IT imperatives to improve business effectiveness in the Insurance Sector

The economic turmoil we witnessed over the past two years has left no industry untouched. Nevertheless, the global insurance industry has continued to post growth, thanks partly to newly emerging markets like China and India among others in the Asian subcontinent. The first quarter of 2009 witnessed a drop of 3.8% in net written premiums. The momentum accelerated in the second quarter of 2009 during which the net written premiums declined by 4.8%, the biggest drop in decline ever since ISO began recording quarterly changes in premium. The economic turmoil we witnessed over the past two years has left no industry untouched. Nevertheless, the global insurance industry has continued to post growth, thanks partly to newly emerging markets like China and India among others in the Asian subcontinent. The first quarter of 2009 witnessed a drop of 3.8% in net written premiums. The momentum accelerated in the second quarter of 2009 during which the net written premiums declined by 4.8%, the biggest drop in decline ever since ISO began recording quarterly changes in premium.

In mature markets like the US and most of Western Europe, the sector is showing signs of saturation. Major insurance products have been available for a long time and thanks to the stringent regulatory requirements in these countries, the degree of market penetration is also quite high. Hence, it is unlikely that underlying demand will increase.

Recent regulatory requirements have only added to the woes of insurance players in these markets. Relaxation of entry requirements have seen the entry of several new players unshackled by the baggage of legacy systems and an array of old product offerings that need to be serviced despite the changing economic scenario. For instance, several banks have already gained considerable market share in the sale of insurance products, particularly annuities and life insurance. This competition is only set to intensify in the coming years with more and more non-insurance players entering the fray.

Impact across the Insurance Value Chain

The global insurance industry is being shaped by external drivers like increasing consolidation, convergence & globalization, changing consumer buying patterns, rapidly developing technology, multi-distribution trends, and more stringent regulations. In addition to this, there is increasing pressure to reduce costs due to declining returns on investment portfolios. Changes in the risk markets has resulted in the markets hardening and reinsurance markets becoming less attractive. Insurers can leverage technology to positively impact each phase of the Insurance value chain. This necessitates the need to first break down the insurance lifecycle into its key components to understand how technology can be leveraged to enhance the process and understand its impact across the insurance value chain.

• Product planning & development: Insurance companies are experiencing declining sales in this turbulent times, facing competition from other financial products as the population ages and boomers face retirements, and are challenged to improve business transparency. There is a clear shift in customer preference. For example, customers opting for fixed annuities products vis-à-vis variable annuities products. Insurers need to introduce new products to market within a given window of opportunity to drive top-line growth.

• Sales & Marketing: Traditionally, insurance companies have leveraged career agents and independent brokers/agents to market their new products and services. The tech savvy generation prefers direct marketing channel that currently accounts for over 11% of net written premium. To drive cost efficiency home, insurers are embracing the digitization of paperbased sales and application processes.

• Underwriting: Underwriting profits are down. Global warming has led to frequent catastrophes or natural disasters. Insurance companies have been paying a lot lately to the policy holders.

• Policy administration: The recent M&A activity, centralization of IT operations from various subsidiaries, and purchase and sale of business unit are the driving force for consolidation and modernization of policy administration systems.

• Claims management: Another area for cost optimization is claims processes. One can start with the digitization of paperbased claims. Claims systems offer insurers multiple avenues to improve operational effectiveness and deliver growth. Insurers are eyeing claims systems as a springboard for innovation, citing claims-related initiatives among their top 3 projects. Insurers that fail to address their aging claims administration systems will find themselves unable to rapidly adapt to cyclical markets, reduce claims leakage, and provide superior customer service by paying claims quickly, accurately and cost-effectively.

• Risk management: The current regulatory climate remains challenging and uncertain. Underlying policy, claims, billings & payment systems are disconnected and the individual information data sources are in silos. These disconnected business process are the inhibiting factors for the effective enterprise wide risk and compliance management.

Potential impact of IT

The insurance sector has been among the biggest exponents of technology though most persist in continuing with their mainframes and other legacy applications. Going forward, insurers, with a view towards the future, need to strategically deploy technology such as core application modernization, Internet and ecommerce, and channel management to cater to the demands of a dynamic market. Technology can not only ensure speed-to-market in product development but also enable innovative, customer-centric thinking. This is also a necessary step to make the business more efficient and resources more productive. Web services, for instance, equips insurers with the ability to simplify the integration of product definitions with legacy applications while simultaneously eliminating manual processing. This, in turn, makes it easier for insurers to consolidate product information, manage products, and leverage existing enterprise applications. Some of the key benefits that can be accrued by leveraging technology effectively are outlined below:

• Cost optimization and Operational efficiency Over the years, the Insurance industry has embraced M&A approach for inorganic growth leading to multiple policy administration and claims systems within the organization. In addition, some of these legacy systems are expensive to maintain and support. Insurers are leveraging well established legacy modernization tools and SOA & Web services based solutions to integrate their internal and external systems. Effective implementation of STP triggers digitization of core processes which in turn leads to operational efficiency. Claims processing software helps insurers automate claims management and enables real-time processing and reporting on the administrative and revenue generation activities while reducing claims leakage. Infrastructure consolidation results in reduction in energy footprint in data centers by means of server consolidation and enhanced operational agility through automation.

Increase customer collaboration and reach Career agents and independent brokers/agents are the distribution channels to market new products and services. High performance user interfaces, self-help portals, and extranets provide the means to up-to-date and 24/7 access to content and inadvertently improve relationship value, provide integrated view of products and customers, and expedite cross-sell and up-sell opportunities. More and more end customers are now relying on the Internet to compare various offerings and choose the one best suited to their requirements. Insurers can leverage the online medium to streamline the costs of selling new policies and create content that outlines the compelling value proposition for each product.

• Maximize revenue generation opportunity The current economic environment has reset customer preferences and expectations. Complex financial products are out and simple, guarantee income products are in demand. The preferred customer products must be quickly replicated through new product introduction cycle. Existing customers buying patterns is a platform for better up-selling and crossselling opportunity. Insurers need to invest in systems that facilitate effective management of these opportunities and relationship among broker, agents, customers, and prospects. CRM solutions help integrate sales, service, and marketing for all channels and products, and provide a unified view of the customer and all relevant business partner relationships. Systems that enable two-way flow of information between the insurer and the channel partner will play a key role going forward in effectively packaging the right products and services for clients and leveraging new opportunities.

• Integrated risk and compliance management As a result of financial services fall out, insurers are anticipating greater regulatory invention and control. Well defined risk and compliance management solution provides integrated alignment of loosely coupled risk management activities and information data sources, emphasis on areas of streamlining the credit process, strengthening claims analytics, enforcing risk monitoring/control, and enhancing liquidity risk activities within asset/liability management functions. Some of the functional areas covered by the risk and compliance management solution include financial reporting, business intelligence & analytics, assets & liability monitoring, and actuarial modeling.