One common question is whether anyone can justify major policy administration replacement projects. The complexity, the integration, and the challenge of replacing custom functionality are daunting. But based on our research, carriers are starting to take the plunge. Over the past 24 months, we tallied more than 160 policy administration system replacements in the P&C sector, not including upgrades (though roughly 60 of the 160 represent purchases of systems by carriers from vendors with existing relationships, including older and/or unsupported policy admin systems). In the life/health sector, activity was lower but still quite active–we tallied more than 70 admin system replacement projects, again not including upgrades.

FRAMING THE DEBATE

We believe the debate is appropriately positioned as a discussion of the trade-offs between legacy and modern systems, or hybrids that share elements of both. The legacy world, characterized by a hard-coding approach, offers advantages of scalability and functionality, while modern systems are more rules and tools based and are designed to be easier to customize and maintain.

While the "surround and contain" strategies currently being used to insulate legacy systems from newer systems (and end users) are getting better, another important distinction is modern systems are component driven by nature. They are based on architectures that leverage a component approach, and they make extensive use of Web services and data standards.

The end result is truly modern systems offer users a world of flexibility and a compelling new business case. The question is whether carriers can make the transition to modern approaches without driving their businesses into total chaos.

HYBRID: NOT JUST FOR CARS

In the past year, Celent has seen a strong shift away from both best-of-breed and all-in-one approaches. While this seems difficult to imagine at first glance (after all, don't carriers have to gravitate one way or the other?), in reality carriers have grown wiser and have begun to adopt what Celent calls a "hybrid approach." This hybrid approach entails selecting a vendor for components that are in need of replacement immediately but with an eye toward what will be needed in the longer term. Using this hybrid approach, a carrier looking at replacing, for example, its claims system this year and its policy administration system in three to five years might emphasize vendors that offer claims systems as a module of a broader suite that includes policy administration, as well.

A strong second choice likely would be claims vendors that either have strong partnerships (particularly around integration) with policy administration system vendors, followed by those that leverage SOA for easier, less expensive integration.?The rationale for this approach is the biggest challenge for legacy replacement typically has been the integration effort (though for many life insurers, conversion certainly is an equal challenge). Minimizing the integration effort through a combination of pre-integration and integration using open standards holds great appeal for carriers that have spent tens or even hundreds of millions of dollars on past projects.

This logic also would apply to similar situations. Carriers looking for a billing system might give preference to a suite that could supply claims or admin. At a minimum, they might expect the billing system to integrate to claims, policy management, and ERP systems via Web services.

FROM THE FRONT LINES

While all of the proposed benefits discussed are great in theory, carriers generally are risk averse and like "proof" these concepts work in practice. This section contains anonymous accounts from a wide array of carriers that have been successful in their use of a variety of types of packaged policy administration systems in the real world.

What follows are "nuggets" from the carriers Celent spoke with:

A relatively large property/casualty carrier implemented a rules-based policy administration system. While it can't all be attributed to this system, the company was able to slash IT budget and staff by more than half. This is largely attributable to system consolidation, drastic reductions in system development, and a service-oriented architecture cutting down on integration effort dramatically. The initial project took just nine months.

A large property/casualty carrier implemented a rules-based policy administration system. With increased automation of policy processing, the carrier believes it could process 30 percent to 40 percent more business without adding staff.

A life/health carrier using a rules- and tools-based policy admin system reports reduced development costs, improved profitability thanks to reduced time to market for new products, and an internal rate of return greater than 40 percent.

Using a rules- and tools-based policy admin system implemented in 2002, a midsize P&C carrier increased its revenue per employee by more than 100 percent.

A small P&C carrier using a rules- and tools-based policy admin system reduced staff and was able to cut IT budget (as a percent of DWP) by more than half.

A small life/health carrier replaced an aging policy administration system with a code-based, vendor-managed modern system. Thanks to significantly lower maintenance fees (less than a quarter of the previous charges), enhancements, and the overall low cost of the system, the new system paid for itself within a year.

A large property/casualty carrier writing specialty business implemented a rules- and tools-based policy system and reduced the time to produce a quote from one week down to 15 minutes.

RISK FACTORS

While these successes may seem to indicate moving to a modern policy administration system is an easy choice, there certainly are risk factors that need to be considered. First, modern systems often have not been vetted in the real world to the extent their legacy cousins have. Accordingly, there is less evidence to indicate how well most modern systems scale beyond a few million policies. This risk can be mitigated by insisting your vendor prove the system's scalability in a lab environment and provide you with detailed results.

A second risk is with many modern systems, not all modules or lines of business are as ready as customers might like them to be. The mitigation tactic for this risk is less reassuring than with the scalability risk. The only way to mitigate this risk is to plan your deployment around first implementing those pieces that are ready to go. However, be prepared simply to decide the system cannot meet your needs yet and the best course of action may be to wait until it does.

The third risk is implementing a modern policy administration system can–and probably will–result in massive changes throughout large parts of the organization. Imagine working from a green-screen terminal for 15 years, when one day you show up at work to find a browser-based application has replaced it. Two key risk mitigation strategies are required. First, involve users at all levels in the decision-making and implementation to avoid surprises. Second, be sure to implement strong organizational change, training, and communication plans as part of your effort.

Finally, to mitigate the overall risk of a large system implementation, go fast. You did not misread that sentence. Despite the counter-intuitiveness of this advice, projects that last three to five years are aiming at moving targets. Business plans and goals change over a long time horizon. To prevent this, plan to have the project completed in 18 months or less. Alternatively, break the project up into meaningful chunks (e.g., claims, policy, billing), each lasting less than 18 months.

CONCLUSIONS

It is easy to dismiss newer technologies as "unproven." However, modern policy administration systems have been around long enough to generate real results, and those results are quite promising so far. Carriers certainly should examine modern solutions as an option but also take careful note of the risk factors described in this article. The real-world examples provided here should cause any carrier to sit up and take notice of modern systems, though only a careful examination of all available options will answer the question of whether a modern policy administration system is the right choice for a carrier's needs.

Craig Weber is managing director of Celent's insurance practice. Chad Hersh is a senior analyst.