The average technology spend for an agency ranges 1.9% - 2.9% of net revenues (revenue minus broker commissions) ("A vision of the Future for Agency Technology" by the Agent Council for Technology (ACT)). This total spend includes core agency management system, networking and internet connectivity, scanning and imaging, infrastructure and replacement costs for hardware like PC computers and printers. Compared to other industries, this amount is very low. For example, on average, insurers are spending 3.2%- 3.5% of net written premium. Research shows that some of the market leaders are spending greater than 3.5%, driving competitive advantage implementing proprietary systems that are being 'pushed' down on the agencies creating a gap to what the agencies really need.
Our research also finds that the agency market leaders view technology spend as a way to execute their aggressive growth strategies and 'leap forward' in the competitive landscape rather than being driven by the carriers.
The core underpinnings of agency technology are base level technology and an agency management system. These two elements create the foundational technology platform necessary to compete in today's marketplace. Once those are in place, there is a variety of add-on functionality for agency management and advanced technologies that integrate with the management system and can drive business productivity.
Do you know what the time and costs to do basic tasks?
What is being done to automate as many tasks and activities as possible?
In a marketplace with shrinking premiums and economic downturn, controlling costs is essential. Payroll is the number one expense for an agency with average starting salaries for producers ranging from $52,000 to $95,000 (Big I Study 2008).
If staff is faxing, re-keying data into multiple systems, pushing and pulling paper files, searching manually, cutting and pasting spreadsheets to produce basic reports, playing phone tag with carriers and putting clients on hold, it is costing an agency big money both in hard dollars and soft dollars such as lost business.
How are processes documented and tracked for prospect and client interactions?
Do they include the proper time and date stamp and audit trail? How exposed is your agency?
E&O is estimated to be a $500 million dollar annual expense for agents and is considered a cost of doing business with approximately 90% of all agencies carrying E&O protection. However, the coverage and limits are sometimes not adequate, presenting significant financial risks.
Today, agencies are interacting with customers and carriers through a complex set of delivery and distribution channels such as phone, fax, paper, e-mail and the web. Creating an audit trail of all correspondence, conversations and communications with time and date stamps can be expensive and challenging.
In a litigious world where people make mistakes, a complex paper-driven process has a higher chance of error. Automation can reduce human error while also providing a fast and easy way to provide audit trails for claims processing and in this way actually help close out cases.
By the year 2010, there will be approximately 64 million baby boomers retiring and replaced with 78 million new breed of consumers of insurance products In the next 10 years, this new customer will represent 45% of the population. (www.censusbureau.gov)
The agency business model is centered on relationships, trust, and service. The evolving customer and underwriter/carrier models are different, based on different expectations and increased service demand levels. This new generation is technically savvy and expects paperless transactions using things like e-mail and web self service with 24/7 responsiveness. The new generation of underwriter will be either semi- or fully-automated with real-time processing and servicing and de-emphasis on long-term relationships.
According to the Department of Labor, the US job market outlook for insurance agents and brokers will increase by 13% or 56,000 additional positions by the year 2016. (http://www.bls.gov/oco/ocos118.htm#outlook) This will create the need to hire Generation X and Y to not only to fill the growth gap, but to replace the retiring baby boomer workforce as well.
This demographic shift introduces a challenge but also creates an opportunity for changing the agency business model. Many agencies are embracing this opportunity and re-designing business models and workflows. Others, however, are waiting for their staff to retire before they implement automation. They do not want to force the existing workforce to adapt to new. In general, most agencies are trying to determine the best approach to take with a blended workforce since transformation and automation require investment, time and training.
The number of independent agencies continues to decrease from 44,000 in 1996 to less than 37,000 in 2006 (Future One: 2006 Agency Universe Study). The decrease is due to a flurry of consolidations, mergers and acquisitions among the small regional and privately owned agencies; however, the size of the agency book of business is growing. In addition, the large brokerage firms are now targeting the multi-billion dollar small commercial market.
The competitive landscape is changing for everyone. The small agencies are now competing against larger ones that tend to be more efficient and effective with automation. This creates a paradigm shift of time to market, cost of doing business and rise in the service level expectations from customer and carrier. For the agencies that want to sell their business, being an insurance agency with a book of business is no longer good enough. Companies looking to acquire are looking for good agencies that are profitable, predictable and display substantial organic growth.
Despite these trends, independent agencies still have to keep current business on the books, drive organic growth and increase sales, shrink margins, and do more with less people. As one agent put it, "it's about stealing business from other agencies by aggressively cross selling, offering new products and providing top notch personal service." Additionally, there is decreased tolerance for non-performing producers who are not meeting quotas and living off of their current book of businesses. These producers are systematically being phased out, while agencies that nurture new personnel with drive and hunger are emerging powers in the market.
When we look at the agency competitive landscape and the need to drive lower operating costs, it is clear, they need to change the way they do business and create opportunity through automation.
Regardless of the sophistication or characteristics of an agency business, they all share similar drivers for growth and customer service. Whether an agency/owner is nearing retirement, ready to sell the business or the agency is a niche player or offering a broad spectrum of financial products--embracing automation is a requirement for all.
The good news is that the industry technology is mature and ready to be deployed. With the integration of the internet into the way we conduct business, the advancement of industry standards, the evolution of agency management systems and other advanced technologies, turning these challenges into opportunities is feasible.
Looking back now, I can reflect on my Torrey Pines experience and compare it to challenges the insurance industry faces. Unfortunately, there are many companies paralyzed by the challenges of today's dramatic shifts in the competitive landscape and the daunting tasks of reengineering the old, brittle, and inefficient business processes that have evolved from yesterday's business requirements. How do we solve the legacy systems replacement challenge? How do we achieve accurate and timely data management and information? How do we get started with predictive analytics when we don't have the data? Will we ever achieve 80 percent straight-through processing, reducing the server farm with virtualization? The list goes on.
For me, all it took was the reassurance I had the entire road map along with the capability and the determination necessary to climb the hill. The satisfaction after reaching the top was worth the mental back flips I completed to get there. For the insurance industry, the challenge and payoffs are the same. Taking the opportunity to create an informed road map is step one, followed with aligning the right people and partnerships to the right tasks, and then just start executing, one step at a time.
This is an excerpt a byline article published in Tech Decision's CIO Chronicles section entitled Climb Every Mountain in December 2008 issue authored by Deb Smallwood.
This is an excerpt a byline article published in Tech Decision's CIO Chronicles section entitled Climb Every Mountain in December 2008 issue authored by Deb Smallwood.
]]>Listen to or download the 12:00 minute podcast below:
---Transcript---
Announcer: Welcome to another ebizQ podcast.
PS: Hello, this is ebizQ's Peter Schooff. And today, I am speaking with Deb Smallwood who many of you will know as the ebizQ's Insurance Community Manager and who is also the co-founder of Smallwood Maike. There are a strategic advisory firm providing research and consulting to both insurance companies and software vendors.
And today, we will be discussing the projections for insurance on the IT Spend. Today's podcast is based on recent 2009 IT Spend research conducted by Smallwood Maike, which is also future article on the ebizQ Insurance Community where you'll find other insights and features as well. So go take a look and thank you very much for joining me today Deb.
DS: Oh, you're welcome Peter. I'm glad to be talking about this topic because it's so relevant to all of us.
PS: So now, what are the key highlights around the spend for the next year?
DS: Well, that's a great question because we are in such a downturn in the economy. Insurance companies are deep in a soft market and they're also struggling with some of their investments, which they rely on for key profit abilities. So one would think that IT Spend would drop but what we're seeing consistently as we go out into the marketplace that the percentage is actually going to stay relatively flat. We're seeing some slight increases depending on the carrier.
What's really interesting is that the carriers really understand the need for strategic investments, and IT investments, and they are looking to make sure that they align to some of their business drivers in making sure that they're getting their return on investments. I had lunch with a couple of vendors this week and they all indicated that their pipeline is strong and that they're going to 2009 with great momentum. So those key strategic initiatives, frontend systems, connectivity to agents, policy admin, policy admin replacements, the claims, billing, they're still hot on the topic.
PS: Now, please take us on a step through analysis in methodology your firm uses to develop numbers for the IT Spend.
DS: Okay. Well, the first thing that we do is we really start with [INAUDIBLE] best data. The IT Spend -- it all starts around applying some basic percentages to the overall network and premium for the industry for both the PNC and life and annuity. So we at an aggregate level, we will look at all the insurance companies in North America both US and Canadian and start to apply some percentages around the net written premium to get an aggregate total stand spend then we validate that with some budget analysis. We have access to many insurance companies budgets and we also do some analysis and comparison of the other data and research that's out there in the industry.
PS: Now, what segment or Tier is spending the most money?
DS: Well, as we look across the industry, we go from very, very small companies that may have $10 or $20 million in net written premium all the way up to the super mega players like AIG, and MetLife, and State Farm that are $30, $50 billion companies. So when we look at the analysis for IT Spend, we tier them. And we say that Tier 1 is 5 billion or above in net written premium. A Tier 2 is a billion to 5 billion.
Tier 3 is 500 to a billion and then anything below 500 billion is a Tier 4. And we do that for a lot of reasons. One is as you go down to the smaller companies they tend to spend less money. Their infrastructure is smaller, their business needs at a conceptual level are the same but they tend to just have less infrastructure and such and then we apply it that way. The other thing and we'll get into it in a couple of other questions is around their behavior.
The sophistication and the behavior of spending is different by tier so that's one of the fundamental reasons why when we do the IT Spend we tier it. So specifically to your question, who's spending the most money? It's obviously the Tier 1, the $500 billion plus net written premium players. They're spending probably 80% of the total spend out there. One because of the size of the organizations. They are many insurance companies spending well over $1 billion and if you go down to the smaller insurance companies, some of their budgets are 10 or 15 million.
PS: Very interesting. Now, what is the total spend in North America in a split between life and annuity and property in casualty?
DS: Well --
PS: And are there any differences?
DS: Yeah, they're slight differences. That's a great question. It feels like it's like a big pot of gold out there. About $45 to $46 billion in terms of total spend. And that is hardware, software, maintenance licenses, and people cost as well, and consulting services. So pretty significant dollars. Its split pretty evenly. Life and annuity is around 21 billion and PNC is 24 billion. As we look across next year, there might be a slight increase in the life and annuity and that really has to do with the huge installed base that they have in terms of all of their policy admin systems. PNC will remain relatively flat.
PS: Gotcha. Now, can you tell me a little bit about the difference in spend and behaviors in the different segments you've been talking about?
DS: Sure. The large Tier 1, the over $5 billion club, as I put it, they're very sophisticated IT departments. And State Farm spends billions and has probably 10,000 people in their IT department. They have programmers and engineers but they also have architects, business architects, data architects, sophisticated project management. They do a combination of build and buy. They like to buy tools and assemble them themselves. They have multiple systems.
Some of the large P&C carriers have multiple policy admin system, multiple ratings engines, very sophisticated two lines of businesses. So as you look at the large carriers, there's lots of opportunities to sell software to and to provide services because they have multiple decision-makers. As you move down the scale, the sophistication gets a little -- not as sophisticated and it's not a knock they just have a different type of business need.
As you get down into the Tier 2, Tier 3, there's more application software that's being purchased, less build, looking to outsource some of the system integration work. And when you get to the really small players, the under 500 million, they're looking for a one-stop shopping and a plug-and-play application.
PS: Right. So it sounds like a lot of money is being spent on technology. I'm sure people listening to are very curious. Exactly what are they spending it on?
DS: So let's talk about that pot of gold, right.
PS: Yeah.
DS: So $42 to $45 billion North Americans spent. And so again, it excites everyone on the vendor community and it probably makes a lot of business executive cringe, but when you look at those dollars, the first thing you need to do I say where is it being spent and there's roughly 30% of those dollars being spent on infrastructure meaning hardware, operating systems, software, and networking.
And about 40% is being spent on maintenance. That would be a combination of legacy systems, regulatory changes, and installed based. And that leaves about 30% for new development which is roughly anywhere from 12 of 13 billion. And then when you look inside the new development, you'll see that some of them are really just major enhancements to existing applications like maybe adding a new product or going into a new state. And then there's always carryover projects.
So when you start to unbundled the 12 to 13 billion, you'll see that only 30% of that 12 to 13 billion are probably brand-new projects starting this year. And then we look at that bucket, that small -- see how the numbers have gone from 42 to 12. Now we're down to 3 to 4 billion and you look at that spend, you'll see that 50% of all of IT is labor. What's an interesting statistic is that the insurance industry has more programmers and more business analyst and engineers than any other industry except the US government.
So all those legacy systems and all those homegrown systems over the years, it's amazing that they have so many developers, more than the technology industry. So when you start to break it down that way, there is about a $1.2 billion pot of gold in terms of new services, new application software that is available to the vendor community. Is around 3% of the total spend.
PS: Interesting. Now, what exactly should the business community understand from all of this, from the very breadth and depth of all of this?
DS: Well, there's significant investments happening in the area of technology and it's absolutely critical that the business understands where the dollars are being spent and invested and also make sure that is aligned with strategy. So when we start to look at some of the spend, we see that over 59% of the spend, another percentage right, is around underwriting, policies billing, and claims and those seem to be core and real critical in tight alignment to the business.
So the good news is there's a lot of money being spent on what's absolutely essential. And there's also 27% of the dollars are being spent on the wholesales and channels distribution. Insurance has got a pretty complex distribution channel all the way from portals, and self-service, to direct sales, to working with agents and brokers so there's significant dollars being spent there. So back to your question, the business just really needs to be mindful that it is aligning to strategy and to give them the returns that they need.
PS: Right. Now, do you have any closing thoughts for any of the carriers are vendors who might be listening right now?
DS: From a carrier perspective, I'll go back to aligning with strategy. So often we walk into carriers, we look at strategies and we look at IT plans and there's a significant gap. And we really believe in enterprise linkage and really linking your business strategies to really understanding the business capabilities you need and they are making the right technology decisions.
So often we're finding that carriers are defaulting to, oh, I need a new claims systems, or I need a need a new policy admin system, and they throw it over the wall to IT. And not everyone is doing that but we still see that and what we really need is a true linkage in partnership between business and IT looking for the right solution and the right capabilities.
From a vendor perspective, boy, although the spending is going to be relatively flat, and they're still going to continue to spend on the carrier's side, vendors -- the cycle times may even be a little slower insurance because they are going to make sure that its meeting their needs. You need to have a clear go-to-market strategy, a strong value proposition, and you really need to understand your return on investment, how is it going to help them either grow their top line or their bottom line, and really understand where the spend is and connect your solutions and you value propositions to that.
PS: Well, that's great information. This is ebizQ's Peter Schooff having spoken with Deb Smallwood, the co-founder of Smallwood Maike and Associates, and the Insurance Community Manager for ebizQ. Thank you so much for all that information, Deb.
DW: Great. Thank you.
Announcer: This has been an ebizQ podcast.
[End of Audio]
The keys to escaping the confines of stagnation in the insurance industry come from establishing a clear business and IT road map with the foundation built on a sound, focused strategy; clarity of the business; and making the right technology choices. Without a clear road map, progress and change can seem daunting to even the best-intentioned company. Just as I faced the Torrey Pines hill with uncertainty, many insurance companies face the same challenge in the constantly changing marketplace. Insurance companies must take tactful steps to create a successful road map (see Figure 1).
Step 1: Leverage market intelligence. Look outside your walls; take a look around in the marketplace. Understand what your customers want and what your competitors are doing. Gather, analyze, and compare this intelligence with your strategy to create your plan for increased mind share and market share.
Step 2: Conduct true capability assessment. Look inside your walls and truly understand your people, process, and technology capabilities. Understand your current state and the capabilities needed to implement your strategy effectively. Set a plan to reduce the gap and to create a sustainable evolving organization.
Step 3: Gain incremental value and return. Deliver the balance of quick hits and strategic gains all with the right cost-benefit analysis that ties back to overall financial goals. The key is to deliver incremental and sustainable value while improving capabilities and achieving your goals.
Step 4: Set realistic goals and milestones. Set goals based on current facts of the marketplace, your capabilities, and bringing value and return incrementally. The big bang is not necessary; think in terms of continuous improvement, step by step, project by project, and evolving from a static to a dynamic organization.
Step 5: Be time sensitive. Have a sense of urgency and just start moving forward. Each day the company is not moving forward is another day the company is falling behind the marketplace and not enjoying the benefits of accomplishing your strategy and goals.
So, why take on the challenges of today's dramatic shift in the competitive landscape, aggressive strategies, reengineering business processes, and implementing leading technology? Because the results will be well worth the effort. Begin to think of the new experiences and opportunities you can create in your organization for your customers, your partners, and your employees. The potential benefits offer a magnificent view of profit growth, improved customer service, and operational efficiencies.
This is an excerpt a byline article published in Tech Decision's CIO Chronicles section entitled Climb Every Mountain in December 2008 issue authored by Deb Smallwood.
]]>The business value of BPM and SOA together at the business process level is unique, providing constantly escalating return on investment (ROI). Of course, there are significant IT savings upfront, and the benefits to the business continue to grow in many ways like competitive advantage, superior customer service, responsiveness and ease of doing business for the customer and agent/broker.
The hard value ROI does not remain static as in BPM-only solutions because of the discoverability, sharing, and re-use at the business level that SOA contributes to the equation, and grows each time the flexible automation solution is accessed, and over time (that is with each sharing or re-use of the solution). The soft business value is realized in even further hard value operational excellences and optimizations.
Insurers’ results are demonstrating the real value and benefits from shifting the mindset and leveraging BPM and SOA. The following is a summary of many case studies and implementations we have observed:
•100% achieve some level of flexibility responsiveness in day-to-day business operations.
•97% realize decrease in overall costs and expenses in both business and IT.
•71% experience some form of risk reduction as it relates to compliance.
•51% see revenue growth.
•43% see expansion in enabling product development.
This is an excerpt from a recent whitepaper “Insurance: Realizing the Full Potential of Change Shifting the mindset to create dynamic business models by leveraging BPM and SOA as true enablers” authored by Deb Smallwood & Cindy Maike, Co-founders of Smallwood Maike & Associates and published and sponsored by IBM. Contact Deb Smallwood at dsmallwood@smallwoodmaike.com for a copy.
]]>Also the ability to detect “business situations” based upon event patterns and data (predictive variables, actuarial variables, etc.). These derive new events (through information enrichment), allows business users to detect, evaluate and react to business events in real time and take the appropriate actions.
Business event process capability is available, the capability on the business and technology is ready, and it just requires an insurer to have the maturity in the mindset of business capabilities as a service. When an insurer implements this level of maturity and precision in the business process, there will be no stopping them from exceeding all expectations of the customer, agent/broker, stakeholder and employee.
This is an excerpt from a recent whitepaper “Insurance: Realizing the Full Potential of Change Shifting the mindset to create dynamic business models by leveraging BPM and SOA as true enablers” authored by Deb Smallwood & Cindy Maike, Co-founders of Smallwood Maike & Associates and published and sponsored by IBM. Contact Deb Smallwood at dsmallwood@smallwoodmaike.com for a copy.
]]>What makes working with business service policies so effective? Business service policies represent declarative knowledge written in a business context, such as “Repeat customers receive preferred status.” They are not limited by hard code—so change is quick and easy.
These business services are created with existing IT assets and organized into reusable building blocks. By keeping these vital building blocks and policies separate from the process, you have reusable pieces that can be dynamically assembled. The overall business process becomes highly flexible and agile.
Altering business service policies, rather than redeploying the business processes, gives organizations the ability to innovate, respond rapidly to external demands, and speed new products or services to market. Customers also gain through enhanced, customized experiences. Most organizations, for example, are becoming increasingly customer focused. With tight competition for the market, it is crucial to provide high service levels and the differentiated products and services they demand.
Business processes optimized with SOA technologies benefit from reusable building blocks, giving rise to an entirely new approach to how business services are deployed. Using these technologies, the dynamic assembly of reusable assets powers a high level of customization—an agent can assemble the right product offering for his customer by making adjustments to business service policies. Real-time changes happen without bringing down the system. Or a carrier can temporarily raise authority levels for claims adjusters to pay claims in an area hit by a tornado. A carrier can also change underwriting criteria to stop writing auto policies on a vehicle with reported safety issues.
For a dynamic environment like this to reach its full potential, business leaders need to share a vision with IT leaders that drives adoption of BPM enabled by SOA based on their objectives. Without business leaders who are aligned with IT, BPM solutions enabled by SOA become difficult to implement and stand to never realize their full potential.
This is an excerpt from a recent whitepaper “Insurance: Realizing the Full Potential of Change Shifting the mindset to create dynamic business models by leveraging BPM and SOA as true enablers” authored by Deb Smallwood & Cindy Maike, Co-founders of Smallwood Maike & Associates and published and sponsored by IBM. Contact Deb Smallwood at dsmallwood@smallwoodmaike.com for a copy.
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