Archives for June 2009

Twitter, meet "specialised" insurance

Social networking was in the headlines again this week with an Insurance Times article on the marketing angle of this nascent phenomenon. I was interested to read that Direct Line plans to use Twitter to communicate with customers, and the process was deemed useful as it had a potential to enhance brand image. As many of you know, I take a curmudgeonly attitude towards the short and medium term impact of social networking in insurance. And you can extend that attitude to my experiences in insurer customer communications, and so the idea of Twitter playing a role in communications intrigues me. Personal experience as a weary consumer shows that customer service in the UK for personal lines has been homogenized and streamlined. It’s at a point where if I have to talk to an insurer staff member (and yes, brokers aren’t any better), I spend more time on hold accompanied with muzak than I ever do talking to staff at an insurer. I wish I had better things to do than play games with a complicated call centre, but I have the misfortune of a “difficult” house that has a dark history of possible subsidence. Reports now show this is not the case, but the question is raised in every quote, which puts me in the “special underwriting” bracket. I’m now up for renewal on my house insurance, and now have further supporting surveyor documentation to support the point of no subsidence, I am forced to “communicate” with my insurer. I call, wait 5 minutes whilst “all advisers are busy” and appreciate that I am “a valued customer” and hold on for a further 5 minutes as I have no alternative. Listening to the tinny voice that tells me to “use our website” increases my blood pressure as I sarcastically snap back at the phone “I would if I could!”. Eventually, I speak to someone who tells me to send in the documents, and expect a response in 3-5 days. No awards for speedy response there. Don’t get me wrong – shopping for personal lines in the UK is a breeze as long as you aren’t a specialised risk. Direct and aggregator options really put the buying power in the hands of the consumer. And fair play to the insurers — they’ve responded to the challenge of low cost channels with aplomb. Being a specialised risk means you get stuck with one insurer, as if you are like me, you become overwhelmed with going out to the market for new quotes each year and having to deal with all those call centres again. Can Twitter save the day in specialised risk? I’d like to think it could play a role, but then I’d also like to think I could pick up the phone and talk to my insurer. We all have dreams. If the call centre model is challenging, which insurer staff is behind the twitter responses? This grumpy old woman remains unconvinced.

Opportunities for solution vendors in China?

China’s new insurance law will take effect on October 1 2009. The revised law strengthens protection for policyholders, the insured, and beneficiaries. However, it adds operational requirements for insurance companies. For example, the revised law adds a two-year incontestable rule to protect the insured party. It is a very common clause in Western countries, but not in China. The revised law also requires insurance companies to pay or decline a claim within 30 days; if more documentation from the claimant is needed, the insurance company has to inform the claimant about all the documents needed at one time. All these requirements aim to settle the problem of the “easy to apply, hard to claim” environment. I see end customers’ preferences are changing from investment type products to protection type products. A simpler claim environment is crucial for the development of China’s insurance industry. That’s why regulators emphasized claims when revising the insurance law. For insurance companies, I think this is a double-edged sword. Will “easy to claim” lead to “easy to defraud?” It reminds me of my conversation with a local insurance solution vendor. He said that China has a non-trust environment: people do not trust each other, so the risk management function in his company’s solution is very strong. Some of my thoughts are: insurance companies might need to upgrade claim solutions to make filing a claim easier; second, they might need to upgrade underwriting solutions and antifraud tools to strengthen their risk management function. Are these real requirements for insurance companies? I’ll continue to follow the market.

Federal Regulatory Reform of Insurance – The First Salvo

The Obama administration published its white paper on financial services industry reform this week, Financial Regulatory Reform: A New Foundation, Rebuilding Financial Supervision and Regulation ( . This will now serve as a baseline against which the legislative process can act. So, while this is not law yet, there are some broad trends which can be noted in the approach which will have implications for insurance firms and their technology response.

A high level review of the document reveals the broad goals for insurance industry regulation and the proposal of two regulatory agencies which will directly affect the way business is done. Taken from the report, the principles underlying the recommendations specific to insurance are:

  1. Effective systemic risk regulation with respect to insurance
  2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies
  3. Meaningful and consistent consumer protection for insurance products and practices
  4. Increased national uniformity through either a federal charter or effective action by the states
  5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business
  6. International coordination

I anticipate much angst around points four and five, especially as these directly challenge the state regulatory set up and its effectiveness and efficiency. On a broad level, no one can argue that these are worthy goals, but how they are accomplished will be contentious.

The establishment of two regulatory agencies is proposed — the Office of National Insurance (ONI) and the Consumer Financial Protection Agency (CFPA). The duties of the ONI are fairly well detailed. From the report: “The ONI should be responsible for monitoring all aspects of the insurance industry. It should gather information and be responsible for identifying the emergence of any problems or gaps in regulation that could contribute to a future crisis. The ONI should also recommend to the Federal Reserve any insurance companies that the Office believes should be supervised as Tier 1 FHCs. The ONI should also carry out the government’s existing responsibilities under the Terrorism Risk Insurance Act.” The ONI will also serve as the U.S. representative to the International Association of Insurance Supervisors with “the authority to enter into international agreements, and increase international cooperation on insurance regulation.”

The potential impact on insurance of the CFPA is less clear. The report states that it would “protect consumers across the financial sector from unfair, deceptive, and abusive practices in credit, savings, payment, and other consumer financial products and services”. Insurance products, particularly life instruments such as variable annuities, are not specifically mentioned. The emphasis is on preventing a repeat of the perceived improprieties seen in the mortgage and credit card areas. However, it does not specifically exclude insurance and “other consumer financial products and services” is a very broad area.

Some of these lines will be drawn during as the Congress develops its legislation. Many, especially where Federal responsibility ends and state requirements begin, will only be determined once the Federal system is in place and active. The practical impact to insurance industry is that there is another sheriff in town now and they will be demanding our time and attention. Companies must prepare now for stress on their data management and compliance processes. (See the Celent reports Insurance Data Mastery Strategies and Insurance Data Mastery Solution Spectrum Pending upgrades to data management tools should happen now and any planned data conversions completed. Companies without a robust reporting environment should invest in these capabilities as the up front investment will be less than the continued expenses associated with a “catch up” approach. In 2010, plan for short timelines for compliance and a more confusing and expensive regulatory landscape.

Web 2.0: a Weapon of Mass D…

While many people refer to Web 2.0 as a technology, Celent considers it more of an attitude. As already mentioned in one of my previous posts on this blog, Web 2.0 combines the need for more mobility, faster information flows, a higher degree of openness, and a strong reliance on collaboration and community. To do so people need to have easy-to-use tools, and the technologies nurturing this need are usually referred as Web 2.0 technologies.

There is a good example of the transformational power of Web 2.0 currently on the news headlines: the Iran post presidential elections troubles. For the Iranian government in place, Web 2.0 represents certainly a danger since it allows the mass people to be the instant messengers of what’s happening minute by minute in the capital city of Teheran. In this war of information, the Web 2.0 attitude is a strong ally for the protesters and the power in place could consider it as a weapon of mass disturbance. Outside of Iran, many people have understood the importance of the Web 2.0 attitude and the impact it can have in such a chaotic situation. Journalists firstly (just check the CNN website and you’ll understand what I mean) but more importantly politicians. What a surprise when I read that the US Government had contacted yesterday the social networking service Twitter to urge it to delay a planned upgrade that would have cut daytime service to Iranians disputing their election. In other words, these people see the Web 2.0 attitude as a weapon of mass democracy.

I am the author of a report Celent is publishing this week called “Reaping the Benefits of Web 2.0: European Insurers Strategies that Work” and I will present the main findings of my research about this topic in a webinar soon. This report and my webinar try to evaluate how the Web 2.0 attitude is currently perceived and adopted by the insurance industry. The Web 2.0 attitude cannot be neglected by insurance companies, but sometimes it seems difficult for them to determine whether it represents a transformational wave. In addition, it is still difficult for them to evaluate the value of initiatives in this area. The Web 2.0 initiatives launched by European insurers described in this report are very different in terms of the impact they might have and can generate on the organization, the level of risk involved, and their probability of transforming the insurance business. For those of you, who are interested in this topic, I invite you to read my report and/or attend my webinar and then determine whether the Web 2.0 attitude can be a weapon of mass development for insurers in the future!

Hey, You! (How Do I Get) Off of…(This)…Cloud?

Cloud computing and Software as a Service (SaaS) offer significant advantages and paths to valuable operating models. However, as with all opportunities, an optimum solution requires that a devil’s advocate position factor into transition planning. One area for the advocate to explore is the exit strategy for an insurer in a cloud computing and/or SaaS arrangement.

Typical outsourcing/multisourcing agreements include provisions regarding vendor insolvency, material breaches of contract, etc. As the recent General Motors bankruptcy demonstrates, no company is immune from default. Is there an escrow arrangement that provides protection to the insurer is the vendor goes out of business? Other critical areas to consider include: what are the material changes that will trigger exit clauses? For example, if a SaaS vendor changes a service provider they are using, does this represent a material change in the contract with the insurer? How does an insurer evaluate the political risks inherent in a vendor’s operations based on the countries they operate in today? How will this risk be assessed and managed on an ongoing basis as political events change?

Specific to insurance, however, special focus must be given to the data requirements of long tail lines like Workers Compensation. How will data be protected and accessible for decades into the future? For example, will data required for payments to be made still be available for decades into the future? How will state and, possibly, federal data requirements be satisfied in a service model?

Agreements can be structured to satisfy these and other concerns, but insurers pursuing the SaaS and cloud approaches must ask themselves what will happen if, for some reason one day, they want to “get off of that cloud”.

Overcoming Fear as a Barrier to Change

At Celent, we often find ourselves helping insurance carriers implement a process of change, whether it’s selecting a new policy administration system, process reengineering, or restructuring the IT organization. Change means more than just a new technology or a new process; it also requires a shift in corporate culture. Even when the IT-side of a change goes well, the people-side of a change can fail. No matter how good a new system is, the project isn’t a success if employees can’t or won’t use it. There are many reasons employees resist change. Annoyance (“learning a new system is difficult and distracts me from my real job”) and skepticism (“the last new system failed so why trust this one”) are two problems. But the biggest barrier–and the most difficult to overcome–is fear. New technology and new efficient processes mean employees fear that their jobs will become redundant and eliminated. And when employees are afraid they will fight change as hard as possible. I recently spoke with the leadership at an insurance carrier who boasted they had not laid anyone off in the history of the company. My initial impulse was to assume this meant they were putting loyalty above creating an efficient business. In the US, it’s sometimes taken for granted that thriving as a corporation means some routine layoffs as operational efficiencies change. But this company instead invested a great deal of time and effort to retrain employees rather than letting them go. Far from being a barrier to change, this corporate attitude succeeded in taking fear out of the equation. Even in a difficult economic time, employees at this company understand that new systems and new processes don’t mean layoffs. While annoyance and skepticism might still be around (and, in fact, might be increased by entrenched training and memories of previous unsuccessful projects), there is less fear. Employees can look at change as an opportunity to gain new skills; end-users can provide feedback and participate in training without worrying that they are making themselves obsolete. And support and participation from end-users is the often overlooked critical change factor that determines a project’s success. I was happy to see this challenge to common wisdom providing such positive results. While not every company will be willing to dedicate itself to this extreme employee loyalty, there is an excellent lesson for everyone. It is often assumed that to remain nimble and efficient, new technologies and processes much go hand in hand with staff reductions or replacements. But, at least for one carrier, a long-standing culture of stability has allowed them to overcome fear and embrace change.

Interesting factoid for the week

Post magazine reported an interesting little factoid – No Lloyd’s insurers in the FTSE 100. Amlin share price dropped at the announcement of of the share issue.

Setting up priorities when selecting a Policy Administration System

Celent is publishing two reports reviewing Policy Administration Systems (PAS) and IT vendors in Europe later this year. The first one will profile solutions available in the general insurance sector and the second one in the life and pension sector. For insurers the selection of a PAS requires the analysis of different parameters that have all their importance. Prioritizing decision elements is a crucial task in order to minimize the risk of choosing an inappropriate PAS and to face ultimately time-consuming and expensive customization efforts. In the frame of recent discussions with European insurers, I have noticed that European insurance companies conducting business in multiple countries are also facing difficulties to decide between two strategic alternatives when replacing their existing policy administration systems:

Implement a single application in all geographies where they conduct business, or

Select one specific vendor in each geographical region.

Knowing that insurers have their own specificity and objectives in terms of future expansion and strategy, I recommend them to define and rank priorities around four major key decision elements when reviewing this important question:

Functionality: I recommend insurers to define functionality priorities. To do so and based on our PAS reports, they should be able to build their own functionality matrix. This exercise can particularly support them to identify which functionality elements are more important than others and how they can support their strategic objectives in the long run.

Technology: I consider that technological flexibility is an important factor insurers should clearly assess when making the decision to replace their policy administration systems. Therefore, I encourage insurers to consider technology factors when prioritizing their IT requirements.

Experience: Since replacing a policy administration system can require considerable efforts in terms of customization, choosing an experienced IT vendor is important. Therefore insurers should emphasize factors related to insurance business know-how and expertise when evaluating vendors.

Geographical expertise: The insurance industry in Europe can be very different from one country to another and understanding insurance business drivers and challenges affecting a specific region is a must for IT vendors offering their solutions and services in a dedicated European insurance market. Regardless of their size, I recommend insurers not to neglect local and small IT vendors having specific expertise and knowledge in dedicated geographies.

Choosing the best alternative represents a key challenge for insurers’ CIOs since this decision can strongly impact their company’s ability to achieve strategic goals in the long run and I hope that our PAS reports will be helpful to them.

6.24.09: Celent Insurance Webinar: Medicare Supplement Insurance Market: Opportunities for Leverage

Celent senior analyst Mike Fitzgerald This event is only open to Celent clients. Please click here for more information.

Celent's anti-money laundering vendor report: 2009 update

Celent’s AML vendor evaluation reports have become something of a de facto standard, referenced by financial institutions and regulators around the world. We began covering the sector in 2003, and are about to start work on our 3rd edition of the report. Although initially the insurance industry was not seen as a high-risk area for AML, in recent years AML has grown as a concern for insurers and regulators. The behavior detection technology that underpins AML software has also expanded its boundaries within the financial institution. Celent has been behind the “enterprise risk” approach, that is, consolidating AML and anti-fraud efforts, since our first AML report back in 2002. But until the last few years there were few real-life examples to point to. Recently, however, financial institutions have become increasingly concerned with fighting fraud, including fraud committed by customers as well as employee fraud. And a growing number of firms are beginning to take a wholistic approach to these issues. So this time around our report will take an enterprise risk approach as well, by including in our evaluation the anti-fraud products of the AML vendors. We’re calling it “Evaluating the Vendors of Enterprise Risk Management Solutions 2009.” We’ll be starting research on the report this month, beginning with qualifying vendors for inclusion in the report. The last edition evaluated 19 vendors and was 100 pages long. As the market has shifted, with new products emerging and others fading from sight, there may be some shuffling in order to keep the field of vendors representative of the marketplace. And although we are constantly looking at this space, we’d welcome any comments on vendors we should consider that we may have missed. As a reminder, the AML software providers evaluated in the 2006 edition of the report were: Accuity, Ace Software Solutions, ACI Worldwide, Actimize, ChoicePoint/Bridger Insight, Experian/Americas Software, Fortent/Searchspace, FircoSoft, LogicaCMG, Mantas, Metavante/Prime Associates, Fiserv/NetEconomy, Norkom Technologies, Northland Solutions, SAS Institute, Side International, STB Systems, Top Systems, Wolters Kluwer Financial Services/PCi