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‘Core Transformation’ May Not Be Enough

In the 1920s, Hollywood had a pretty good grasp of what it took to be a leading lady. She had to be able to use exaggerated gestures and facial expressions to convey what was going on without the benefit of sound, and she had to look attractive onscreen. Nobody cared what her voice sounded like – and then came the talkies.

Suddenly, the established actors and actresses had to learn brand new skills and adapt to a new paradigm, because no movie studio was going to continue putting out silent movies when the other studios were putting out talkies. Some stars did well, like Mary Pickford, a silent film star who won an Oscar for her first speaking role. And then there were actresses like Jean Hagen, playing Lina Lamont in “Singing in the Rain,” who sounded like someone stepping on a rubber ducky that had a head cold. Even for the film stars who successfully made the transition, moving from silent movies to talkies was a challenge unlike anything faced before.

Every industry encounters these moments, although some are not as obvious as the talkie revolution. The good news is that insurers, as a whole, are starting to execute on their transformation paths. Customer service is improving, business models are morphing, products are becoming more sophisticated and the core systems that support the full breadth of the company’s business are changing – and all these changes continue to accelerate. As I mentioned in our last core blog, SMA’s recent research on policy administration systems found that 94% of insurers require robust configuration capabilities from a new PAS, because these capabilities provide the foundation for the ability to increase speed to market and speed to service, and solution providers have gotten the message. There are more and more systems on the market that are adopting these dynamic configuration capabilities. In fact, they have now become table stakes when core systems are replaced.

But there needs to be a transformation of the full core, including people and processes – not simply a system replacement project. The full core transformation includes modern policy, billing and claims systems, advancing business capabilities and an adaptive and agile organization.

Among the important ingredients for organizational transformation are the ability to adjust to required new skills, to determine where these skills will be located in the organization and to decide how the delivery of product changes will occur. For example, will you rely on the technology alone to create the differentiation, or will you adjust the organization and the skills? The new configuration capabilities can be used by people who have been trained as business analysts – and these resources are often in short supply at most companies. I have experienced demos where I hear that the configuration capabilities can be used by the business professionals to expedite product deployment. The assumption is that there are resources available in the business to perform this work. In many cases, the reality is that the business does not have the skills, processes or time to perform this work.

Often, the technical areas do have the process and some of the necessary resources, but, if the work shifts to the technical side of the business, then the IT pipeline is just being filled with the same volume of change requests that existed in the past. This is the Gordian knot that must be worked through. Insurers that have previously dealt with forms and rating engines have figured this out – they have a handle on reality and how to manage it. Many have reorganized to centralize the resources that will perform these services. They have architects that understand the hazards of configuration and can help create the “bumper guards” that are necessary to ensure success.

In SMA’s research note, Policy Administration: P&C Plans and Priorities, 52% of insurers stated that it was difficult to find the right mix of business and technical skills to work on the configuration capabilities provided by modern policy, billing and claims systems. New skill sets are required to fully capitalize on the advantages of responsive and agile product development – new hybrid skill sets that include a combination of business analyst skills and an understanding of technical principles. Some insurers use business analysts. Others turn to IT users who have a strong understanding of business capabilities. In today’s environment, there are not many resources that meet these qualifications. Companies that are investing in training are advancing quickly.

A certain flexibility is inevitably needed to cultivate these truly skilled configurators. Insurance companies are organized around yesterday’s capabilities. Insurers need the ability to shift staff between departments – to create new working groups, to manage new priorities, to adapt to new business processes and to engage new skill sets. This flexibility equips an insurer to seize opportunities in the market, establish new modes of customer service and build business models that deliver value-added services that extend well beyond reaction and restoration.

The whole point of core transformation is that changes at the micro level can be used as a stimulus for changes at the macro level. Organizations able to address the technical and business capabilities that transformation demands can also make organizational shifts with enormous impacts. The key is to recognize that you must use some creativity and be willing to take some risks by challenging long-established traditions.

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There is a happy ending to “Singing in the Rain,” and it is not through the solution that Jean Hagen’s studio recommends – that being traditional diction training. Jean finds that what she does best, using her unique voice, leads her down the road to success in the new world of the talkies. In the transformative new world, insurers can also find their own road to success, heading toward the ultimate goal of becoming a Next-Gen Insurer. Core transformation, with its combination of synergistic organizational, business and technical capabilities, is a key ingredient to getting there.

Core Transformation – Start Your Engines!

Ready, GO, set! That might not describe every core modernization project, but it certainly can seem that way in today’s fast-moving environment. 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 from modern core systems to fulfill the potential of core transformation.

First, it helps to define what exactly a modern system is today. This is trickier than it sounds because the definition of “modern” has changed in recent years – and will continue to change. Core systems that were considered modern in 2010 are already showing their age, as recent systems have far outpaced their capabilities. Strategy Meets Action (SMA) defines a modern system as an application that includes robust configuration capabilities usable by both IT and business users, uses standardized application programming interfaces (APIs) to facilitate integration of new systems and technologies and leverages service-oriented architecture (SOA) principles to enable scalability. Each of these capabilities is crucial to being able to use core modernization as a launch pad for core transformation.

In our recent study on trends in policy administration, an amazing 94% of P&C insurers reported that product configuration capabilities are a required feature in a new policy administration system. This is a requirement across the industry for all core systems. Configuration capabilities are so important because they are critical to accelerating speed to market and speed to service. An insurer’s ability to react to market changes and take advantage of new opportunities is limited by the amount of time it takes internally to roll out new products and services or modify existing ones. Robust configuration tools not only make configuration easier but also spread it throughout a wider portion of the company, reducing the bottlenecks that often occur when all changes must be coded by a programmer. In a market where products and services are more personalized, configuration within policy, billing and claims becomes an essential tool.

Core systems today are required to dynamically integrate with various internal and external systems and new and real-time data, as well as big data. SMA’s research reveals that, as the sophistication of the solutions on the market has grown, insurers are often using third-party solutions for ancillary systems like business intelligence, agent portals, new business and document management. The number of data sources continues to grow significantly each year, including maturing and emerging technologies like telematics and the Internet of Things (IoT) that generate large quantities of data ripe for analysis. Data from these and other new technologies have myriad uses, including to rate a risk, personalize a service or present a new product offering. Specific solutions depend on integration with the core, and reducing the time and effort demanded by integration promotes the consideration of, for example, a business intelligence (BI) solution capable of vastly more in-depth analysis than the integrated BI component of a PAS, or an external data source that provides information that an insurer otherwise could not use. Easing the friction of integration benefits insurers well into the future, because easier integration today also translates to less arduous integration with systems and applications not yet imagined.

The most modern solution on the market is only as good as the book of business it can manage. With transaction volume and speed increasing, insurers must have scalable systems capable of meeting new and increasing demands, which requires leveraging SOA principles. Not only do insurers gain the ability to use a modern system’s capabilities with an increasing number of transactions, they also can extend the life of the system by enabling it to expand. When demand spikes after a catastrophic event or when a new market opportunity is identified, the system is well prepared to manage it. Cloud capabilities are presenting real alternatives to provide the scalability needed to successfully handle peak workloads, both anticipated and unexpected.

These three critical components of a modern system are not just what insurers need today – they prepare insurers to adapt to the future. Modern core systems with these capabilities can evolve along with the insurer. Insurers need to be able to shift their technology environment as needed to meet the future’s unknown opportunities and challenges, and that requires the ability to create products, integrate the latest systems and technologies and scale in concert with an insurer’s book of business. When the need arises for integration of artificial intelligence, for example, or processing millions more transactions per hour than ever before, the capacity is already ready and waiting. Once insurers know they can depend on their core systems to support them through market changes, they can focus their attention on optimizing their current processes and innovating to become a Next-Gen Insurer.

The order is important – ready, set, go. No matter how fast you want to move, you need to plan and then execute! Don’t let technology drive you – embrace the change and adopt technology with your future vision in sight.

Policy Administration: Ripe for Modernizing

Modern core systems are essential to an insurer’s ability to compete effectively in today’s increasingly complex and dynamic market. Policy administration systems (PAS), in particular, are ripe for modernization — policy administration is the heart of an insurer’s operations, and it provides the information that feeds other core systems as well as most of the secondary systems, like document management and agent portals. Insurers know that modernization is an inevitable step on the journey forward. The exciting news is that the industry as a whole has reached a tipping point where nearly two out of three insurers are engaged in some stage of PAS modernization, whether in the evaluation stage of a new solution or in the actual implementation.

SMA’s recent study, Policy Administration: P&C Plans and Priorities,  reveals that all insurers know they must take the modernization journey and that most are already on the way, although in different phases and at their own pace. Fully 78% are planning to replace at least one core system (policy, billing or claims), and more than half are planning to replace all three. With so many insurers working toward the same goal, there are certain commonalities and lessons to be learned that can be used to make a company’s PAS modernization projects more efficient and effective.

One of the most alarming findings from the research is the substantial challenges that insurers are still experiencing as they work with their systems’ configuration tools. This is the number one feature insurers require in a new PAS, but it is also one of the top challenges they cite in working with the solutions on the market, including issues of handling the work internally. Our observation is twofold: Evolving PAS solutions are adding and enhancing configuration capabilities, but their usability aspects are still maturing. The second insight is that insurers are coming to realize they must reorganize to some degree to improve their maintenance processes. The skills and resources that a configuration specialist needs are often assumed to exist but are not always present. Resources that could be trained for this role are typically isolated in the business or IT organizations. There needs to be recognition that there are specialized skills to be learned for configuration and maintenance, and decisions to be made about where this work will be performed.

Core systems modernization is inevitable, and although PAS replacement, the biggest component of that process, demands significant investments of time, resources and money, most insurers have already begun their adoption of modern core systems. With so many companies engaged in PAS replacement, we can learn a lot about what makes these projects successful, both before and after implementation. There are challenges ahead, but they are not insurmountable, and the benefits of core systems modernization will be realized for years to come.

Disjointed Reinsurance Systems: A Recipe for Disaster

Insurers’ numerous intricate reinsurance contracts and special pool arrangements, countless policies and arrays of transactions create a massive risk of having unintended exposure. The inability to ensure that each insured risk has the appropriate reinsurance program associated with it is a recipe for disaster.

Having disjointed systems—a combination of policy administration system (PAS) and spreadsheets, for example—or having systems working in silos are sure ways of having risks fall through the cracks. The question is not if it will happen but when and by how much.

Beyond excessive risk exposure, the risks are many: claims leakage, poor management of aging recoverables and lack of business intelligence capabilities. There’s also the likelihood of not being able to track out-of-compliance reinsurance contracts. For instance, if a reinsurer requires certain exclusion in the policies it reinsures and the direct writer issues the policy without the exclusion, then the policy is out of compliance, and the reinsurer may deny liability.

The result is unreliable financial information for trends, profitability analysis and exposure, to name a few.

Having fragmented solutions and manual processes is the worst formula when it comes to audit trails. This is particularly troubling in an age of stringent standards in an increasingly internationally regulated industry. Integrating the right solution will help reduce risks to an absolute minimum.

Consider vendors offering dedicated and comprehensive systems as opposed to policy administration system vendors, which may simply offer “reinsurance modules” as part of all-encompassing systems. Failing to pick the right solution will cost the insurer frustration and delays by attempting to “right” the solution through a series of customizations. This will surely lead to cost overruns, a lengthy implementation and an uncertain outcome. An incomplete system will need to be customized by adding missing functions.

Common system features a carrier should look out for are:
  • Cession treaties and facultative management
  • Claims and events management
  • Policy management
  • Technical accounting (billing)
  • Bordereaux/statements
  • Internal retrocession
  • Assumed and retrocession operations
  • Financial accounting
  • AP/AR
  • Regulatory reporting
  • Statistical reports
  • Business intelligence
Study before implementing

Picking the right solution is just the start. Implementing a new solution still has many pitfalls. Therefore, the first priority is to perform a thorough and meticulous preliminary study.

The study is directed by the vendor, similar to an audit through a series of meetings and interviews with the different stakeholders: IT, business, etc. It typically lasts one to three weeks depending on the complexity of the project. A good approach is to spend a half-day conducting the scheduled meeting(s) and the other half drafting the findings and submitting them for review the following day.

The study should at least contain the following:

  • A detailed report on the company’s current reinsurance management processes.
  • A determination of potential gaps between the carrier reinsurance processes and the target solution.
  • A list of contracts and financial data required for going live.
  • Specifications for the interfaces.
  • Definitions of the data conversion and migration strategy.
  • Reporting requirements and strategy.
  • Detailed project planning and identification of potential risks.
  • Repository requirements.
  • Assessment and revision of overall project costs.
Preliminary study/(gap analysis) sample:

1. Introduction
  • General introduction and description of project objectives and stakeholders
  • What’s in and out of scope
2. Description of current business setting

3. Business requirements

  • Cession requirements
  • Assumed and retrocession requirements
4. Systems Environment Topics
  • Interfaces/hardware and software requirements
5. Implementation requirements
6. System administration
  • Access, security, backups
7. Risks, pending issues and assumptions
8. Project management plan

The preliminary study report must be submitted to each stakeholder for review and validation as well as endorsement by the head of the steering committee of the insurance company before the start of the project. If necessary, the study should be revised until all parts are adequately defined. Ideally, the report should be used as a road map by the carrier and vendor.

All project risks and issues identified at this stage will be incorporated into the project planning. It saves much time and money to discover them before the implementation phase. One of the main reasons why projects fail is poor communication. Key people on different teams need to actively communicate with each other. There should be at  least one person from each invested area—IT, business and upper management must be part of a well-defined steering committee.

A clear-cut escalation process must be in place to tackle any foreseeable issues and address them in a timely manner.

A Successful Implementation Process
Key areas and related guidelines that are essential to successfully carry out a project.

Data cleansing
Before migration, an in-depth data scrubbing or cleansing is recommended. This is the process of amending or removing data derived from the existing applications that is erroneous, incomplete, inadequately formatted or replicated. The discrepancies discovered or deleted may have been originally produced by user-entry errors or by corruption in transmission or storage.

Data cleansing may also include actions such as harmonization of data, which relates to identifying commonalities in data sets and combining them into a single data component, as well as standardization of data, which is a means of changing a reference data set to a new standard—in other words, use of standard codes.

Data migration

Data migration pertains to the moving of data between the existing system (or systems) and the target application as well as all the measures required for migrating and validating the data throughout the entire cycle. The data needs to be converted so that it’s compatible with the reinsurance system before the migration can take place.

It’s a mapping of all the data with business rules and relevant codes attached to it; this step is required before the automatic migration can take place.

An effective and efficient data migration effort involves anticipating potential issues and threats as well as opportunities, such as determining the most suitable data-migration methodology early in the project and taking appropriate measures to mitigate potential risks. Suitable data migration methodology differs from one carrier to another based on its particular business model.

Analyze and understand the business requirements before gathering and working on the actual data. Thereafter, the carrier must delineate what needs to be migrated and how far back. In the case of long-tail business, such as asbestos coverage, all the historical data must be migrated. This is because it may take several years or decades to identify and assess claims.

Conversely, for short-tail lines, such as property fire or physical auto damage, for which losses are usually known and paid shortly after the loss occurs, only the applicable business data is to be singled out for migration.

A detailed mapping of the existing data and system architecture must be drafted to isolate any issues related to the conversion early on. Most likely, workarounds will be required to overcome the specificities or constraints of the new application. As a result, it will be crucial to establish checks and balances or guidelines to validate the quality and accuracy of the data to be loaded.

Identifying subject-matter experts who are thoroughly acquainted with the source data will lessen the risk of missing undocumented data snags and help ensure the success of the project. Therefore, proper planning for accessibility to qualified resources at both the vendor and insurer is critical. You’ll also need experts in the existing systems, the new application and other tools.

Interfaces

Interfaces in a reinsurance context relate to connecting to the data residing in the upstream system, or PAS, to the reinsurance management system, plus integrating the reinsurance data to other applications, such as the general ledger, the claims system and business intelligence tools.

Integration and interfaces are achieved by exchanging data between two different applications but can include tighter mechanisms such as direct function calls. These are synchronous communications used for information retrieval. The synchronous request is made using a direct function call to the target system.

Again, choosing the right partner will be critical. A provider with extensive experience in developing interfaces between primary insurance systems, general ledgers, BI suites and reinsurance solutions most likely has already developed such interfaces for the most popular packages and will have the know-how and best practices to develop new ones if needed. This will ensure that the process will proceed as smoothly as possible.

After the vendor (primarily) and the carrier carry out all essential implementation specifics to consolidate the process automation and integrations required to deliver the system, look to provide a fully deployable and testable solution ready for user acceptance testing in the reinsurance system test environment.

Formal user training must take place beforehand. It needs to include a role-based program and ought not to be a “one-size-fits-all” training course. Each user group needs to have a specific training program that relates to its particular job functions.

The next step is to prepare for a deployment in production. You’ll need to perform a number of parallel runs of the existing reinsurance solutions and the new reinsurance system and be able to replicate each one and reach the same desired outcome before going live.

Now that you’ve installed a modern, comprehensive reinsurance management system, you’ll have straigh-tthrough automated processing with all the checks and balances in place. You will be able to reap the benefits of a well-thought-out strategy paired with an appropriate reinsurance system that will lead to superior controls, reduced risk and better financials. You’ll no longer have any dangerous hidden “cracks” in your reinsurance program.
This article first appeared in Carrier Management magazine.