Is there any life left in those old (life) blocks?

Last week, the Hartford (USA) announced that it was refocusing its business strategy. The immediate impact of this change was to place its annuity business into runoff, and to initiate a search for a buyer (or strategic alternative if a buyer cannot be found) of its Individual Life, Woodbury Financial Services and Retirement Plans. In addition to this news from the Hartford, earlier this month we also saw the Prudential (USA) announce that it was going to discontinue the sale of individual long term care products.

In mature markets around the world, there appears to be a growing demand to either find new homes or alternative strategies for long-term business that no longer fits with the business strategy of insurers. In Europe, for example, Solvency II and local market reforms (such as the Retail Distribution Review in the UK) are acting as a catalyst for insurers to re-evaluate the economic viability of running these blocks as they reduce in size with age, and also with a view towards releasing capital.

So, if you’re an insurer with large block of non-strategic long-term business, what are your options?

The most obvious option, and preferred by many, is to find a buyer for the block. Although strategically, this can be the cleanest option for the insurer, it comes with two big risks. The first risk is brand reputation. Even though the products within the block may be viewed as non-strategic by the insurer, it is unlikely that the customers holding those products see them that way. Ultimately, these same customers may also be good prospects for other financial products and services. The second risk relates to transition. Ideally, the buyer of the closed block needs to be able to absorb the business into its existing operation without a drop in service quality or benefits to the customer. Typically, this will involve some level of convergence on processes and platforms with other similar blocks – not an easy task, and it is likely that the biggest share of the reputational risk associated with any failure still lies with the insurer who sold the block!

Other options range from financial restructuring through to outsourcing through to internal transformation. No option is straight forward, all involve some level of balancing the cost to serve with the reducing size of book, and all attract risk. Arguably, at the heart of any good strategy for closed blocks, should be an understanding of the value of the end customer holding the product, and how further value can be extracted from the relationship to the benefit of both parties (regardless of who manages / owns the block now).

At Celent, we are researching the options open to insurers for managing closed blocks and also strategies for maximising the value of the customers held within them. If you have an opinion on what the best strategy is for managing these old discontinued blocks of business, then we’d be keen to hear from you.

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.)

Lessons for IT Service Vendors: Get to know your clients

IT Service vendors play an important role in the insurance industry. In a world where the internet makes it easy to have customer service representatives half way across the world or developers in remote locations, insurance companies like many other 21st century organizations look to vendors to meet their IT needs in lieu of hiring people or buying systems and hardware. IT Services vendors provide expertise to insurers in areas such as writing, modifying, testing, and supporting software. The vendors help plan and design computer systems that integrate hardware, software, and communication technologies. This is especially important with the frequency of mergers and acquisitions. IT Service vendors provide on-site management and operations of insurers’ computer systems and/or data processing facilities. They provide outsourcing of key processes and they give professional and technical computer-related advice. Celent’s forthcoming report about ITS vendors provides a detailed spectrum of over thirty IT Service vendors in North America. The report profiles each vendor in relation to the services it provides, the skill sets of their insurance vertical staff, details of their client base, and customer feedback related to the services provided. Celent has other regional reports in the pipeline. There are several reasons why an insurer may look to an IT Service vendor for their offerings. Many insurers, when facing shrinking margins, look to an IT Service vendor to improve the efficiency of their operations. ITS vendors help insurers pursue strategic agility. ITS vendors enable insurers of any size to tap into a global labor pool to find the skills they need at potentially competitive rates. Celent’s recent blog post highlights several of the business drivers for outsourcing. For whatever reason they choose to buy IT Services, insurers have key reasons why they choose one vendor over another. Over the years, service offerings have evolved from the labor arbitrage offering to that of a possible partnership. Feedback to Celent in CIO discussions and responses from clients in Celent’s ITS vendor survey shows that the factors related to choosing an ITS vendor are not merely based on price, although price is still a big factor. Based on the Celent survey of ITS vendor clients for the North American ITS Vendor Spectrum Report, clients want a vendor to be responsive to their needs and to really know their business. And overwhelmingly, almost 80% of the clients were looking for long term partnership potential. When it comes to knowing the client’s business, for the most part, IT Service vendors are meeting the needs of their clients. Nearly 60% of the respondents said that the vendor either knows the client’s business very well or as well or better than the client. The flip side is that almost 40% do not do a very good job of learning the business of the client, or at least to the satisfaction of the client. What does this mean to the IT Services vendor? Get to know your client, its needs, its business, and its people. Make sure your proposition matches their requirements, and evolves alongside the client’s changing needs. Those clients that were most happy with their IT Service vendor felt they had a true partnership with the vendor. Those that were less happy felt that the knowledge of the IT Services vendor should be greater than the client’s and the vendor should be flexible and willing to going beyond what has been done before. The IT Services vendor should have knowledge of best practices and use the experience they gained from other implementations or projects to improve their project’s outcomes. As this feedback demonstrates, insurers are looking for partners in their delivery of IT, not just low cost services. Look for more on this topic in Celent’s upcoming North American ITS Vendor Spectrum Report.

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.