core systems modernization for a couple of reasons. While we at CastleBay can and do get involved in ROI exercises, it is not a frequent client request, and when it is I end up with an uncomfortable feeling that the resulting numbers are rife with assumptions and may, by the end of a multi-year project, be unverifiable.  Also, to some extent, I think ROI can miss the big picture as to why a carrier undertakes a core systems modernization.

As with so many things in our business the viability of an ROI calculation depends significantly on the size of the carrier involved.  There are two ways to cost justify a new modern core insurance platform: business growth and expense savings. 

Business growth requires several outcomes from the core system modernization. These include:

Ease of doing business:  This means different things depending on the carriers’ lines of business and distribution channels. For a commercial carrier that writes exclusively through independent agents, ease of doing business is aimed at the employee in the agency who, faced with multiple markets for a risk, chooses one over another. We have heard consistently that all other things being equal, the business will follow the path of least resistance. This usually means the carrier with the slickest proprietary interface wins.

Despite the best efforts of industry segments to establish effective agency/carrier interfaces and to reduce the massive duplication of effort in that distribution model, the fact remains most carriers spend major dollars to deploy proprietary interfaces. Usually the most immediate measure of efficacy is increase in business submissions—the number of new business applications received. Assuming the increased submission rate translates into increased new business and that business is profitable (at least over time) the carrier benefits financially.

In the personal lines world, ease of doing business usually translates into customer websites and apps where the insured has various self-service options such as getting a quote, doing a simple endorsement, getting a vehicle ID card, paying a bill, and possibly reporting a claim. The power of these technologies is significant and has led to a situation where technology has become a business driver rather than merely an enabler.

Speed-to-Market: Ease of doing business is all well and good as long as a carrier has the product in place at an acceptable price for the insured to select or the agent to propose. We have all heard many times about carriers that gave up on business opportunities when they found out how long it would take IT to enable a line of business, a new state or even a rate change. For a different perspective on speed-to-market, consider the direct companies that write auto business in the UK.  These carriers do rate changes daily; often in support of an advertising campaign aimed at a certain demographic in a certain geography. Yes, they run “specials” on insurance. 

Pricing Accuracy: Finally, the point of writing more business is to write more profitable business. For many carriers still toiling with data-poor legacy systems it is a significant challenge to understand and segment profitable from unprofitable business. Legacy vendors have minimal ability to run “what if” analyses to assess the impact of possible rate changes. In a business world totally dominated by numbers these carriers are largely flying blind. Further, a carrier needs to know what it can charge for a product and still make a profit. In some markets margins are paper thin: Consider again the commoditized personal lines market where it is commonly assumed that an insured will change carriers for a savings of $50 to $100 of annual premium. 

Expense savings come in two main flavors.  Neither is seen as appetizing. 

  • First there are savings projections which can be made based on staff reductions. If a modern system has rules and workflows and wizards and straight-through processing then fewer people are needed to do the same amount of work. While this is true the equation gets changed to: The same number of people can do more work, which will be generated by business growth (see above). Insurance companies in general do not like to fire people, and significant cost savings in operational expenses usually require staff reductions.   
  • The second and potentially bigger area for cost savings is in claim payments.  While this notion usually causes an outbreak of the vapors amongst carrier management there are sometimes opportunities to reduce indemnity payments while increasing customer service. We had one client that reduced the average number of days an insured needed a rental car as a by-product of implementing a modern claims platform. Seven figure savings in rental car reimbursement were realized and the insureds were getting their own vehicles back more quickly.

So, growth and savings can materialize from legacy transformation. However, the process may be more complex and lengthy than it seems from this discussion. If you recall my conversation with Larry Fortin, seven years into its transformation Millers Mutual has saved no money on staffing—IT is bigger than it has ever been and the business is not significantly smaller.

What is in process is the company is becoming knowledge-based with fewer employees to administrative or process work, and more to knowledge work. IT is bigger but does more to provide information and insights to its business customers. Now the company knows more about where and how it can grow and what lines and classes of business make money. 

One would expect that at some point in the future these promising developments might yield measurable results that can be attributed to the work and costs of the past seven years.

But to Fortin’s major point, that’s not really the point. The point is, for many carriers in this age of accelerating competition and disruption, the justification for legacy modernization is not return on investment. Rather it is survival and relevance. Insurance is nothing if not data. Pretty much everything an insurer does—issuing policies, billing premiums, paying claims—can now be rendered electronically. 

There is no physical product in insurance. Fixing cars, replacing furniture, defending law suits, cleaning up oil spills is usually done by partner service firms. We print fewer policies, process fewer bills, and issue fewer checks. We mail fewer envelopes. Today I pay my insurance and get my policy and ID cards via the device I am sitting at writing this article. My daughters get theirs on their iPhones. 

There is nothing significant that an insurer can do today to grow, change or merely survive that does not rely on computers and data. The basis for everything we do is information: captured, validated, persisted, aggregated, analyzed, segmented, and augmented. The first part of this formulation—captured, validated and persisted—requires a data rich modern core systems platform. Without rich transactional data as its basis, analysis and segmentation are useless. 

Data warehouses are built on and are dependent on the core insurance systems—policy, claims and billing. The days of insurance companies surviving on agency relationships, human capital or niche market expertise are largely over. Carriers such as Slice and Lemonade and to an extent Hiscox are not some weird and faddish outlier; they are the future of our industry and they are as much technology companies as they are insurance carriers.

Maybe a better formulation for thinking about core systems replacement is Return on Information rather than Return on Investment. Information is where carriers now compete, and where they will win or lose. This is recognized and reflected in the amount of money, resource, and attention that data warehouse, reporting and analytics now receives. But, as we noted above, these are secondary (and higher level) information functions that rely on the underlying transactional data from core systems, which are the bedrock for any successful insurance carrier going forward. To recast the military dictum:  He Who Knows Wins.      

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