To some extent, inertia is driving this trend–policy administration replacements are large undertakings, and a project in motion tends to stay in motion. However, companies see policy administration rehabilitation as a strategic decision. “They really believe it's absolutely critical to have new policy administration and new rating to compete,” says Smallwood.

FUNCTIONAL FIXES

In its study, Datamonitor asked carriers to rank different business drivers for policy administration replacement. Within both the life and P&C industries, the top reason was the inability of legacy systems to contend with a modern regulatory environment.

“Functions to enable compliance aren't necessarily missing, they're just not meeting the standard,” says Jonathan Steiman, analyst in Datamonitor's financial services technology group. “Carriers may be dealing with ad hoc or post-production tools that are clunky to use in order to get the data needed to be compliant with regulations.”

The problem of compliance created by legacy administration systems is particularly acute in the life industry, Steiman says.

“In the life market, there are so many different disparate systems. A big life insurer could have 15 or 20 systems built layer upon layer. An insurer has to look at all those different systems, all with different standards around data and product definition and language. It makes it difficult to get a full picture of holdings and operations and present that information to regulators,” he explains.

Dealing with multiple administration systems is a reality for life, annuity, and supplemental health insurer Conseco, which has completed numerous company acquisitions. The company's preferred platform for consolidation is PDMA's LifePro, but the decision to consolidate is made on a case-by-case basis with an eye toward compliance.

“We look at administration systems and make a judgment based on functionality and risk, such as the amount of additional manual work needed to ensure compliance,” says Russ Bostick, executive vice president of technology and operations. “Our decision is generally not based on a financial payback analysis because conversion projects tend to have a long payback period–five to seven years.”

STRETCH AND FLEX

Beyond the top driver of compliance, the goal of flexibility underlies many of the key functional improvements sought by carriers. In the Datamonitor study, two functions tied to flexibility–improving time to market and streamlining business processes–ranked highly among both life and P&C carriers.

“Flexibility is about having a system that requires less programming to meet the changing environment in a quicker manner. It's about having a policy administration system that enables you to lower your operational costs. It allows you to target the expense ratio by processing and managing policies more efficiently,” Steiman says.

“Improving time to market has been a longtime driver for policy administration projects,” he adds. “You can get the rates approved and create the product, but in the past, carriers have been held up by rigid policy administration systems they had to build out. It's a bigger driver in the P&C market due to competition and commoditization, which creates the need to be first to market with some of the more innovative products.”

“Carriers are struggling with old policy administration and rating systems,” says Smallwood. “They can't put changes in, and it's taking months to put in new products. They have to do something about it.”

Commercial lines P&C carrier Western World Insurance Group is in the process of replacing a 20-year-old policy administration system built on a midrange platform that is “highly customized,” according to Thad DeBerry, the company's senior vice president of IT.

“The system has worked well for us until today, and there is a lot of organizational knowledge built into that system, but it is quite inflexible,” DeBerry reports.

Western World defines “flexibility” as the capacity to help the company achieve four key objectives. First is ease of use for both employees and agents. “We need to be easier to do business with,” DeBerry says.

Second is faster speed to market, tied to the third objective of product flexibility. Last, the company needs to be sure any system is “future resource available.

“Currently, we have a core group of very effective people who have been here for years and know the specific implementation of our existing system inside and out. It would be difficult to find midrange COBOL programmers to step in and continue to have the productivity we have today. Additionally, most of the other development we're doing is .NET,” DeBerry says.

The company chose the QuickSolver platform from INSTEC as the basis to begin a policy administration upgrade. The company is first targeting the “pre-issue” functions of policy submission, rating, and quoting. “We already have a fairly robust policy issuance process. We can get policies to customers–that was not a pain point. But when it came to submission, rate, and quote, we had our hands tied with our existing system,” DeBerry says.

The phased system rollout begins with general liability, targeted for pilot at the end of the second quarter. INSTEC's support for standard ISO commercial lines and the ability to configure new products rapidly were critical factors in Western World's decision.

“INSTEC has a very well-defined framework for ISO lines of business, yet the platform is easily configurable for our specialty lines and supports packaging of products. It also is optimized for connection to our .NET-based agent portal environment,” DeBerry says. By leveraging virtualization software to create development, staging, and production environments for the Web-based QuickSolver on the same server, he notes Western World kept additional hardware requirements and expenses to a “minimum.”

DeBerry believes the QuickSolver user interface, which incorporates Microsoft Rich Internet Application (RIA) technology, will create an easier-to-use experience as well as help the company better ensure future resource availability. Western World also is able to leverage native Web services connections in the INSTEC platform to connect it to the insurer's existing integration infrastructure and policy production environments, including a document production platform from Skywire (now part of Oracle) and an ImageRight document management and workflow solution.

Additionally, DeBerry asserts Quick-Solver's rules-based design will deliver faster product rollout and speed to market while a component-based architecture enables “futureproofing” by allowing the company to target individual functions for replacement if needed.

“It's easy for us to draw a line and take pieces–such as submission, rate, or quote–out if needed,” he says.

Western World is among a large number of P&C carriers focusing on the rating function, according to Smallwood. “If you can pull the rating function out of your policy administration environment and have business users maintain it through a rules-based approach, you can achieve some real flexibility,” she says.

Like Western World, personal and commercial lines P&C carrier Oregon Mutual found its business constrained by inflexible functioning of its legacy system for its non-BOP commercial lines: a 1980s-vintage mainframe running a z/VSE-CICS policy administration system the vendor stopped supporting several years ago.

“The system is code based and inflexible. To make changes, add a product, or do anything other than a rate change that involved a table was time-consuming and slow to bring to market. We wanted a system that would be nimble, get us to market more quickly, allow us to make rapid product enhancements, and require fewer people to do so,” explains Rick Prouser, the carrier's vice president of information systems.

Having also built a mainframe-based administration system for its BOP business, the carrier considered creating a replacement system for the rest of commercial lines but ultimately chose to deploy Duck Creek's Policy Administration Commercial ISO Lines Solution.

“A commercial lines policy administration system is very complex. The resources required to spec, design, build, and test a system would have been overwhelming. Moreover, we wanted to be able to replace our current system relatively quickly. A 'build' approach would have taken much longer than a 'buy' approach, it almost certainly would have been more expensive, and it would have been much higher risk,” Prouser says.

Although the base Duck Creek system can handle the majority of Oregon Mutual's commercial lines, the vendor is in the process of building custom components to handle the carrier's employment practices liability insurance (EPLI) and farm business. Oregon Mutual plans a state-by-state rollout, starting with Nevada later this year, and ultimately plans to move BOP business onto the new system, as well.

The functionality enabled by the Duck Creek system's architecture was important to Oregon Mutual's decision, indicates Prouser. The platform includes prebuilt ISO product templates and provides the ability to package several commercial lines products across multiple states, which was essential to the five-state insurer.

“The model of some of the other systems we looked at was code based,” Prouser adds. “[The vendor] would do the maintenance and enhancements and make rate and product changes. We wanted to be self-sufficient, and Duck Creek is tools and rules based. If we need to make changes, add products, or add classes of business, we can make them without relying on a third party.”

Those types of features are selling points of modern, standards-based systems, Smallwood says. “With today's solutions, carriers have direct access to the data, Web services that enable easier integration, and workflows that support straight-through processing. You can bolt on a different rating engine or a document management system. Also, since the database is exposed, front-end and back-end business analytics and business intelligence are easier,” she points out.

LOOK UNDER THE COVERS

However, Smallwood maintains while today's administration systems are better at enabling integration than their predecessors, they could improve their flexibility by extending componentization to the functional level.

“Policy administration providers really need to open up their systems and allow you to buy the functionality that is needed and to complement the front-end investments implemented. Vendors talk about unbundling, but they're not truly there yet at a granular level–you can't extract and reuse functions such as class code processing or structure of location coding. That's because it's not in vendors' best interest to have a 'Chinese menu' where you can pick and choose functional components,” she says.

“Also, some vendors may call themselves modern SOA-enabled systems, but they're really not SOA under the covers. They're a newer version of today's legacy systems, and carriers will one day wake up and see they have the same legacy issues once again but with a more complex cobweb of Web services and XML,” Smallwood contends.

PORTAL POWER

Providing more online capabilities to producers is another functional driver behind policy administration projects. In the Datamonitor study, enabling better data exchange and integration with third parties ranked equally in importance among life and P&C carriers.

Improving its agent portal was a top goal in Western World's policy administration project. “In the past, our policy administration system integrated in a limited capacity with the portal. The portal had various underwriting tools and limited ability for agents to submit business but did not have full-blown rating or quote because we could not do a full integration with the administration system to extend those capabilities,” says DeBerry.

“We continually heard from our agents that–price, product, and compensation being fairly equal–it all comes down to service. Agents indicated if we built in more ease of use, we could expect to see more of their business. INSTEC can run as a Web service so our existing portal can integrate with the new rating engine seamlessly,” DeBerry adds.

The biggest challenge Western World faced in planning to expand the portal functionality was on the business side. “The most difficult part was defining the business case and settling upon the requirements,” DeBerry remarks. “The technology piece actually has been pretty easy.”

Specifically, the carrier needed to strike a balance between agents' and underwriters' desires, DeBerry explains. “Agents want as few keystrokes and mouse clicks as possible; underwriters would like to capture more information than agents might like to provide. We had to work hard to draw the line, to capture only what we really needed to write a risk while still maintaining our underwriting discipline,” he says.

Agents still will connect to Oregon Mutual using the carrier's Agent BizLink site. Single sign-on capabilities will transfer agents securely to the Duck Creek system. In addition to portal integration, the Duck Creek system will connect to Oregon Mutual's document management and workflow platform. It also will automate renewal processing and stat reporting.

“We wanted a system that would support the full policy administration life cycle from the point of sale forward,” Prouser says.

Because Conseco, like many life insurers, will continue to maintain multiple administration systems, its agent and customer service portals are essential interfaces to bridge users to the most-needed functionality in those systems.

“We do a 'Pareto analysis' to identify what 20 percent of data and transactions account for 80 percent of customer inquiries,” Bostick says. “Our approach balances administration system replacement with a 'surround and connect' strategy that incorporates a workflow system and Web-based user interface to reduce the cost of service while maximizing the accuracy of that service,” he says.

Somewhat surprisingly, enabling policyholder self-service was the lowest-ranked business driver in the Datamonitor study. The likely explanation, according to Steiman, is on one hand, independent-agent carriers aren't overly concerned about policyholder self-service. On the other, direct writers already have done the necessary work to enable customer self-service by competitive necessity.

BEING FUNCTIONALLY FOCUSED

What concerns Smallwood behind the ongoing trend of policy administration replacement is whether carriers actually are focusing enough on the functional reasons for doing so. Although business leaders have come to understand “tech for tech's sake” isn't a good reason for investment, they haven't necessarily come to the realization the “replacement for replacement sake” argument is equally weak.

“Business and IT tend to think in terms of 'applications' rather than 'capabilities.' As long as carriers keep asking for new policy administration systems, the trend for vendor solutions will continue to be full replacements systems only,” she maintains.

Steiman expects high levels of PA activity to go on, but he also wouldn't be surprised to see the difficult business climate begin to have an effect.

“Most of the drivers for policy administration replacement are valid and remain strong,” he says. “However, I can see the possibility of insurers beginning to be concerned with restructuring, retrenching–even survival.” TD