Too often, insurers have seen core system replacement as an IT project requiring an IT decision. But the strategic importance of such an initiative is properly considered a leadership decision aimed at supporting the strategic direction and, in many cases, the transformation of the business.
The tendency to focus on IT is understandable: an insurer’s policy administration system is at the center of its business; it is a hub that connects to and influences all other core systems. In many ways, it is the heart of the carrier’s technology environment, feeding other applications and functional areas that connect with the information needed to perform their respective tasks effectively. However, this central function is precisely what makes core system transformation a business project.
An insurance carrier considering replacing a policy administration system must conduct a systematic review of its mission, strategic aspirations, organizational dynamics, technologies and operational efficiencies. Armed with the results of this review, the insurer’s leadership needs to answer a broad array of questions that affect all aresa of the organization and the constituents served within them. Example questions include:
– How will this change impact our business direction and the potential for achieving our strategic aspirations?
– Why should we make the change – and why now?
– What value will it bring to policyholders, adjusters, customer service, and other end users of the system?
– What value will it bring to operations, business processes, the technology stack and staff?
– Are we going to leverage mainly out-of-the box capabilities and change our business to fit the package? Or are we going to change the package to fit our business needs?
– What alternatives to replacement should we consider?
– What else should be replaced at the same time as part of a transformation journey?
– How prepared is the organization for the change, and what do we need to do to ensure that they are? ?
– How well are the requirements defined?
– What is the availability of key resources required for the transformation?
– What external support will be needed –and at what cost to successfully implement the changes?
– What are the current metrics and how would they change in a transformation scenario?
– What are the technology implications of the change including infrastructure, contracts, collateral systems, etc.?
– What are the longer term plans for outsourcing and BPO?
During a thorough analysis guided by questions like these and others, the insurer should focus on identifying, gathering and validating metrics. The metrics will become the foundation, initially to support the objective decision. However, they will also provide the basis for performance management after the implementation is complete.
There are two primary ways to measure business success: growth, and profit. Accordingly, creating a business case can be simplified into the two basic components of cost and benefit.
From a cost perspective, the carrier needs to generate accurate estimates encompassing a wide range of topics, including but not limited to planning, licensing, configuration, integration, migration, testing and organizational change management. The carrier must determine the source of the expenditure (internal vs. external), as well as capital vs. expense. Varying the factors and executing sensitivity analysis could lead to different conclusions regarding the economic viability of the project.
The benefit side is a bit more complex, but it fundamentally breaks down into three basic components.
- Process improvements and efficiencies – During the process of evaluating the policy system environment, the carrier should seek improvements across the policy life cycle from issuance to renewal or disposition. The focus should be on processes and procedures that can be streamlined, eliminated, combined or integrated in order to create a low-cost and efficient/effective operation. Typical metrics to consider include issuance cycle time, straight-through processing, hours per policy to process by step, resource per thousand policies to support, self-service utilization (generally measured by customer/agent in bound phone calls, abandon rate and hold times).
- Expanded access to markets – Through expansion, leverage is created on the infrastructure allowing greater access to potential policy holders in new states, new markets, new distribution channels, and through new product types to be spread over the cost structure. This growth criterion can be difficult to measure and should be highly scrutinized – small changes in market access assumptions could lead to dramatically different outcomes. Consideration should be given to tying the benefit case for expanding markets to the incentives to the individual or groups accountable for results.
- Legacy retirement – The ultimate goal of the policy transformation is to eliminate the legacy systems and all of the ancillary support applications that go along with them. Related cost savings should include the direct cost of labor, infrastructure, downtime, integration costs, etc., as well as indirect costs, including limitations that affect the carrier’s ability to respond to market opportunities or regulatory compliance requirements.
Creating an effective foundation through planning and analysis for a policy transformation program is essential to establish the right direction and the right structure, paving the way for the right results.