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Commercial Insurers Face Tough Times

Beyond the secular forces we described in our “Future of Insurance” series, more immediate and cyclical issues will be shaping the insurance executive agenda in 2016. Commercial insurers (including reinsurers) face tough times ahead, with underwriting margins that are being pressured by softening prices and a potentially volatile interest rate environment.

Recently, reserve releases, generally declining frequency and severity trends, as well as lower-than-average catastrophe losses have allowed commercial insurers to report generally strong underwriting results. However, redundant reserves are being (or have been) depleted, and the odds of a continued benign catastrophe environment are low. For example, one insurance executive recently observed, “The odds of this long of a lucky streak occurring is less than 1%.”

The commercial insurance market has, in recent years, had generally strong underwriting results, but this could change—potentially, very soon.

With varying degrees of focus, commercial P&C insurers have been mitigating the risk environment by taking a variety of strategic actions. In 2016 and beyond, they will need to accelerate their strategic efforts in four key areas: 1) core systems and data quality, 2) new products, pricing discipline and terms and conditions, 3) corporate development and 4) talent management.

Core systems and data quality

93% of insurance CEOs—a higher percentage than anywhere else in financial services—see data mining and analysis as more strategically important for their business than any other digital technology. Nevertheless, many commercial insurers operate with networks of legacy systems that complicate the timely extraction and analysis of data. This is no longer deemed acceptable, and leading insurers continue to transform their system environments as a result. Significantly, these transformations do not focus solely on specific systems for policy administration, claims, finance, etc.

To ensure timely quality data across the entire commercial P&C value chain, commercial insurers also focus on how the various systems are integrated with one another.

To put this into context, when a dollar of premium is collected, it not only “floats” across time until it is paid out in claims, it also “floats” across a variety of functions and their related systems: Billing systems process premium dollars; ceded reinsurance systems process treaty and facultative transactions; policy administration systems (PAS) process endorsement changes; claims systems process indemnity and expense payments.

Actuarial systems in disconnected data environments prevent the timely and efficient extraction and analysis of internal data and also complicate the focused and efficient use of external data, especially unstructured data. “Big data” is becoming increasingly popular considering the insights that insurers and reinsurers can derive from it. However, such insights only become actionable to the extent that companies can assess the external environment in the context of the internal environment—in other words, to the extent that big data can enhance (or otherwise inform) the internal data’s findings.

If all functional and systemic codes are not rationalized on an enterprise-wide basis, it is very difficult to efficiently accumulate and analyze data.

New products, pricing discipline and terms and conditions

Commercial insurers and reinsurers are not generally known as product innovators, but they can be. For example, as the profile of cyber-related risks increases, the need for cyber-related commercial insurance grows, thereby offering numerous opportunities for product innovation.

Because cyber is a relatively new exposure, frequency and severity data are nascent, therefore both pricing and risk accumulation models are in various stages of development. As a result, prescient insurers are carefully tracking and comparing their cyber pricing practices and coverage grants with those of key competitors. To be effective, such practices should be consistent with existing price, terms and conditions and monitoring processes. For example, tracking actual-to-expected premiums and rates is a common practice, which leading insurers perform regularly (i.e., at least quarterly, with monthly tracking common).

Insights from this kind of analysis apply to both new and existing products. The underwriting cycle is inherently a pricing phenomenon, and insurers and reinsurers that have greater and more timely product and pricing insights have a competitive advantage relative to those that do not. To explain, in addition to lower rates, the “soft” parts of the underwriting cycle tend to be characterized by the loosening of policy terms and conditions, which can erode profitability as quickly as inadequate prices. Therefore, the most competitive insurers and reinsurers carefully and continuously track the adequacy of policy terms and conditions. Recurring actuarial analyses and standardized reporting can monitor changes in pricing as well as in terms and conditions. However, identifying emerging underwriting risks is inherently qualitative. Therefore, this analysis can be time-consuming, especially for insurers with suboptimal PAS environments. However, almost all companies find the analysis well worth the effort.

Corporate Development

The combination of historically low interest rates, favorable frequency and severity trends and the relative lack of severe catastrophes has resulted in record policyholder surplus across P&C commercial insurance. Executives have a number of options on how to deploy surplus, one of which is corporate development.

Commonly, “corporate development” means mergers and acquisitions, but it can also encompass book purchases/rolls, renewal rights and runoff purchases. Determining the best option depends on many factors, including purchase price, competitive implications and an assessment of how the acquired assets and any related capabilities can complement or enhance existing underwriting capabilities.

Accordingly, some insurers are beginning to augment traditional due diligence processes (such as financial diligence, tax diligence and IT diligence) with underwriting-specific diligence to help ensure value realization over time.

If a corporate development opportunity offers underwriting capabilities that at least align to—and preferably enhance—existing capabilities, it can help facilitate a smooth integration, thereby mitigating underwriting risk (a key cycle management consideration).

Talent Management

For the most part, commercial underwriting decisions cannot be fully automated because they require judgment. Therefore, it is natural for underwriting talent to be a top priority. However, insurance executives have lamented that it is a major challenge for the industry to attract and retain knowledgeable personnel.

Two trends make commercial insurance talent management particularly challenging. First, experienced underwriters are leaving the industry. According to one study, “The number of employees aged 55 and over is 30% higher than any other industry—and that, coupled with retirements, means the industry needs to fill 400,000 positions by 2020.” Second, underwriting talent is relatively difficult to attract. For example, according to the Wall Street Journal, insurance ranks near the top of the list of least-desirable industries—according to recent graduates. The image of the insurance industry is that it is generally behind the times and offers little in terms of career development. Therefore, developing a performance-driven culture that enables the recruitment, development and retention of underwriting talent is more crucial than ever.

To help accomplish this, insurers should employ and should continuously assess tools and resources that educate and empower underwriters through all phases of their careers. This is important because the expectations in commercial underwriting are high, and the nature of the job requires a diverse range of skills (e.g., analytical, relational, sales, financial and risk). Furthermore, the best commercial underwriters are entrepreneurial, which employers should highlight as they recruit and manage their underwriting staffs.

Commercial insurers face a looming talent crunch and have to find ways to present themselves as—and actually be—a place where young people can have rewarding careers.


  • The relatively strong underwriting results of recent years are likely to soften in the coming year. Accordingly, commercial underwriters will need to accelerate their strategic efforts in:
  1. Core systems and data quality,
  2. New products, pricing discipline and terms and conditions,
  3. Corporate development
  4. Talent management
  • Core systems transformations go beyond individual system competencies. To ensure timely, quality data across the entire commercial P&C value chain, insurers also are focusing on how the various systems are integrated with each another to facilitate the timely and efficient extraction and analysis of internal data and the focused and efficient use of external data (especially unstructured data).
  • There are opportunities to create new products, but, to be profitable, insurers must exercise pricing discipline and must carefully and continuously track the adequacy of policy terms and conditions.
  • Current surplus levels have enabled insurers to invest in corporate development, and some insurers have augmented traditional due diligence processes (such as financial diligence, tax diligence and IT diligence) with underwriting-specific diligence to help promote value realization over time.
  • Commercial insurers have an aging workforce and are facing an impending talent crunch. Automation cannot replace the judgment that is required for effective underwriting. Therefore, it is vital for insurers to develop a performance-driven culture that enables the recruitment, development and retention of underwriting talent over time.

The RATs That Stifle IT Efforts

I can just imagine the ad on Craigslist:

“$750,000 – Legacy Policy Administration System, P&C, 30 years old. Runs great! It’s our daily driver!!!”

You’ve been good to it (sort of). It’s been good to you (sort of). The idea of replacing it makes you a little nauseous. In fact, you have at least 30 good reasons—perhaps typed up and in your top desk drawer for when vendors call—that you haven’t been replacing your legacy system or systems.

For all the talk of modernization, many organizations still haven’t taken the plunge into system replacement and organizational transformation. And, until recently, many of those organizations were standing on some very good reasons. Many Tier 2 and Tier 3 carriers have maintained their systems reliably, like the 1950s cars frequently found in Cuba. The carriers have cared for the systems and nurtured them much as you might an aging car. In many cases, carriers have added modern support systems around the aging core, hoping that a sufficient stopgap solution might buy time for a more strategic replacement. This is analogous to adding a USB charger and a new stereo to that well-maintained 1950s car. Of course, those support systems have generated their own complexity, as these systems were never meant to do the things they’re being asked to do today (24 x 7 availability, Web front ends, real-time processing, etc.).

See Also: The Seven Colors of Digital Innovation

An insurer’s particular market niche may also have kept it from desperately needing an updated core system. Group insurers, for example, have traditionally been faced with less direct consumer contact and a different model for sales and administration. Regional commercial insurers have operated with a small base of loyal clients that perhaps didn’t demand online service. Now these organizations are facing the same decisions they confronted five to 10 years ago, but they are coming to different conclusions. “Is replacement worth the hassle when the machine isn’t technically broken?” “How can we overcome our internal apprehensions?”

As it turns out, much of what keeps insurers from modernizing is the application of well-meaning thoughts and activities that reflect less on business realities and focus more on the hurdles. I call these RATs — Replacement Avoidance Tactics. Some RATs are theoretical. Others are concrete. They share the same issues, however, and they can be equally difficult to trap and remove—or exterminate!

RATs are an apt analogy. RATs act just like their namesake. They are pesky, non-life-threatening, quickly moving varmints that an organization can’t get a handle on. They are unfortunate, misplaced justifications, sometimes tied to job security, sometimes well-intentioned and sometimes simply misinformed. There are many types of RATs, but they all contribute to the same delinquency. They make it possible for perfectly logical organizations to come to the wrong conclusions. If we take a look at several of the more aggressive species of RATs, we may get a glimpse of how easy they are to get rid of with a simple twist in philosophy.

The Cost RAT

Dollar signs tend to dazzle and frazzle perfectly good plans for modernization. At Majesco, we regularly see organizations spending a great deal of time assessing potential ROI for projects large and small. We are great advocates of understanding ROI before moving forward, and we often help insurers with these assessments. To overcome this RAT, I suggest starting replacement discussions by highlighting demonstrated needs and not touching on the idea of cost until later. An insurer won’t truly know the cost nor the potential ROI until the actual need is understood, the solution has a definitive concept and the real benefits are outlined. Without first scoping out the full transformation (or just the replacement effort), the costs and benefits cannot possibly be fully understood or calculated. In fact, in some cases there may not be an acceptable “hard dollar” ROI, but the risk of broken systems or the opportunity costs of missed possibilities in the market are the real driver.

The Timing RAT

“Poor timing,” as a replacement avoidance tactic, is really just pain avoidance. The reality is that policy admin replacement—while painful—is in most cases necessary. It will relieve much unnecessary work, and delaying it simply adds to the difficulty of replacement—kicking the can down the road while compounding current and future problems and increasing the likely replacement cost. Yet, this RAT has burrowed into the philosophy of many insurers, working hand in hand with the Cost RAT and the Risk RAT.

The Detour RAT

I have driven through states and cities where the same roads seem to always be under construction. Drivers live with perpetual detours, and they seem to simply get used to it and accept it over time. We live in an era where insurance systems and processes face a similar challenge. In short, the Detour RAT is the one that allows companies to get lost in their own complexity and believe that it is just too hard to start over. Whether you’re simply attempting to replace your core systems due to end-of-life issues or for speed-to-market advantages, or—as in some segments of the industry—rapid change is fueling a need for continuous overhaul, organizations with legacy core systems often find themselves attempting to rebuild and restructure with piecemeal components or filling in gaps with business process outsourcing (BPO) and cloud offerings that may cover just the most vital areas. I’m sure many highway architects have thought, “I wish we could just scrap this interstate and build a new one two miles away.” Fortunately, in insurance (unlike in highway construction), you can do that! But to do it, the organization has to be willing to shut down some of the reconstruction that is currently in process. I have been in the room when well-meaning managers have discussed the amount of money they will have wasted on a project, even when they realize that scrapping it is the right thing to do.


Whenever it comes to the impact on people within the organization, the discussion is always touchy. This may be a stereotype, but a Tier 3 regional insurer will typically be more concerned about what happens to current full-time employees than a Tier 1 global multi-national. Policy admin replacement can have the same impact on personnel as corporate restructuring. It makes sense. As you replace the “machinery,” individual toolsets may no longer be needed while others may need to be hired. Automation may very well lead to some roles becoming obsolete. It’s best to remember that policy admin replacement is good for the whole health of the organization. Is the organization’s goal to employ the most people? That would be rare. Help your people retool, but don’t allow HR concerns to sidetrack modernization. The right employees will reinvent themselves and create far more value in the new environment.

See Also: 2015 ROI Survey on Customer Experience

The Risk RAT

The Risk RAT could also be called the Complexity RAT. From the inside, system replacement looks messy. It is like rats have been chewing on the wires and hoses. The structure is still sound (let’s hope), but, if the complexity can’t be dealt with, the modernization process runs the risk of faltering and losing much of what has been built. This is one of the most genuinely valid concerns and certainly one of the highest hurdles. From the inside, complexity brings with it a psychological weight. From the outside, a partner such as Majesco can help to lift the weight of complexity. Outsiders can help the organization understand how a modern, flexible system will allow for complexity to be re-created only where needed, but more importantly to understand where that flexibility can help reduce (often perceived) complexity. For example, we often find that an insurer believes it has 3,000-plus products in its policy administration system or thousands of compensation plans in its compensation systems, but with modern, flexible, rules-based solutions those thousands can be brought down by 90% or more—simply by creating a base plan with lots of variability.

There are probably seven more RATs that we could talk about. The key to overcoming each of them is to Continually Acknowledge Them (use this CAT to kill your RATs), so they don’t sidetrack modernization. Let the CATs help inform and guide your decisions, not derail them. Continually focusing teams on the positive results will help everyone understand how your efforts are tied to overall organizational health. Everyone knows RATs don’t belong in healthy environments.

Recognize RATs for what they are and encourage people to stop feeding them so much!

No More Need for Best-of-Breed Solutions?

Every five years or so, the insurance industry changes course. Hard market, then soft market. Keep the lights on, then innovate. Build, then buy. Outsource, then in-house. Best-of-breed, then suite.

Unlike with most politicians, some measure of this waffling is certainly beyond the control of insurers truly in the thick of it. However, other preferences reflect the uncertainty of markets and economies, the fluctuation of consumer expectations and demands and what some may call downright desperation to stay ahead of the curve.

Technology has long been recognized as an enabler, and it definitely fills that role when planned for strategically and implemented well. As the industry has taken up the challenge of providing faster, better, more personalized service to consumers, the demand for technology to facilitate the necessary processes has increased, as well. Core system modernization has become a top priority for insurers across all lines of business (LOBs). This means analyst firms and consultants are being engaged at a staggering (and expensive) rate to help spec out requirements, develop the request for proposal (RFP) and narrow things down to a very short list.

Interestingly, the biggest question for most insurers is not whether all of the core administration systems need to be replaced, but rather how and when is the best time to do it. Enterprise rip-and-replace projects traditionally come with a big stigma, a heavy dose of fear and bit of skepticism. Can it be pulled off successfully? With advances in technology such as the move toward cloud for deployment, the incorporation of configuration tools that promote insurer self-sufficiency and better implementation methodologies, the dark skies are definitely clearing.

Today’s most modern enterprise suites provide better integration, better capability and better results than niche-focused solutions of the past. While suite components can, by and large, all be implemented individually, pre-integration, reliance on a single data repository, use of a common architecture, an ensured upgrade path and common user interfaces mean these solutions still have a serious competitive edge over standalone systems. But does this really mean there is no more need for best of breed?

Better Integration

Once famous for creating silos and building “kingdoms” within the enterprise, insurance technology has come a long way. Recognition that insurance processes could be completed faster, and with greater assurance of accuracy, if every relevant employee was looking at the same information, insurers are turning to enterprise suites as the solution of choice. The core administration (policy, billing and claims) components of most modern enterprise suites offer increased integration and conveniently draw information for customer service representatives (CSRs), agents and underwriters from a single data or document repository. Further, by building on similar workflows, user interfaces (UIs) and processes, enterprise suites minimize change management issues and decrease downtime needed for training.

Better Capability

It’s pretty common to hear technology vendors talk about how their solutions let insurers concentrate on core competencies, but rarely is this turn of phrase actually applied to technology vendors. Insurance suites of the past typically built out full, robust capability for core administration processes, but only invested in the bare minimum when it came to supporting processes, functions and components. The best enterprise suites available today not only handle, but excel at, providing capability for peripheral processes that support core administration, including reinsurance, underwriting, document/content management, accounting/general ledger, agent/producer and consumer portals. This depth of capability was once only available to insurers through best-of-breed solutions, but now only highly customized situations and processes require such niche-focused systems.

Better Results

Even though everyone suspects it’s a much higher number, best guesses throughout the industry say that insurers replace core administration systems only once every eight to 10 years. That low frequency hardly allows internal IT staff to gain any kind of proficiency in implementation methodologies or change management. The tightly integrated nature of suite components eases implementation challenges measurably, and at the end of the day, once you get into a groove, why get out? By taking advantage of teams already established for one replacement project for another, insurers can lessen business interruption significantly. Plus, using an agile implementation methodology that incorporates iterative releases will eliminate the scope creep and missed expectations inherent to waterfall projects.


Five or 10 years ago, it may have been necessary to buy a best-of-breed technology solution to get capability specific to a certain LOB or process. However, modern enterprise suites, whether implemented together or individually, today offer the same robust capability once offered only by best-of-breed solutions, but with better integration, faster access to critical data, significantly easier upgrades and ultimately, better results.

Getting Beyond the Policy Admin System

As SMA’s Karen Furtado wrote in last month’s blog post about core systems, “Now that the insurance industry recognizes modernization as an indispensable tool for remaining competitive, it is worthwhile to take a step back and look at the technical capabilities that insurers really need.” With underwriting, this requires a platform that extends beyond the policy administration system and makes optimal use of the expertise of the underwriters themselves.

Today’s environment is full of infinite possibilities for the future of underwriting. Advances in the electronic exchange of information have benefited the insurance industry in major ways. One example is apparent with the portals and exchanges that are making it easier for agents to submit business opportunities. Given the ease, more submissions are coming in the door. This increased workload coupled with new data sources for validation and verification leaves underwriters at a tipping point. With increased demand and increasingly more complex variables, they need a solution that gives them enhanced capabilities that extend beyond the same old way of doing things.

In today’s competitive market, the ability to issue a quote for every desired risk is critical. The power literally has shifted to the palm of the consumers’ hands, where they get instant gratification via their mobile devices. For some insurers, not being able to handle the volume of quotes that are being submitted to them means leaving significant money on the table.

Therefore, a modern policy admin system is necessary for its ability to automate the processes that are performed by the underwriting department. These systems automate the data capture, base rating and rules and final pricing, and they manage formulas and document production for all risks. They process transactions for new business, renewals, endorsements, cancellations, reinstatement, etc. But, for complex risks, the risk analyses and evaluations that are determined based on information about credit, hazards, financials and loss experience are made outside the policy admin system. Automation supporting these decision-making processes takes place outside the policy admin system. SMA research shows just 37% of the entire underwriting process is managed via the policy admin system.

Before that harsh reality sets in, realize that the modern underwriting platform is not, should not be and cannot be a standalone system. Nor is the modern policy admin system a standalone solution. Now, the two (underwriting platform and policy admin system) should be connected, with the ability to perform the complex functions mentioned above.

One of our SMA imperatives is: “Interconnect Intelligence for Underwriting.” Nothing in modern insurance can happen in isolation, in a traditional silo. Those days are over, but, fortunately, the technology is available to support current and future needs. The key is finding the right connection points, the right technology and the right fit for your organization. Today’s real-time, big-data, high-volume market dictates the same from your company’s system, and that is why modern support for underwriting requires more than just a policy admin system.

Why Implementations of Core Systems Fail

As an engineer (at least that’s what my university degree says), I must say I like to solve problems. Big, ugly, complex problems can a great challenge.

We all know what has been happening with insurers’ core systems over the past several years. To respond to the challenging needs for product agility, customer-centricity and operational effectiveness, insurance companies are moving toward new core systems and away from the constraints of their legacy systems. And there are oodles of problems to be solved. Product modeling and patterns, configurability and customization options, integration and connectivity, external data sources, testing automation…it’s a tasty list, my friend.

And yet…and yet.

Even if these complex problems are nicely solved, many insurance companies fail to achieve the anticipated returns with their new core systems.

Over the past years of these types of projects, when we at Wipfli analyze the root causes, we find that the following risks have not been properly managed or mitigated:

1. Expectation risk – Are we all looking for the same things?
2. Acceptance risk – What could prevent us from leveraging this investment?
3. Alignment risk – What could prevent us from achieving the value we expect?
4. Execution risk – Are we getting things done effectively and efficiently?
5. Solution risk – Will this solution deliver on its potential?
6. Resource risk – Have we accounted for the total investment required for success?

What’s most enlightening about these risks is that five of them are about people and not technology. Only solution risk encompasses technology. As the engineer once said, “This project would have been a roaring success except for the people!” Don’t be that guy….

The desired future state following an implementation is only achieved when individual contributors do their jobs differently.

So, yes, systems projects are about the people.