Archives for February 2009

Ebb and Flow in Property Casualty

Not that we need any more bad news, but there is a dynamic in the ebb and flow of the property casualty industry that is causing me some concern. That is, all things being equal, the performance of the P&C industry usually lags what is happening in the general economy. This is driven by the timing of policy expirations and, where applicable, audits. Non-auditable guaranteed cost liability and workers compensation policies premiums are based on sales receipts and payrolls at inception. In an economic downturn, they will renew at lower valuations (read price). In the case of auditable policies, the lower than expected sales and payroll levels will result in return premiums. Even if prices increase, spreading existing costs over these lower premiums will increase the expense, and thus the combined, ratio. The loss ratio will also rise as less premium is earned during the new term. It is partly the interplay of these moving parts that CEO Brian Duperreault was referring to recently when he discussed the “invisible hard market” — higher rates but lower insured exposure value.

This may explain why we are still not seeing a normal rate of IT project expenditure approvals. In conversations these past few weeks, I am hearing that there are lots of inquiries regarding IT system purchases and that vendors have a healthy flow of requests for information, but that only a very few deals are closing. This is after a very slow Q4. Likely, CEOs and CFOs are waiting to get a handle on late summer renewal pricing before releasing any discretionary funds. These indications will not begin to become visible until June. Do not be surprised if the decision rate remains slow until then.

Back to the future…

The major international equity indexes have lost ground this week, dropping by 3 to 4% in average. It appears that the recent numbers issued by companies have increased the global fear of a deepening recession. Despite a clear sign of confidence regarding its own future provided by Munich Re last week and notably its decision to keep its dividend per share stable, investors prefer giving more importance to the bad side of the coin for instance the disappointing Swiss Re numbers. The big giants have adopted different strategies and it seems that the German company is weathering the storm better. In the banking sector, the two biggest Swiss banks CREDIT SUISSE and UBS have announced billions of losses for 2008 but both companies see improvements ahead and expect good news already in Q1 2009.

Even though the overall environment doesn’t look great, I’ve got the feeling we are entering a phase of exacerbated pessimism in opposition to the irrational exuberance described by Alan Greenspan when he was talking at the Annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research in Washington in December 1996. Are financial markets so emotional that they exaggerate all kinds of perceptions in the highs as well as in the lows? According to me, there are clear signs of over-reaction or anticipation resulting in above-average volatility on the equity markets, which adds more uncertainty for the future of the insurance and the banking industry. That being said, the economical slowdown is a necessary cure to get back to basics. Then, we will enter into a sound prosperity for a while before diving in some kind of amnesia and enter a new exaggeration phase. The economy and especially the financial industry need bubbles to surf on but now it’s time to rest a bit before finding the next one…

3.11.09: Celent Insurance Webinar: Celent Model Carrier 2009: Case Studies of Effective Technology Usage in Insurance

Celent senior analyst Jeff Goldberg This event is free for Celent clients and invited guests. Please click here for more information.

Answer the emails before you Twitter

If you think twittering is for the birds, then think again. US President Obama and Stephen Fry (a renowned British actor) are both active users of the micro-blogging website – Earlier this month, Stephen Fry was stuck in lift in London and used Twitter to talk to his followers – all 180,000 of them – about his predicament. Ever helpful, his followers offered advice on surviving in broken lifts and generally uplifting comments. Welcome to the world of social networking.

But it’s not all fun and games. Recently, a US congressman took to announcing in detail his movements on a visit to Irag. This caused an outrage over the unintended security risk he caused for himself and his delegation.

Companies are using Twitter for their own purposes. You can follow the CEOs, hear what employees are saying about the company or interact as a customer. Twitter has caught onto this corporate surfing and has made mutterings about charging corporate users. Clear benefit of this channel remains unproven and such a move would certainly dampen corporate interest.

In the corporate world, Twitter is said to be able to play a role in customer feedback, queries or product questions. However, these activities could just as well be served in on-line forums which are better at structuring and associating data. Twitter boards can sometimes look like random streams of the unconscious that can only make sense to the Twitter owner. Most companies will allow you to submit queries to them via email but either don’t respond, or respond in a useless timeframe. I’d happily use alternative channels (email, twitter, skype) to communicate with companies instead of having to deal with those interminable call centres. But then the company must actually respond.

The Wall Street Journal noted “… some users are starting to feel ‘too’ connected, as they grapple with check-in messages at odd hours, higher cellphone bills, and the need to tell acquaintances to stop announcing what they’re having for dinner”

I’m with WSJ on this one. Twitter is yet another communication channel in an over-communicated world. The technology may be a viable consumer communication channel but it competes with alternative and more established channels. My message to firms considering this is to get your other channels working first.

Green IT Virtual Roundtable at Insurance & Technology

I participated in a “virtual roundtable” at Insurance & Technology magazine on the topic of Green IT. If that interests you, check out my thoughts (and the thoughts of the other contributors) here: It seems like so much of the Green IT conversation is about hardware: lower-energy servers, computer recycling, increased virtualization, carbon-neutral data centers… While these topics are very important, I feel that the best Green IT results in the insurance industry come from software, with process efficiency and automation. If we reduce the number redundant processes, get rid of duplicate rating engines (one for the system of record, one for online quick quotes), and eliminate the need to print and re-enter data, we reduce the overall energy consumption. That helps regardless of how energy-efficient a data center is, plus it leads to a huge reduction on expenses. Because it’s an indirect way to reduce energy (aside from print-reduction, which is very direct and very key to the insurance industry) it doesn’t get as much focus. That being said, I’ll be writing more about the hardware solutions for Green IT in another publication at the end of March. I’ll be sure to post a link here when that’s released. Also, Cathering Stagg-Macey is currently working on a survey and report about Green IT in the insurance industry, so let Celent know if you have questions on the topic.

Talking with a Consultant in Japan

I had an opportunity to talk to an independent consultant who has worked for some time now with insurance companies in Japan. He specializes in new technologies involving calculation engines. His experiences give some insight into the reasons why these emerging technologies are being adopted relatively slowly, and may also give some insight as to the pace at which these technologies may generally be adopted throughout Asia.

The standard processes Most insurance companies’ administration and illustration systems rely on mathematical IT or actuarial resources to provide input for new products and product revisions, as well as IT staff to make appropriate system changes.

Generally these systems use a table-based approach to derive premiums and projected values. This approach requires significant disk storage, particularly for administrative systems that have to hold historical data dating back many decades.

The process of generating these tables is generally entrenched in the product development cycle, and in many cases involves a number of people using various skills and techniques to develop models in a wide range of tools such as Excel, Delphi, Foxpro, and other programming languages. The time to market depends on, among other factors, product complexity and number of systems. In some cases, the speed also depends on current staffing levels because some of this knowledge is lost in staff turnover and personal toolset preferences. In this process, there is a distinct division of responsibility: the mathematical resource for the tables and their accuracy, and IT for their deployment and ultimate usage.

New technologies In recent years a number of vendors have released technologies to support deployment of new products and product revisions to many systems without the need to generate large and complex tables. These technologies also allow for a single centralized repository of calculation and business rules using a single software source – thus capturing all the intellectual property in one place and reducing the complexity of having to support multiple skill sets. The skill set required for these technologies is potentially a combination of traditional skills and new skills.

Challenges The adoption of these technologies requires a mindset change, not only in actuarial departments (product development) but also within IT. The business benefits are not always apparent to the individuals using the tools, because their focus generally is on “build” activities.

The definition of product components is generally done in a GUI interface, which requires different skills than Excel or traditional actuarial programming languages. The result is far more visual, and testing and debugging are far more interactive. So there is a learning curve, but it is usually short.

On the mathematical side, the main problem in introduction of these technologies is related to business processes (and software) that have been entrenched for many years, as well as the reluctance to change, which is particularly common in organizations where responsibility for parts of the process is being shifted.

On the IT side, the main challenges revolve around the interfaces and the need to consider the impact and efficiency of replacing table look-ups with calls to a third party product, not only for simple calculations done in an “online” kind of scenario, but also for full policy projections and usage in a batch type of environment. The challenge here is to design interfaces that are more generic so as to reduce maintenance and enable cloning in the event of new requirements, not simply to use these technologies as a plug-in replacement for table look-ups, which could lead to inefficiencies and negate the value of the new technologies.

My thoughts There is no doubt that these new technologies will be adopted – however, implementation needs to go hand in hand with a number of business considerations. Consultants should be aware that standard implementation processes may need to be tailored in light of local business and cultural practices. In the same light, business value may have to be demonstrated in alternative ways.

89.1% Combined Ratio and Still Lost Money…Ouch!

I was struck by CNA’s fourth quarter results where they reported an improvement over last year’s Q4 combined ratio — 89.1%. Once upon a time, that would have been “golden”. But, because they recognized losses of over $300million on mark-to-market actions for some of their investments, they LOST money for the year. What a leadership challenge it is to keep everyone motivated in the face of great results with bad outcomes. Let’s all recognize one anothers’ efforts to work hard, contribute and push through these unprecidented times.

Can Green IT be more than a friendly carbon footprint?

Over coffee, a colleague, Miqdaad Versi, and I have been discussing green IT in the context of 2009. How can it remain a priority with the current crisis unfolding? We both agreed that green IT is more than feeling good about one’s carbon footprint — green IT is an approach to sourcing, utilising, and disposing that can reduce expenses. Now, tell me that isn’t compelling!

Here are Miqdaad’s thoughts on the topic:


After the new stimulus package in the USA, the green agenda is becoming a hotter topic [clearly, it’s not just the climate heating up(!)]. And technology can really make a real difference, whether through major initiatives such as relocating and improving cooling systems at data centres, or continuous, smaller projects such as instituting duplex printing.

The power of technology is that it’s effect is not only on the computing or technology industry itself, but also on the carbon footprint of entire companies. Let’s consider the simple case of switching lights off, or being more efficient with air conditioning systems. IT-led automation would cut a large slice off the energy usage. Or what about the carbon footprint left by those commuting to work, or air travel for meetings. Installing virtual systems, remote access and the latest HD video systems can entirely change the green credentials of your company.

But even all of these are still only a group of disparate ideas without any holistic plan. More and more consultant firms are getting in on the act and providing a complete green audit – starting with installing proactive systems to clearly identify green problems and monitor energy usage; followed by a systematic analysis of the results comparing them to well-known benchmarks, and using them to set ambitious improvement targets; and finally, finding a technological solution to radically and completely develop the green agenda.

The thing is that this green IT push will not only make the new green-friendly President happy but probably the CEO as well, with cost savings and efficiency improvements being reported throughout the industry – the cost of installing the latest HD video systems for conference calls is recouped after just two or three meetings! And it’s always good to be ahead of the upcoming regulation, with sustainability and improved publicity nice by-products.

So what are the big multi-national companies doing? Lots of green initiatives have started with technology firms banding together to make a difference. On the multinational and global scale, the Green Grid is focusing on data centre, as well as the promotion and adoption of best practice; the Climate Savers Computing Initiative has the aim of reducing IT’s share of carbon emissions – basically telling buyers about the most efficient desktops they can buy and how to use power saving schemes to keep electricity bills down. With Microsoft, Intel, Cisco, HP and Dell among the technology firms supporting these initiatives, there is clearly a real drive to move on this front.

Green IT is turning into a phenomenon pervading the whole of society. The Connected Urban Development aims to create replicable models for communications infrastructures for entire cities to reduce carbon emissions at every level of the community. Cisco is spearheading the IT side. The power of technology to make a real difference is being felt on a global scale.

So will green IT be the hot topic of 2009? Will it be seen as more important than Web 2.0 and other new, exciting ideas in the coming year? A few months ago, I’d have been sceptical…but with the green agenda being the focus of the most wealthy nation on the planet, only time will tell.


Celent is planning some research into attitudes and perceptions of insurers to green IT. Watch this space!

3.3.09: Celent Insurance Webinar: 2009 US Insurance CIO Survey: Pressures, Priorities, and Practices

Celent senior analyst Donald Light This event is free for Celent clients and invited guests. Please click here for more information.

The Challenge for a CIO in Africa (or Middle East)

Visiting South Africa recently, I was struck by the insurers’ frustration of the lack of vendor commitment to the country. My conversations were with large insurers – and I mean seriously large companies tipping billions in premium — and it appears even these companies are unable to attract vendors to make the serious investment. Those vendors that have, appear to have local operations that are not able to deliver to the standards of their international parents.

This is a story that is repeated across Africa, and the Middle East. These are small but growing markets but in terms of potential, merely amount to rounding errors in global premium when compared to markets such as India or China. It’s understandable that suppliers choose to chase the big markets (but not why local operations offer poor service). So where does this leave the CIO of an insurer in Africa or the Middle East?

I’ll stick my neck out here and propose something for consideration – offshoring. Labour arbitrage and cost savings are typically the headline benefit of an outsourcing deal and admittedly, there is little labour cost saving to be had between Africa and India. But there is a lesser talked about benefit – one of a vast pool of skills.

Celent has been researching outsourcing recently and I am impressed at the level of commitment from providers to the insurance domain. You know the figures of the number of IT graduates in India and China each year and that many of them are choosing the outsourcing world. The large outsourcers offer tremendous career opportunities and a certain cache on the resume.

I’d challenge insurers in poorly served countries to think laterally to solve this problem. Outsourcers have offered staff augmentation for many years. Now add to that a deep understanding of insurance and of the vendor solutions on the market, and a maturity of the delivery model and the proposition looks all the more appealing. Outsourcers in India and China also understand about poor communications infrastructure and will be in a position to offer innovative solutions.

I’d challenge outsourcers to look at Africa and the Middle East as interesting expansion opportunities. South Africa has always been interested in looking outside of the country for innovation, best practice and skills and I imagine other parts of Africa and Middle East are similar. Revenue from these regions will not offset the 2009 slowdown in contracts in Europe and North America. However, a revenue stream from these regions is likely will to be a little immune to the global insurance cycle and provide a small buffer in future down cycles.