Getting It Straight

The benefits of straight-through processing in policy administration systems include greater efficiencies and lower costs. Implementing it, however, presents some challenges. Here are 12 best practices to help ensure success.

BY WILLIAM S. FOURNELL

P&C carriers facing challenges to profitability recognize that cutting costs and streamlining operations and technology are essential steps for succeeding in todays insurance marketplace. A key area of focus is policy sales and administration, where multiple systems and silos typically provide limited connectivity and require time-consuming manual intervention.

The most importantand perhaps most challengingtask intended to lower costs and increase consistency of operations is implementation of new rules-based policy administration technologies that leverage straight-through processing (STP).

By automating key sales and underwriting functions for transactions such as new business, policy changes, re-newals, reinstatements, and cancellations, STP can help P&C carriers cut operating costs from 40 percent to 65 percent and issuance time to a day or less. Unfortunately, the available vendor offerings do not meet the needs of many insurers because they are insufficiently scalable or are architected with older technologies. As with most big challenges, there are no quick-fix solutions. Furthermore, many large-scale programs exceed budget and schedule and fail to deliver the value expected.

Here are a dozen best practices that could help your organization embark on a successful program to implement a new policy sales and administration system:

1. Start by creating the definitions. The first step is to define the business vision, objectives, and future operating model of your policy administration and underwriting operations. Key attributes should include:

• Levels of centralization as well as decentralization.
• Product and process similarities across lines of business and products.
• How customized vs. commoditized the insurance products will be.
• Levels of specialization as opposed to generalization.
• Levels of procedural vs. analytical work being handled.
• Levels of subjectivity vs. objectivity in underwriting decision-making.
• Frequency of product and rule changes.
  These definitions must be confirmed and well communicated throughout your organization.

2. Build the road map. Next prepare a road map to the future. Each incremental enhancement/change must be defined in the context of a longer-range, end-state operating vision. Without this long-term approach, initiatives could fail to achieve their individual objectives while reinforcing a siloed operation.

3. Create new roles and business processes. The organization risks paving the cow path if the focus is merely on automating the current manual processes. Therefore, new roles and business processes should be formally developed and rolled out together with new systems and handled as related projects with deliverables that are developed and tested along with the system before implementation. Also, evaluate your existing operational business measures, and update them to reflect the impact of the new system. For example, financial and other performance incentives for agents should be designed to accelerate adoption and reinforce behavior that is consistent with your new operational goals.

4. Recognize there may be a perceived loss of centralized control. Traditional policy administration pro-cesses retain all the control within the centralized P&C operational and underwriting departments. For some organizations, implementing an STP solution may require culturally shifting to a Trust the Agent approach. For example, collection and retention of photos, authority for discount eligibility and waivers, and replacement-cost input are all activities for which responsibility will shift to the agent under the STP model. Following a Trust but Verify approach is most effective, balancing more agent autonomy on the front end with additional audits after the fact.

5. Develop accurate requirements. The temptation is to rely on analysis of the existing legacy systems to document and understand requirements for the new policy administration application. However, the challenge of reverse engineering what are often 20-plus-year-old batch systems written in older 2GL or 3GL languages is huge. Also challenging are the variety and complexity of P&C requirements for multistate, multiproduct policy administration systems. Often, the best source for developing the new requirements is the existing manuals governing policy writing, underwriting operations, and training. Given the regulated nature of the insurance industry, most carriers are diligent in keeping these manuals up to date.

6. Carefully plan and execute a business mobilization program. A strong focus on training, communication, and organizational readiness will be paramount before and during the system deployment. Many organizations spend less than two percent of their overall program investment on these key activities. In some instances, new users will blame a well-functioning system for what in reality is a lack of training, communication, and effective deployment. Identifying a business management group to drive the piloting and rollout of new processes is essential.

7. Employ a block development and implementation strategy. With this approach, the overall program is broken down into development blocks. Each block comprises a set of functional requirements and capabilities that have an affinity and can be developed, tested, and demonstrated as an integrated whole to the business sponsors. As testing progresses through each block, a natural regression trial of the previously developed blocks takes place. A strong rationale for this approach is it can generate an early benefits stream for the organization and provide the potential to make the entire program self-funding. In this regard, a particularly effective strategy is to build first the new business application that populates the new policy administration database and feeds the legacy administration system.

8. Utilize frameworks to accelerate the overall development effort. Functional frameworks can be used to accelerate the definition of scope, requirements analysis, and design as well as to develop the overall application architecture of the new policy administration application. Likewise, technical frameworks can provide a tested and scalable technology architecture designed specifically to support the needs of a policy administration solution.

9. Analyze the user experience early in the program. One of the most challenging aspects of developing a new STP policy administration application is the expansion of users, including agents and other channel partners, who now will have access to a real-time application. It is critical to understand their needs and to define key visual concepts and style requirements well before the application design and construction phases begin. Given current legacy system constraints, there may be a radical change to their work environment. User input and involvement early on is critical to a successful rollout.

10. Plan the overall integration strategy. Policy administration is a core application. As such, it feeds, and is fed by, many other applications. Given the scale of these programs, it is essential to insulate other legacy systems from significant impacts as a result of the new application. One of the most significant challenges in this area is the lack of existing system documentation. Often, legacy applications are batch-oriented. Significant time should be given to batch-flow analysis and to understanding the entire daily, weekly, monthly, quarterly, and annual batch cycles. Also, a key goal should be to minimize the impact to legacy systems that are not being replaced. They must be able to operate in the future as they do today. However, each legacy interface should be built with the flexibility to move to a common interface in the future.

11. Avoid the Tail Wagging the Dog syndrome. Legacy system limitations can constrain potential capabilities of the new policy administration system. Therefore, the program carefully must evaluate trade-off decisions that could compromise long-term benefits.

12. Develop a smart policy conversion strategy. Smoothly converting existing policy information to the new policy administration system is critical. Typically, the new policy administration application logic works fine for households and policies created using the new application. However, it can fail when exposed to policy information already on the books. For example, the existing database likely contains active policies for products that are no longer sold by the company but that continue to be renewed. This circumstance can cause such policies to be marked for nonrenewal by the new application. Another key decision concerns the rules for when a policy is eligible for conversion. Often the preference is to allow policies to convert at renewal time. While this is an opportune moment to move policies to the new application, it can drag out the conversion of an agents book of business over an entire year, depending on policy term lengths. A preferable approach is to convert all policies in an agents book over the course of a single weekend to allow him or her to move swiftly and entirely to the new application. This approach also supports a more controllable geographic deployment strategy.

Unquestionably, there are significant challenges to implementing new rules-based policy administration technologies. However, the cost-saving benefits of systems that leverage straight-through processing are enormous. By employing these best practices, insurers can greatly enhance the design, development, and implementation process and more quickly and cost-effectively enhance their operational efficiency, marketplace competitiveness, and business profitability.

William S. Fournell, a vice president in Capgeminis Financial Services Consulting Practice in North America, has more than 21 years experience serving a wide range of financial institutions, including some of the nations leading insurance companies. He can be reached at [email protected].

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