In my conversations with insurers, I am frequently asked about IT investments. People want to know what the trends are around IT budgets and how their spending on information technology compares with others. To help explore these topics, we analyzed insights from our portfolio of research and did some additional analysis.

Working on this research project was illuminating. The findings validated and quantified some key assumptions about how and where technology investments are being funded. Some of the major conclusions show that:

• While there is wide variance in the percentage of premium that insurers are allocating to the IT budget, the industry average continues to run between 3% and 3.5%.
• A significant portion of the IT budget is allocated for discretionary spending. Nearly 40% of insurers indicate that 10% or more of their budget is discretionary, and more than 20% of insurers allocate more than 20% of their budget to discretionary use.
• There is major investment in technology-based solutions occurring outside the IT budget. 59% of insurers report significant spending outside the IT budget, with 5% of insurers stating that spending outside the IT budget exceeds 50% of the budgeted IT spending.

There are no hard and fast rules dictating an appropriate or normal or acceptable percentage of premium that should be spent on the IT budget. Spending levels are and should be influenced by the business climate, strategic initiatives and the competitive landscape.

It is great news that more insurers report better alignment of IT investments with business objectives and strategic initiatives. This alignment is critical to driving new collaborative approaches for addressing both challenges and opportunities. The industry is serious about investing in the modernization of systems and architectures. That investment is laying a foundation for the optimization of business processes and operations in every aspect of the environment. The result is transformation that delivers real value and the ability to drive innovation for the future.

This is a pivotal time for the industry, and technology is an essential enabler for the capabilities that will deliver needed growth and efficiencies in the coming years.

During the planning process, it is important to look beyond how the budget compares with that of peers, and to assess what funding is required to support the business capabilities that are needed to compete. Understand what the gap is. It may be necessary to exceed the traditional percentage of DWP allocation that your company has grown comfortable with. Realize that in today’s environment, the reality is that IT spending is high, and many companies are able to find additional funding in business units to help meet company goals and position for competitive advantage.

For more information from our recent report, IT Budget and Spending Realities and Trends in the North American P&C Insurance Industry, please visit our website: https://strategymeetsaction.com/.

I once saw an episode of the television show "Undercover Boss" that offered a good lesson for employers everywhere. 

For those of you not familiar with it,  "Undercover Boss" is a CBS show where a CEO who is completely unaware of what actually happens within his company dons a cheap and unconvincing disguise and spends a week working undercover within the organization. He meets employees along the way who, while turning out to be the bedrock of success for the company, have every possible malady and crisis occurring in their personal lives. The CEO learns that her company does not train, supply, support or develop employees at any acceptable level. One CEO actually found that his female employees had to urinate in a can when on the job. Ironic when you realize his company was Waste Management. The program ends every week with the CEO revealing himself to said employees, giving them each a bazillion dollars, a paid vacation to Disneyland, new teeth and a promotion to head a new department designed to do whatever they happen to be good at, like peeing in a can. I personally think the employees are being paid off to keep quiet about the CEO's inability to actually perform any job within the organization.

If you haven't guessed, this isn't my favorite show. However, my wife and I are a typical married couple and have to have something to watch, or risk having to "talk," which always gets me in trouble, so we load up the DVR.

I have often joked in the office about doing a spoof video of "Undercover Boss. The joke, of course, being that, in our small office, everyone knows me and is already aware that I am incapable of performing any job within my organization. In the real show, we always see the CEO's palatial home(s), fancy cars, private jets and drop-dead-gorgeous families. In my version, you would see a modest home with a lawn in desperate need of new sod, a Hyundai Santa Fe that hasn't been washed since 2010 and our four cats, one of whom is blind. The highlight of the home portion would likely be my mopping up the occasional accident when blind kitty is in the box but doesn't know his fanny is over the side. You would not see my wife, as she hates having her picture taken. Even our wedding photos are just of me. They came out okay, but frankly the one of me throwing the bouquet just looks staged. 

I suppose I could wash the Hyundai before we commenced filming, or try to borrow my wife's Mercedes, but she requires a hefty security deposit.

But, as usual, I digress.....

The episode about which I wish to opine featured Jose Mas, CEO of MasTec Industries, an energy transmission construction company. The company builds pipelines, transmission lines and other energy infrastructure. The company was founded by Mas' father, a Cuban immigrant who passed away in 1997, at the age of 58. By Mas' own account, his father was a "hands on" businessman, involved in every facet of the operation. This really became apparent in one segment of the show. 

Mas junior was in Oklahoma, where he had just demonstrated his complete inability to run a piece of heavy equipment while working with a field supervisor named Rich, who was from Georgia. Rich had been with the company almost 15 years and was preparing to retire. At one point, Rich said he "got hurt real bad" while working for MasTec. With the show's history of featuring employees who willingly rip the bejesus out of their employers while standing in front of multiple camera crews, I braced for the worst, but it didn't happen. Rich explained that he fell in a hole and crushed his ankle, the treatment of which involved surgery and multiple screws. He followed up by saying, after a significant pause, "MasTec treated me real good on that deal." 

And what was it that made Rich feel that way? The CEO at the time, Mas senior, personally contacted both Rich and his wife to express his concerns and offer any assistance they needed while Rich was off the job. It was a small gesture that resulted in a huge long-term benefit. MasTec likely did other things to make the process a positive outcome, but it struck me that it was the outreach to his wife that so impressed Rich.  

Communication with an injured worker from a high level of the organization is great. Communication with the worker's family and loved ones is pure gold. What a brilliant concept.

The story is even more remarkable if you do a little basic math. The accident happened while Mas senior was still alive, so more than 14 years earlier. Rich was not yet at his 15-year mark with the company when he told his story, so he was a relatively new employee when the accident happened. MasTec was a very large and successful company when the accident happened--yet the CEO made the effort for a relatively new and unknown employee.  

I am intrigued by the continuing trend of pursuing competitive advantage through early adoption of analytics, and the concept of "first mover advantage," but was taken aback by a contrary view expressed at a recent round table on compliance and risk. There, it was suggested that, because of uncertainty about the requirements of insurance regulators, it might be better to wait before committing time, money and resources.

The participants talked of "last mover advantage," and in their particular case perhaps they have a point. I wondered where else last mover advantage had been used and to what effect, and what the implication is in the insurance sector. Last mover advantage is a tried and tested strategy with our old friends, the retail sector. Own-label branding often relies on branded suppliers to invest in marketing to establish a new product, before retailers enter the market with a lower-priced version. It was suggested at the round table that "first mover advantage" is a myth. Chux was cited as an example–it entered the market ahead of Pampers but lost out.

Personally, I don’t buy into that idea. Effective innovation is no longer just about being the first to have a good idea, but being able to quickly execute on the idea in a sustainable way that meets the customer’s needs.

There's no doubt that innovation is speeding up. IHS Consulting cites a study showing that, of 46 major innovations in the 20th century, the average timespan between introduction and follow-on declined by 90%, from 33 years to 3.4 years, and that was in the pre-digital age. What does innovation look like at the speed of WiFi?

In a rapidly growing global marketplace, speed to market remains critical for insurance innovators and can mean the difference between success and failure of a new venture. Analytical accelerators can only increase that speed and provide greater certainty of a successful outcome. Incremental improvement that continuously differentiates, including customer and staff feedback obtained through social media analytics, allows insurers to keep ahead of their competition.

How insurers obtain and keep competitive advantage remains critical, and innovation is clearly a part of this. But I wonder, what is more important: the quality of the innovation, or the quality of the competition?

I am reminded of an old joke, which goes something like this:

Two hikers in the jungle came around the bend to find an enormous tiger up the trail. The tiger spies them and begins running toward them at a full speed, licking its lips. One hiker drops his backpack, sits down, throws off his boots and starts lacing up a pair of running shoes.

The other hiker says: “What are you doing? You’ll never outrun that tiger!”

The first hiker replies: “I don’t have to outrun the tiger. I only have to outrun you."

Although insurance companies are embracing analytics in many forms to a much higher degree than other businesses, adoption by the insurance industry is still only in its adolescent stage. Deployment is broad but inconsistent. The use of analytics may be about to mature considerably, though, based on a recent series of mergers and acquisitions.

Currently, while a majority of large carriers use predictive modeling in one of more lines of business, and mostly in personal lines auto, a smaller percentage use it in their commercial auto and property units. Insurers recognize predictive analytics as a critical tool for improving top-line growth and profitability while managing risk and improving operational efficiency. Insurers believe predictive analytics can create competitive advantage and increase market share.

Fueling even greater excitement – and soon to be driving transformational innovation - is the recent surge of M&A activity by both new and nontraditional players, which have combined risk management and sophisticated analytics expertise with robust and diverse industry database services. The list of recent deals includes:

• CoreLogic’s 2014 purchase of catastrophe modeling firm Eqecat, following its 2013 acquisition of property data provider Marshall & Swift/Boeckh; a significant minority interest in Symbility, provider of cloud-based and smartphone/tablet-enabled property claims technology for the property and casualty insurance industry; and the credit and flood services units of DataQuick.
• Statutory and public data provider SNL Insurance’s 2014 purchase of business intelligence and analytics firm iPartners, which serves P&C and life companies.
• Verisk Analytics’ 2014 acquisition of EagleView Technology, a digital aerial property imaging and measurement solution.
• LexisNexis Risk Solutions’ 2013 acquisition of Mapflow, a geographic risk assessment technology company with solutions that complement the data, advanced analytics, supercomputing platform and linking capabilities offered by LexisNexis.

Other 2013/2014 transactions that have broad implications for the insurance analytics and information technology ecosystem include:

• Guidewire Software, a provider of core management system software and related products for property and casualty insurers, acquired Millbrook, a provider of data management and business intelligence and analytic solutions for P&C insurers.
• IHS, a global leader in critical information and analytics, acquired automotive information database provider R.L. Polk, which owns the vehicle history report provider Carfax. 
• FICO, a leading provider of analytics and decision management technology, acquired Infoglide Software, a provider of entity resolution and social network analysis solutions used primarily to improve fraud detection, security and compliance.
• CCC Information Services, a database, software, analytics and solutions provider to the auto insurance claims and collision repair markets, acquired Auto Injury Solutions, a provider of auto injury medical review solutions. This transaction follows CCC’s acquisition of Injury Sciences, which provides insurance carriers with scientifically based analytic tools to help identify fraudulent and exaggerated injury claims associated with automobile accidents.
• Mitchell International, a provider of technology, connectivity and information solutions to the P&C claims and collision repair industries, plans to acquire Fairpay Solutions, which provides workers’ compensation, liability and auto-cost-containment and payment-integrity services. Fairpay will expand Mitchell’s solution suite of bill review and out-of-network negotiation services and complements its acquisition of National Health Quest in 2012.

Based on these acquisitions and the other trends driving the use of analytics, it will be increasingly possible to:

• Integrate cloud services, M2M, data mining and analytics to create the ultimate insurance enterprise platform.
• Identify profitable customers, measure satisfaction and loyalty and drive cross/up-sell programs.
• Capitalize on emerging technologies to improve pool optimization, create dynamic pricing models and reduce loss and claims payout.
• Encourage “management by analytics” to overcome departmental or product-specific views of customers, update legacy systems and reduce operating spending over the enterprise.
• Explore external data sources to better understand customer risk, pricing, attrition and opportunities for exploring emerging markets.                       

As the industry is beginning to understand, the breadth of proven analytics applications and the seemingly unlimited potential to identify even more, coupled with related M&A market activity that will drive transformational innovation, indicates that the growing interest in analytics will be well-rewarded. Those that are paying the most attention will become market leaders.

Stephen will be Chairing Analytics for Insurance USA, Chicago, March 19-20, 2014.

Wellness has failed.  Get used to it. 

Understanding why wellness has failed requires a brief history lesson of the wellness provision of the Affordable Care Act (ACA). The wellness provision was based on the success story at Safeway and a seminal article in Health Affairs -- both of which turn out to be made up. 

To begin this series on the failure of wellness programs, let’s look at Safeway, which is so central to the ACA wellness provision that the provision is sometimes called the Safeway Amendment. The Safeway CEO, Steven Burd, claimed to have reduced healthcare spending by 40% using a wellness program. He wrote an op-ed in the Wall Street Journal, testified before Congress and became friends with President Obama even as Sen. John McCain also cited Safeway as a role model. The slight problem with all of this: Safeway’s claim was absolutely, unequivocally, made up.

A front-page article in the Washington Post pointed out that the wellness program didn’t even exist at the time Safeway’s healthcare costs fell. Instead, the decline in corporate spending was because of the implementation of a high-deductible plan, shifting cost to employees. (Curiously, once Safeway actually did implement a wellness program, its health spending rose faster than average. This was probably a coincidence because, even today, only a small fraction of Safeway’s workplace participates in the program. 

Next came the seminal article in the prestigious journal Health Affairs, written by equally prestigious Harvard economists Katherine Baicker and David Cutler. The article was titled, “Workplace Wellness Programs Can Generate Savings.” Not “could possibly generate savings” or “may generate savings on a good day,” but “can generate savings.” These economists reviewed all the published evidence and reported quite a definitive “3.27-to-1” return on investment from wellness.

This article is easily invalidated on two points. First, the overriding rule of a study is that it must be replicable. This article was published four years ago and has yet to be replicated. Quite the opposite: Every subsequent article in Health Affairs has shown that even with the most generous assumptions imaginable, like leaving many elements of cost out of the ROI calculation, wellness doesn’t save money. 

Second, in July, lead author Baicker had enough sense to walk back the article’s conclusion, saying on NPR’s Marketplace that “it’s too early to tell” if there are savings. She also said that employers need to “experiment” to “see what happens with weight and blood pressure.”

Besides the retraction, two other things about this interview invalidate wellness:

1. Biostatistics 101 states that the smaller the effect, the larger the population needed to show it. To admit after decades of wellness programs involving millions of people that “it’s too early to tell” means that whatever effect there is (if any) would be very subtle, so subtle that it couldn’t possibly merit an entire industry and significant workplace disruption to achieve it.
2. Except at the extremes, for which a companywide wellness program isn’t needed, “weight and blood pressure” have almost no effect on corporate healthcare spending. Corporate spending on overweight people, during their working years, may be greater than for thinner people (the evidence is mixed), but there is no evidence that weight loss across an employee population can be maintained, and the reverse is usually true—most people who lose weight regain it. Controlling blood pressure is far more likely to increase corporate spending than reduce it. Rates of stroke in the working-age population are disappearingly low to begin with, and the cost of a stroke is far lower than the cost of controlling the blood pressure of 1,000 employees to prevent one. (Some companies will say they are “medicalizing their workplaces” for humanitarian reasons and not to save money, which is laudable…though, as subsequent installments in this series will show, misguided. In any event, the article was about saving money.)

Along with Safeway’s lie and Baicker’s retraction comes the Business Roundtable’s hypocrisy. The Business Roundtable was and is the major lobbying force in favor of wellness. Claiming they want to “help people” and “foster a culture of health” for “employees and their families” while opposing ACA and the minimum-wage increase is not even the hypocrisy here. The hypocrisy is that the head of the Business Roundtable’s health committee, Gary Loveman, is also the CEO of Caesars Entertainment. In that “day job” running a chain of casinos, he poisons more employees with second-hand smoke than any other CEO in the U.S.

Perhaps he feels that health hazard is more than offset by the meaningless seven-point reduction in blood pressure that he says wellness has achieved for the small segment of active participants committed enough to stay with the program. (He didn’t measure the dropouts and non-participants, whose results may not have supported his narrative.) A skeptic might therefore conclude that Business Roundtable CEOs support wellness only because it provides an excuse to dock some workers 30% of their health premium, and pocket it themselves.

To wrap up Part One, the entire premise of employers “playing doctor” by medicalizing their workplaces is invalid. It is no wonder, then, that the science and outcomes are made up, as well – those are topics for future installments. However, if you stay with this series (or cut to the chase and read the book), you’ll find that there are solutions, and those solutions incorporate everything that wellness doesn’t – science, morale and cost-effectiveness – while emphasizing the role of the broker and consultant in designing the benefit.

Over the last two years, we have witnessed executive appointments and many strategy projects related to improving the customer and agent experience. It seems like we’ve all been bombarded by banner ads, e-mail promotions, webinars and conference speeches on this topic (and I speak from personal experience, having participated in a number of these). All of this energy and activity will translate into more major initiatives and spending in 2014. The question is, “What will these initiatives look like, and who will be in the driver’s seat?”

There will still be many individual projects that will contribute to enhancing the customer experience. Insurers will roll out new mobile apps, customize customer documents, upgrade portals and provide new customer self-service options. All of these types of capabilities are important elements of the customer experience. 

But for insurers that are thinking ahead, there will be two overarching initiatives that set the stage for a differentiating customer experience.

One of these initiatives will be driven by business leaders – planning for customer interactions through the whole customer journey. In 2014, more insurers will map out their communications with customers and agents across the enterprise. This type of initiative is increasingly being driven by the CMO with the intent of improving brand consistency and customer satisfaction.

The second initiative is often driven by the CIO, and it is aimed at establishing a unified digital platform that integrates all types of digital communications with customers and agents – mobile, portals, the public web site, social media and collaboration technologies.

I expect to observe many different variations of these initiatives in 2014. Insurers that are able to combine these efforts will make the most progress in improving the customer experience and having an important impact on company results. The ideal scenario will be to establish a unified digital platform to support all digital customer interactions in a common, efficient manner and then optimize each interaction with an understanding of the overall customer journey. Individual projects for mobile, collaboration, portals or other technologies will be able to leverage the platform and produce consistent, personalized communications.

In general, the investments in technology tend to follow the state of the economy and the state of the insurance industry. However, we have noticed an interesting trend over the past five years – insurers have become increasingly optimistic about the prospects for the industry and more bullish about the role of technology.

This is not to say that IT budgets are dramatically increasing – in most cases, they aren’t. But, through an era when many organizations were slashing IT budgets and laying off staff, insurers have by and large maintained their investments and have gradually increased spending. For 2014, an average increase of 3% over 2013 is anticipated, and insurers are planning to spend even more on IT during 2015-2017.

However, more important than the spending numbers is the way that those dollars are being deployed. An increasing number of insurers are thinking long term and engaging in transformational initiatives. I don’t mean to imply that insurers have never been strategic regarding their IT investments before, but there is a great deal of energy around high-impact projects with companywide implications.

In our first Insurance Ecosystem survey at the end of 2009, only 13% of insurers considered their companies to be in transforming mode. Now, our survey at the end of 2013 indicates that 32% of insurers are transforming. Big, cross-functional initiatives for improving the customer experience, creating a culture of innovation, and core replacement/modernization are becoming more common.

What’s especially interesting is the activity going on in the core systems space. The industry has been experiencing a wave of replacing or modernizing policy, billing and claim systems for the past five years – it’s now new. While many of those replacements have been driven by legacy systems that are limiting the organization’s adaptability, there are more insurers that are now viewing core replacement as an opportunity to position for the future – to build a foundation for a more agile company, one that can respond to market needs, capitalize on innovation and leverage technologies such as mobile, analytics and cloud computing.

Certainly, the priorities and investments are different by line of business and insurer size. And each company has its own unique set of circumstances and strategies. But the big themes are unmistakable – we are in the midst of an era of change in the insurance industry, and technology is a vital enabler of that change.     

For more information about insurers’ IT plans and priorities, read SMA’s new research report, 2014 Insurance Ecosystem: Insurer Technology Spending, Drivers, and Projects.

Research suggests 40% of major business decisions are based not on facts but on the manager’s gut.[1] In workers’ compensation, critical decisions are made not only by managers but by front-line workers. How accurate and timely are the decisions that claims adjusters make? What about the decisions made to ignore information and avoid taking action? How are outcomes traced back to the decisions made and not made? What accountability is built into the process? What kind of decision support is available? Are decisions based on objective data?

Business intelligence, derived from analytics, can inform business decisions throughout the organization. But the data analysis must be infused into operations to lead to action. Only analytics that are linked to operations can consistently and positively provide decision support that creates positive outcomes.

Sequestered knowledge

Both garden-variety analytics and highly sophisticated predictive modeling are common now in many organizations. But few apply the analytics to their operational processes effectively to make a significant impact on outcomes and profitability. In workers’ compensation, applied analytics, particularly those relating to the medical aspect of claims, are rare.

In workers’ compensation, analytics are most often sequestered in the executive suite. Analytic results are shared at board meetings and are lavishly portrayed at marketing shindigs or annual reports. They are represented in colorful graphics while decision-makers ponder their meaning. But there is little impact on decisions made by middle managers and front-line workers.

Analytics must be linked to operations to allow for action.

Dashboards are not actionable

Dashboards have become a fashionable way to display analytic results, but they don’t link the analytics to operations. They do not change behavior. They are designed to portray conditions in the organization across a broad swath of indicators in one view. 

An example is a hospital where a dashboard displays vital operational statistics including admissions and discharges for the period, average lengths of stay and acuity rates. Dashboards are interesting and informative. But who should do what to incorporate the knowledge? What should be done operationally to affect the indicators going forward?

Basically, dashboards are for viewing only, and unless the organization has designed response procedures for assigned persons, the impact is negligible. Dashboards have no direct relationship with operations and no mechanism for tracking responses to the information. Changes in process are anecdotal only.

Corporate communications, regardless of how sophisticated, do not effectively translate analytic knowledge into action on the front line.

Actionable analytics

For analytics to lead to action they must be linked to, and fused into, operations automatically. Front-line workers must be led by the information process to take appropriate action. 

The best way to do this in workers’ compensation is to electronically monitor the data, execute the analytics in real time and initiate the desired actions among workers by means of an automated electronic message. This approach hurdles the communication log jam by sending immediate, specific information directly to the person who can best act on it. 

Infusing analytics into operations requires a computerized system specifically designed to monitor and analyze all transactions and to automatically send alerts.

Accountability

When the computer system identifies a high-risk situation in a claim, the appropriate person is automatically notified electronically. At the same time, the system should also keep an audit trail noting all claims identified, the reason and to whom the alert was sent. The end-to-end process will infuse analytics into the process, render the process more efficient and establish accountability.

When a person is alerted of a high-risk claim, action is expected. Some organizations have formal procedures for the actions required under a specific set of circumstances. Such actions are documented so that outcomes can be traced back to the claim conditions, initiatives taken and the persons involved. The results are exponentially improved while the data gathered in the process enhances organizational performance intelligence.

Results

Analytics by themselves cannot and will not change outcomes. But analytics linked to operations through specifically designed systems will affect both the process and outcome. Only actionable analytics create value.

[1] Davenport, T. Harris, J., and Morison, R. Analytics at Work, Smarter Decisions, Better Results. Harvard Business School Publishing Corporation. 2010.