A more subtle but equally important factor is just about everything adjusters do (i.e., the claims processes, tasks, and activities) is molded by the legacy claims system. Changing that system will mean almost every process becomes a candidate for change, and some processes definitely will change. Potential or actual wholesale change creates challenges for line claims staff and every level of claims management.

In the end, though, many insurers decide the claims function is just too important to live forever within the constraints of legacy claims systems. For example, it can be hard to find people with the right skill sets to maintain and change themnewly hired staff looks askance at green screens, obscure codes, and rigid workflows. In addition, as important as pricing, underwriting, and servicing are, people and businesses buy insurance because they want someone to make things right if something bad happens, i.e., they want their claim paid quickly, fairly, and accurately. Even more compelling in the argument for a cost-cutting replacement is the amount of financial leverage claims exert over an insurers results. Sixty to 70 cents out of every premium dollar is paid to claimants (and more in bad loss years). Another 10 to 15 cents goes to the appraisers, adjusters, and attorneys who decide how much is paid to the claimants. A relatively small percentage change in reserves, especially for long-tailed liability lines and mass torts, can have a powerful impact on the income statement as well as on perceptions of investors and raters.

Replacing a claims system puts significant stress on the claims group, the IT department, and their relationship. The
project cannot succeed unless both groups work closely and well with one another. This article, based on research on several successful claims systems implementations, identifies both those stress points and the best practices for resolving them.
There are five steps in replacing a core claims system: making the decision to replace; choosing a vendor; creating the detailed design of the new system; implementing the design; and deploying it. There also is a sixth step: adding value post-implementation. While not part of the replacement process strictly speaking, this sixth step does much to determine the level of benefit the insurer receives over the life of the new system.

1. Decide to Replace
Simply deciding to replace a core claims system is not enough. A smart insurer will take the time to map the key business and technology drivers that have motivated the decision. For example, beyond stopping the pain of a legacy system, does the claims group want to make its adjusters more productive or process change easier? Does IT want to lower its resource commitment to maintenance or to migrate all new core applications to a new platform?

There also are corporate objectives and strategies. Is growth an imperative? If so, there are implications for improving claimant experience and policyholder retention. Or is improving underwriting performance the focus of management attention? Then identifying fraud and reducing leakage will take center stage. Or have past or future mergers and acquisitions created the need for a claims system that can serve to consolidate many legacy systems?

The payoff for this type of self-knowledge comes with the next step.

2. Choose a Vendor
An insurer needs to balance carefully the vendor-selection team. It should be small enough to move rapidly and large enough to sift through a lot of information from a long first-round list of vendors. Beyond the obvious need for representation from both claims and IT, the team should include people with a hands-on knowledge of how the current processes and systems function (and malfunction). The team also needs people who are senior enough so that its recommendations will carry adequate weight.
When the team creates a request for information (RFI), it should make maximum use of what has been documented in the previous step about drivers, motivations, objectives, and strategies. These will suggest various high-level requirements for features and functions that should be embedded in the RFI, for instance:

Externalized workflow and rules engines that can be used by business-side analysts to develop new processes and
decisions rapidly.

Imaging and document and content management capabilities to create a paper-free adjustment process, utilizing digital claims folders and able to generate required forms and correspondence.

Portals for claimants, agents, body shops, medical providers, etc., that facilitate inquiries, simple transactions, and shared work spaces.

Compatibility with Java or .NET
platforms.

It is worth highlighting one issue that sometimes does not receive adequate attention: the nonlicense costs of implementation. The total implementation project requires a large teamsometimes a very large team with representatives from claims and IT as well as the vendor and/or consultants. Different vendors solutions may demand dramatically different levels of resources over significantly shorter or longer periods. Explicit recognition of these costs should be integrated into the selection process.

3. Design
In this step, the implementation team makes a series of critical decisions, including detailed requirements, use cases, user interfaces, workflows, and decision rules. Good decisions will go a long way to making the new system a success.

One of the most important decisions will be the trade-off between the amount of change in claims processes on the one hand and the need to control the pace and cost of the implementation project on the other. Every insurer implementing a new claims system intends to improve its claims processes. During design it may become clear some of the things the claims staff wants to change will require significant technology resources to configure or even customize the new system. Most insurers will opt for postponing most of these resource-intensive changes until the new system has been in use for some time.

Additionally, the governance structure for the entire project should be in place at the start of the design task. Because of the scope and complexity of new claims systems, many insurers will have a working-level governance group meeting weekly and a policy-level group meeting bi-weekly or monthly.

4. Implement
Most project resources are consumed during this task. This is where careful, detailed design work is rewarded. This also is where a good governance structure and process will handle new or revisited design issues. Some changes are expansions of scope and often are viewed skeptically. Other changes may be prompted by hitting resource constraints within scopethese require more judgment.

Conversion of closed claims files sometimes causes unforeseen difficulties during this step. How far back should the conversion process go? Should all records be digitali.e., no paper? How do you handle the inevitable incompatible data fields and unstructured information? Leaving some form of the legacy system in place partially will solve these issues.

5. Deploy
There are two major issues in deployment: phasing and user acceptance. Many insurers choose initially to deploy a new claims system in a single region or for a product line or function (e.g., first notice of loss). This approach allows for a shakedown period, during which systems, process, and people issues can be resolved.

In a sense, every new claims system always achieves user acceptancebecause the old system no longer is available. But users who are briefed on the new system during its design and implementation tasks and are well trained, preferably by their peers, can make a big difference in the systems value over time. Some creative evangelism also can helpone insurers rollout relied heavily on balloons, streamers, and a cake.

6. Add Value
This is a post-implementation step. The initial design trade-offs between process change and technology time/resources no longer apply. Modern claims systems have a depth of functionality, workflow, and rules capabilities that enable continuous process improvement. To realize that value, insurers must create the appropriate organizational values and incentives.

Six Things an Insurer Must Get Right

There are no guarantees of success in lifeor in implementing a new claims system. However, industry research has identified six elements of successful implementations.

The first is to build a technology road map and business drivers into the vendor-selection process. An insurer that does not have an explicit understanding of both sets of issues before vendor selection starts will reap the consequences during implementation and for years afterward.

The second is to balance the what and when of process changes. Any claims group should have a long list of process improvements it wants to make. The good ones know how to time those changes to push, but not punish, claims and IT staff.
The third is to solve two legacy riddles: to rip or not to rip, and to convert or not to convert. Completely ripping out the legacy claims system has the virtue of simplicity but the cost of a much more formidable integration challenge. The answer to the riddle of converting old claims files will depend on cost and need for future access.

The fourth is to engage the claims group. Of course, claims staff always will be involved. The question is the quality of its ownership and participation. Does the staff bring deep experience and a vision of the future? Does it have a we, not you, attitude? Does it spark anticipation and acceptance throughout the claims organization?

The fifth is to be friends with your vendor. Of course vendors want every implementation of their system to be successful. Smart insurers take advantage of two very specific kinds of knowledge vendors bring: what it takes to implement their system successfully and the full range of features and functions their system provides.

The sixth is to manage the program. Good project and program management skills are essential. To meet both expected and unexpected challenges, claims, IT, the vendor, and any consultants all must share a sense of ownership.

Increasing numbers of insurers have their claims and IT groups following some version of these best practices, with the result they are realizing financial and competitive gains. u

is a senior analyst in Celents insurance group and is based in Silicon Valley. His current research focuses on how technology can support insurers strategies, objectives, and core processes.