Archives for September 2009

New competition for UK policy admin vendors and more choice for insurers

The PAS space is hotting up here in the UK. Talk of eviscerated IT investment spending has been vastly overstated. Before the crisis really kicked off, insurers around the world were looking at how to address legacy core systems, and the level of RFI activity and PAS deals supported this. The recent announcement of Allianz UK and TIA was an example of a large UK insurer taking on the challenge of the legacy drag effect. Today, this was followed by the announcment of Axa Commercial replacing the current mainframe system with Duck Creek’s Example platform. Deal activity levels in the UK have seen a lull in the last twelve months, but Celent sees these two deals as a sign of the new times. Insurers will look to get back on track in IT investment as soon as possible, and most will have to face the challenge of replacing outdated core systems or at the very least, consolidating to a few of the best systems in house. Both these examples highlight the investment that has been going on for sometime by policy admin vendors from outside the UK. Celent’s view is that the UK market has been underserved by PAS vendors for some time now, and an increase in competition can only mean more choices for the insurer.

Retail, D-Tail, or E-Tail? The Good Old Days Start Tomorrow

Life was simpler when most insurance purchases were delivered through a Retail channel. Insurance agents–not brokers, bankers, affinity groups, or workplace kiosks–were the sole source of information and advice will for potential insurance buyers. If you wanted insurance, you called an agent. The agent was the driving force behind selling and delivering the product.

But let’s resist the temptation to refer to the past as the “good old days.” I believe those days perpetually start tomorrow.

The direct model is now thriving. Inspired (!) to buy insurance by postcards, TV, radio, and print, consumers access their carriers over the telephone, or via the mail or Web. To differentiate this from the Retail model, I call it the D-tail model. It is based on the premise that if you reach out to enough consumers in a low-cost manner, some proportion will be motivated to buy. The traditional agent’s role may be limited or nonexistent, because buyers are channeled into a new business process that is handled by back office staff.

Take the Web interactions one step further and you get E-tail. In its purest form, E-Tail business is highly automated, channeled through a Web interaction, and replaces both the agent as advice giver and the “push” activities used to get consumers thinking about insurance. E-tail buyers are self-directed, and typically want to make purchases with limited or no human intervention. Some carriers, even for complex products like life insurance, are supporting a true STP model via their E-tail channel.

It is tempting to look at these three delivery models and say that one or the other is the future of our industry. In fact, all three models have a purpose. In some markets, notably the UK, they are all mature.

Retail, D-tail, and E-tail exist because each serves a distinctly different need today. But I believe that all three needs will persist into the future, and will continue to morph with consumer attitudes and technology. That is why carriers must support all three models in combination. Ideally, using a common tool set that brings a sense of cohesiveness and flexibility, while driving down costs considerably from where they are today. Carriers that let themselves become one-trick ponies in terms of sales and delivery are at risk of becoming obsolete.

Innovating Innovation

There is an interesting article in The Economist this week about an innovative approach to innovation. A service called InnoCentive outsources research and development to an open community on the web. Companies can post challenges on the website and enterprising problem solvers across the world can submit solutions. Unlike many open community approaches, this one offers actual monetary compensation for workable solutions.

The service has been expanded to include a service called InnoCentive@Work. This replicates the challenge/solution market within a company and solicits responses from a company’s internal employees before moving them to the public community. One of InnoCentive’s leaders was quoted saying “Companies often don’t know how much they already know”.

Having worked for several large, global insurance companies, I could immediately relate to this statement and was intrigued by the possibilities of this innovation model. Could an outside service administrate innovation more effectively than the time-tested “suggestion box”? Could the promise of a direct cash award, distributed by an objective third party, take the place of the sometimes awarded, internal bonus for “a great idea”?

After visiting the website, I came away with the impression that, to date, manufacturing companies are participating more than service providers. However, I’m betting that some financial services firms will sign on and see results. Although the insurance industry suffers more from a lack of execution than innovation, given the outlook for constrained revenue growth, every advantage matters.

Celent Model Carrier Opening Day!

Every January, Celent recognizes the effective use of technology through its Model Carrier Awards. We are pleased to announce that nominations for the 2010 version is now open (http://www.celent.com/755.htm).

Past winners earned their recognition through outstanding implementation of software and process in areas such as agency portals, document management, claims, billing, distribution management, sourcing and policy administration.

If you know of an insurance company who exhibits best practices in the use of technology, please click on the link and complete the nomination form http://www.celent.com/755.htm

Submissions are being accepted until November 13, 2009. The presentation ceremony for the awards will be held on Thursday, January 29, 2010 at the Westin Times Square Hotel in New York City. We look forward to seeing you and your nominees there!

Economics Does Not Lie

The financial crisis and the economic downturn having pushed governments to massively inject money into the economy – firstly to partly or fully nationalize financial institutions and secondly to stimulate the economy – have contributed to question the validity of the principles of the free market theory among populations and the general opinions in Europe and the United States. Guy Sorman published recently a very interesting book, which I recommend you to read and whose title is: Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis. To know more about the author and what his book is all about, I also invite you to read an interview Guy Sorman has given in July 2009: Defending the Free Market: an Inteview with Guy Sorman. I have already given my opinion about the financial crisis and the economic downturn to our blog’s readers. In his interview, Guy Sorman mentions two things that are very interesting according to me. When asked about the efficiency of stimulus plans and Keynesian economics, he says: (…) Keynes suggested that government accumulates surpluses during periods of growth in order to invest them during downturns. This has never been done, though. What we have is public spending financed by public debt, which leads to an increase in interest rates, which in turn freezes the recovery. Thus, in real life, no stimulus plan has ever worked. Those mavericks who still advocate stimulus plans argue that they haven’t worked in the past because not enough money was spent. But to spend more could lead only to bankruptcy or socialism, not to recovery.(…) Later in this interview, Guy Sorman mentions the Japanese economic policy during the 90s: (…) Unfortunately, the nation’s economic policy between 1990 and 2000 was disastrous. The government, with lots of corruption behind the scenes, invested huge sums in useless infrastructure. Private investment was crowded out by this public stimulus, which brought the country to a standstill. This so-called lost decade is the most illustrative demonstration of the adverse effect of public spending.(…) Economics is a human science. Reality helps validate economic models that are built upon experiences and data collected in the past. What economists can do nowadays is certainly not to predict what is going to happen in the future. On the other hand, they can surely tell us what economic policies will certainly fail.

China banks invest in insurance companies

Recently there has been some news about Chinese regulators approves some of China banks to invest in insurance companies:

  • Bank of Communications got approval to purchase from China Life 51% of China Life CMG.
  • Bank of China (BOC) got approval to purchase 25% of Heng An Standard Life, through its wholly owned property/casualty insurance subsidiary Bank of China Insurance Company.
  • Bank of Beijing got approval to invest in ING Pacific, and then got approval to invest in ING Capital, by purchase share from local company Capital Group.

In 2008, China’s banking regulator (CBRC) and insurance regulator (CIRC) signed a memorandum on strengthening cooperation between banks and insurance companies and on cross-sector supervision. In principle, this allowed banks to invest in insurance companies and insurance companies to invest in banks. The Bank of Communications was the pilot of this type of investment. Next, Bank of China and Bank of Beijing got approval from regulators. It has been said that China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC) are also interested in investing in insurance companies, and some insurance companies are interested in investing in banks.

I see all of those cases mentioned above could benefit both buyer and seller.

Bank of Communications/China Life CMG case:

  • For the seller: China Life CMG is a joint venture set up by China Life and the Australia’s Colonial Mutual Group, and it accounts for less than 0.01% of the China life insurance market. As the largest life insurance company in China, China Life had been trying to sell its share of China Life CMG for a long time to avoid internal competition.
  • For the buyer: By purchasing China Life CMG, Bank of Communications formed a financial group with banking, insurance, trust, and financial leasing businesses.
  • This is a case of local bank buy share from local insurance company.

Bank of China/Heng An Standard Life case:

  • For the seller: for Standard Life, it is “a move which would likely bolster its cash position,” according to Dow Jones Newswires.
  • For the buyer: BOC Insurance leverages BOC’s branches for distribution and BOC’s customer base for cross-selling. By taking a majority stake in Heng An Standard Life, BOC would be able to provide both life and property/casualty products. This is another milestone for Bank of China in the process of forming a financial group.
  • This is a case of local bank buy share from foreign insurance company.

Bank of Beijing/ING case:

ING has two joint ventures in China, ING Pacific Life Insurance and ING Capital Life Insurance. It wants to consolidate these businesses.

  • ING Pacific is a joint venture set up by ING and the CPIC Group. CPIC has a life subsidiary, CPLIC, which is the third largest life insurance company in China, and P/C subsidiary, CPPIC, which is the third largest P/C insurance company in China. CPIC was looking to sell its stake in ING Pacific to avoid internal competition.
  • ING Capital is a joint venture set up by ING and a local company, Capital Group.
  • ING owns a share of Bank of Beijing as a strategic investment.
  • Bank of Beijing taking a share in both ING Pacific and ING Capital could make ING’s China business integration easier, since the two joint ventures would have a similar ownership structure. Also, ING could leverage Bank of Beijing’s distribution channel.
  • This is a case of local bank buy share from local insurance companies.

From analyses above, we can find out that the ING case is completely different with Standard Life case. Standard Life sold shares to “bolster its cash position”, while ING’s case is aimed at consolidate its operation in China.

What is the trend I see from these cases? Firstly, allowing banks to invest in insurance companies and insurance companies to invest in banks will form new financial groups and consolidate the China insurance market; And another trend is, the bancassurance business model in China may change, moving from agency-level cooperation to deeper and broader capital-level cooperation. Banks and insurance companies could cooperate in various stages, from product development and distribution to customer service.

Gmail's Downtime Does Not Mean the End of Cloud Computing

Gmail, Google’s online e-mail service, was down for a couple of hours this week, and it sparked a seemingly endless number of articles about the new concerns raised for users of cloud computing. I have a number of problems with this reaction. 1) How, before Gmail’s two-hour downtime was even fixed, did all these different media outlets determine that businesses were now raising questions about cloud computing? Most of these articles should probably have been about how media outlets are now assuming that businesses are concerned about cloud computing, or, rather, about how media outlets are now concerned about cloud computing. I suppose that media outlets are, in fact, businesses, so perhaps this first point is invalid. 2) At least in the insurance industry, everybody is already wary about cloud computing for exactly these reliability reasons. And I’ve yet to talk to an insurer who uses Gmail for their means of business communication (if you are such an insurer, please get in touch with me — I’d love to hear your story). So since everybody already has concerns about cloud computing and since no one uses (or very few use) Gmail for business purposes, I doubt that Gmail’s downtime really changed any insurer’s perspective on cloud computing. 3) Based on various surveys I’ve seen, corporate e-mail servers tend to be down for over an hour a month. Whether or not you believe the surveys, you can judge this against your own company’s track record. This means that Gmail’s reliability is HIGHER than most corporate e-mail. The reason everyone is so shocked by Gmail’s downtime is because it appears to be an unusual event. I am not intending to say that the lack of corporate e-mail for two hours is not a very big deal and doesn’t come at a huge cost. I also realize that Gmail or other online services going down has a different kind of impact than a local business server: Gmail is used by millions of people so the reach is much wider. The real issue here is one of perception and control. There is a perception that our local servers are more reliable, even if, in reality, they are less reliable (as in the case of Gmail). More importantly, there is a feeling of control we have when the server is in our own data center. Even if that server goes down four times a month, we can shout down the hall and find out what’s wrong. When something on the cloud goes down twice a year there’s nothing we can do but wait. I won’t even start on the fact that refering to Gmail as cloud computing is confusing the issue of actual cloud computing. That would require more space than I have here. But, at the very least, I can say with confidence that — despite Gmail’s two-hour outage — it is not yet time to give up on the cloud.