Archives for November 2010

Battening down the British hatches : 2011 will be the year of uncertainty

At this time of year, along with Guy Fawkes celebrations and eating turkey, Celent analysts in UK, US and France start the process of interviewing CIOs at insurers to understand their plans and priorities for 2011.

Even at this early stage of the research process, there are some interesting differences in the regions. Insurers in Britain appear not to share the US view that we are in a new normal (See celent report ) – a new world of flat growth, weak consumer consumption, high unemployment and low interest rates. In fact, several are planning for growth for 2011 in what is a highly saturated, brutally competitive market. The French insurers we’ve spoken to are more pessimistic and more closely aligned to their US colleagues.

Whilst the business strives for growth, the internal driver is cost containment. The UK CIO face either flat or small decreases to IT budgets going into 2011. A handful are required to cut their budgets by up to 30% over the next three years. IT is being asked to become more affordable, and to reduce their contribution to expenses. As one frustrated CIO said “They [the business] are back to cutting the legs off IT”.

What does this all mean for the UK insurance technology industry? The impact in 2011 is probably small. Several insurers have large scale investment projects already underway and these are not under threat. I would expect to see more tactical solutions crafted for the new world of affordability. Multi-million claims replacement projects will be a hard sell, but FNOL or fraud point solutions provide value at a price that fits the new world.

In the medium term, we will see the discretionary budget under threat once more. Since Celent has been covering the UK market, we’ve seen small and steady increases in IT budgets and a resulting downward trend of the maintenance chunk of the budget. So with the increased discretionary IT investment, some insurers have managed to turn the ratio on it’s head – having 60-70% of IT budget available for new investment. These IT departments are undoubtedly more agile and more flexible in responding the business requirements, mirroring for most their organisation strategic goals of responding to the markets. But with year on year cuts to IT budgets, expect this ratio to slip once more.

For vendors, it will become harder to sell new products and services with the reduction in addressable IT budget. If the new normal does arrive in the UK, as you may intuit is Celent’s view, there is no light on the economic horizon. Rates will not rise, competition will increase, premiums will remain flat, and against this backdrop, IT will be pressured into more cost reduction.

Trend this out over three to five years (smarter people than me are not able to pinpoint any economic turnaround in the coming years for the UK) and IT starts to become an expense line again, unable to deliver in the manner that business has come to expect. This will be frustrating time for IT folk who have built up significant credibility with the business in recent years.

For now, to protect against this scenario, Celent would suggest that it has never been more important to have the dialogue with the business about how and where IT can contribute to cost containment and profitability. Automation, analytics are just two areas that can help. Before the market gets too dire, maybe it’s time to invest ahead of the curve.

The interviews mentioned in this post will form the basis for our syndicated reports “CIO 2011: plans and priorities” to be published in January 2011.

12.16.10: Celent Insurance Webinar: Approaching the Boiling Point: Business Process Outsourcing, Software as a Service in Insurance

Celent Senior Analyst Benjamin Moreland and Craig Weber, Senior Vice President, Insurance Group This event is free to attend. Celent clients and the media will have access to the webinar’s PowerPoint presentation after the event. Please click here for more information.

Can mid-market expansion happen with the newest generation of new business and underwriting products?

Will automated underwriting systems finally replace the underwriter for term life insurance products? Could these systems be the catalyst that finally allows life insurers to penetrate the ever elusive middle market? I think both answers are “maybe.”

Today’s new business and underwriting systems offer broad functionality for the producer and the underwriter. Reflexive electronic applications, instantaneous third party data integration, and risk related configurable underwriting rules all can help the producer to potentially issue a larger number of policies instantly.

The newest generation of new business and underwriting systems offer electronic applications that give early insight into how much medical underwriting is needed on a case. Using insurer defined rules that assess risk and reflexive questioning, the system determines what, if any, medical underwriting requirements are needed. Because the system evaluates the risk, the application may never be seen by an underwriter. That’s because for many term products up to a certain face value, the insurer’s rules may rely solely on instantly accessed third party databases. According to Celent’s research, this currently happens less than 25% of the time, but the capability is there to expand the use of these systems to meet the needs of the middle market and at the same time lower the cost of issuing lower face value policies.

The recession has meant there is a larger percentage of the population on the lower end of the income spectrum than ever before. This has important implications for life insurers since more people may look to buy lower face value policies. These applicants demand lower premiums and faster issue times. To streamline the application to issue process and to meet these demands insurers can look to today’s new business and underwriting systems with their straight through processing (STP) functionality and their potential advantages in reducing the cost and time associated with insurance sales and underwriting for all policy types.

The newest generation of new business and underwriting system can also give an insurer deeper insight into its own underwriting rules. The data analytic capability of the system monitors system behavior so insurers can make immediate risk related rules adjustments. If the access to data helps push the level of reliance on the underwriting engine by increasing instant issue policies, the new business and underwriting system could pay for itself through operational savings. Although overly simplistic, using data from Celent’s discussions with life insurers that actively use a new business and underwriting system, a 10% increase in simplified issue policies (assumes the switch of approximately 525 policies from medical underwriting to instant issue with savings of $.40/$1000 per new business face amount) could result in savings of approximately $100,000 per year. That’s a potential break even in four to five years for some vendor systems available today.

According to a Society of Actuaries 2010 study, automated underwriting has been fairly successful for life insurers who use automated underwriting for simplified issue and non-medical underwriting, and to a slightly lesser degree for flagging pieces of information in the underwriting process for review by an underwriter. If an insurer can get past the cultural issues related to using automated underwriting systems, and as long as it does not try to replicate all medical underwriting with an automated system, true benefits will be seen. So, underwriters will still be needed for term products, but to a lesser degree, and the growing middle market has the potential to be penetrated further than ever before.

For further reading on the new business and automated underwriting systems available in the North American market today, read Celent’s North American Life Insurance New Business and Underwriting Systems, 2010: Life, Health, and Annuities ABCD Vendor View.

Aggregators: Online Insurance Sales as a Service

Aggregators are not numerous in Switzerland but the few that exist are mainly active in the health insurance domain. Actually Switzerland has a particular compulsory health insurance system. Private insurance companies can offer the standard medical cover (part of the social security system) and are directly controlled by the federal authority under the responsibility of the health minister. Contributions are collected under the form of premiums which can vary by region (canton) and age but they are independent of the individual level of salary or wealth.

Since the launch of the compulsory health insurance system in 1996, premiums have continuously increased and the Swiss population put pressure on the government to find solutions to contain this increase. Among others, the health minister has decided recently to tackle the problem of intermediaries and commissions paid to them by insurers. The idea is to reduce insurer’s sales costs by 50 million Swiss francs. Approximately one third of this amount is paid to online aggregators.

Where the problem becomes interesting is when we try to define what an aggregator is. According to the Swiss authority, a broker can be defined as an entity that brings two parties together and proposes at least two different health insurance offers resulting in the payment of a commission by insurers. Therefore aggregators have to be considered brokers.

However aggregators believe their business model is different. As they’re paid per quote submitted to insurers and not per effective sales generated, they believe their revenue cannot be considered a commission like traditional brokers but software-usage costs for insurers. In other words, insurers pay aggregators the right to use an advanced online insurance platform and they pay this right on a usage-basis (here a per-received-quote fee). Did you know that aggregators were the inventors of the Online Insurance Sales as a Service!

Is Your IT as Good as You Think It Is?

During a recent interview with a senior level leader within a large P&C insurer responsible for their outsourcing efforts, he made the comment that they plan to increase their use of BPO and explore SaaS solutions. However, he then went on to state that the biggest hurdle that they face in using SaaS is they do not really know how good they are to be able to compare if any vendor can do a better job than they can. This struck me as very on target and reflects the state of many insurers, although most will not admit it.

I’ve worked in IT for over 25 years with some very large and distinguished companies, as well as smaller, not so well known ones. In each case, I was fortunate to work with some very qualified and intelligent people. In most cases, we usually believed that “our” IT team could do the job better than anyone else. This is a great attitude to have from a team perspective and fitting to some degree for companies at the time. However, this can no longer be acceptable with the maturation of BPO and SaaS. You can no longer delude yourself into thinking you can do IT solutions (soup-to-nuts) better than any SaaS vendor, especially into today’s market where utilization, agility, speed to market, lower TCO are key business drivers. An insurer’s IT team may know the business and their IT systems better than anyone, but it doesn’t mean that they can support business solutions going forward better than anyone else.

I’m not suggesting that BPO and SaaS vendors can always support insurance applications more effectively and efficiently than an Insurer’s IT support staff, but insurers have to begin determining how well they actually perform to be able to decide if a SaaS or BPO vendor is a better long term solution. It would be like creating a baseball team that does nothing but practice and play games among themselves and believe that they have the best team around. Within most sports, the metrics to compare already exist. They do not exist within most IT development and support staff today. What is your current support level for your current applications? How much control do you really have over your applications and infrastructure? How secure is your data today? These are valid concerns stated by insurers today with respect to BPO and SaaS, but they should be the same questions insurers are asking of themselves.

BPO and SaaS are beginning to mature in the insurance space. The economy and competitive forces will drive these solutions forward. Those insurers that know how well they do IT today and can compare their own capabilities to potential vendors will be the ones that are able to make the smart choices with respect to what to outsource and what to keep in house. Those that do not will be the “lessons learned” stories over the next several years. (See “Approaching the Boiling Point: BPO, SaaS in Insurance” Celent report, due out December, 2010.)

Ouroboros or the snake that is eating its own tail!

For those of you who don’t know it, China has its own rating agency. It is called Dagong Global Credit Rating Group. This week the Dagong Global Credit Rating Group reduced its credit rating for the U.S. to A+ from AA, citing a deteriorating intent and ability to repay debt obligations after the Federal Reserve announced more monetary easing. Of course the major US rating agencies still give the highest rating to the US. So, which view from the Chinese and the American view is the closest to reality? Maybe this is not the most important question right now. Actually what is more important to know is whether China still buys US government bonds? Actually it seems that China has been less inclined to buy US government bonds recently and so have been other Asian countries. So who is buying US government bonds right now then? The response is: The Fed! This is like a snake that is eating its own tail! and the animal is very hungry… Drawing by Theodoros Pelecanos, in alchemical tract titled Synosius (1478).