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Under Pressure, Insurance Fights Back

This article is part of the Best Practices White Paper The Insurance Industry [February 2004]


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George Bernard Shaw once wrote to a friend, “I’m sorry I have written such a long letter. I didn’t have time to write a short one.”

In George’s case, it was a matter of conciseness being the fruit of a brilliant mind, well applied. In my case, ignorance often leads me into territory where a great deal of time is spent lost in a puddle of confusion.

That would be the case this month. When we chose to examine the insurance industry as the subject of this month’s White Paper, my reaction was: “Oh great. This should be good. You can take everything I know about the insurance industry, ball it all together and push it through a Cheerio without touching the sides.”

So I relied on the insurance industry experts at FileNet and Captiva—two key vendors to the insurance industry and amply capable to do all my thinking for me.

For example, here’s just one of the many things I didn’t know: The insurance industry doesn’t make its money from its core business, i.e., selling policies to saps like me. (Now picture me, with one of those stupid Scooby Doo-in-the-haunted-mansion looks on my face: “Hunh??”)

Typically, insurance companies work on a combined ratio of something like 107, meaning they lose seven cents on every dollar earned. But by riding the high interest rates in the investment markets, they could beat that seven cents, and then some, and end up bottom-line making money. That’s the advantage of running a business that takes in a lot of cash from bill payers—also known as saps like me.

Pretty dicey, if you ask me, but that’s the way it works. Or—more accurately—worked. Because things have changed dramatically.

As long as the investment income was great enough, there was little urgency to “fix” the profitability imbalance. Core business processes, archaic as they might have been, remained immune from scrutiny since, hey, the annual reports are still looking happy, and there aren’t any riots breaking out in the stockholder meetings. But nowadays the interest rate environment no longer supports the kind of hedge the insurance business needs. The 10-year-bonds (the insurance industry’s investment of choice) you bought in 1993 at 10% are now cashing in, and the bonds you’re reinvesting in this year are at 4%.

And as an insurance executive, you’re starting to wonder where you’re going to make up the difference. So guess what? Suddenly, the core business of selling policies and managing claims is getting a lot of renewed—and concerned—interest. A Deloitte survey showed that 80% of insurance company CEOs state they can no longer run their businesses based on investment income.

A Brief, Recent History

“That’s a revelation,” says John Sarich, Insurance Industry Marketing Manager, FileNet Corporation, remarking on the Deloitte study. Insurance executives, he reckons, are concluding that “the only way we’re going to improve this industry is through process improvements. We have to improve our core business processes to be more efficient if we’re going to generate profitability.” In many ways the industry is coming from behind. Here’s a brief recent history lesson: During the Y2K scare in 1999, the insurance industry spent a ton of money. So the year 2000 ended up being flat, from an IT spending perspective. In 2001, they were just starting to invest in technology, and bringing more stuff on-line, basically starting the process that is now being resurrected.

But, ungodly as it was, 9/11 hit right when most insurance companies were in their budgeting process for the following year. For practical purposes, the attacks created a nearly unanimous time-out. Nobody knew exactly what was happening, and nobody knew how much it would cost. So they deferred projects in process, and initiated no new funding.

“2002 was a pretty tough year for IT,” admits Sarich, but he is optimistic about the near future. “We’ve seen an uptick. Our numbers are better than they were a year ago. And we’re starting to see companies come back and invest a lot of money again. They’re starting to look at business problems again—e-mail has become a huge issue for insurance companies, for example. 2004 is projected to be a year where there’s significant investment in new technologies. Sure, it’s a buyers’ market and so it’s a perfect time for insurance companies to do it. But they also know they have to do it.”

The message of cost containment couldn’t have been clearer from my expert panel. Jay Keough is the insurance industry expert at Captiva Software, and he echoes the assessment of IT’s and the software industry’s recent economic condition. His pragmatic view is that the insurance industry has had its collective butt kicked lately, and his customers’ reactions are perfectly sensible: “Almost without exception, the drivers behind these (information capture) projects are cost savings and efficiencies. Sure, there are side benefits, which come from having information in back end systems that makes them able to deliver the value you hope for. For example, having a customer service rep able to immediately access a customer’s record. But the decision to buy the system in the first place is primarily about cost. Insurers, particularly in the health market, have had a hard time focusing on the revenue side of the equation, because they’ve been pinched. They HAVE to go after the cost side. The pendulum has swung far and hard back to the hard-dollar return. It may be that executives have other ‘value’-based objectives in mind, but they’re using ROI alone to justify their purchases.”

Jim Vickers, Captiva’s Chief Marketing Officer, also sees this cost-consciousness driving the insurance sector. “Especially in the last year and a half, customers have been very focused on the hard-dollar return on investment. “Even on the deployment side,” he continues, “there has been a trend toward customers who pull in the integration and deployment work themselves because they don’t want to lay people off. It has been forced economically—they can put their people on it instead of incurring the costs of outsourcing.”

Keough agrees. “It may be specific to the healthcare market, but there are a lot of end users with specialized staff that are doing the work themselves. Their expectations from the vendors are very high. If the vendor doesn’t have the right amount of expertise in an aspect of a solution, they’ll go out and find somebody who does,” he says.

Under the Microscope

FileNet’s Sarich says this cost-focus has brought business processes under the microscope. “We use an ROI tool when we examine the requirements of a customer,” he relates. “We look at tasks and functions and who does what and how much they’re paid, etc. And it’s very revealing. For example, there’s always a claims supervisor who has had 25 years of experience in handling all kinds of claims. He’s a walking encyclopedia of claims. His job is to take all the claims that come in and assign them to different adjusters. He puts them in a file and personally decides who to pass it to—’Mary ought to handle this one ... Bill ought to handle this one ... this one’s easy, let’s give it to the new guy...’ He spends 80% of his time handing out claims! What a waste!”

This triage of claims is low-hanging fruit for technology, and alone could create an adequate return calculation for most firms. You should be able to take a piece of content—say, a new driver in the household—and create a workflow called “add new driver.” It would automatically get information from third-parties (like Motor Vehicle reports), score and underwrite (confirm the person’s the right age, address is clean, etc.) and add him to the policy, then kick out a report to the agent and to the administration system, so we’ve basically automated that entire process.

The payback on that investment alone would be stupendous. Because, as Sarich reminded me, “ROI is a function of how messed up you are when you start.”

Coming From Behind

Is that the case? Are all insurance firms so screwed up that even changing the light bulbs would be an improvement technology-wise? Hardly, and none of the experts I spoke with would claim that.

But the insurance industry has a long way to go. The technology coming into the market satisfies the needs insurance companies have right now, but can also guide them to where they want to be in a few years. Portals, on-line self-service ... these are things that banks routinely now do, for example, and they’re way ahead of insurance. But insurance companies are beginning to understand.

Here’s an illustration from Sarich that puts it into perspective: “An insurance executive who sells a lot of automobile policies says that his ideal risk—the person he gives his best rate to—is 27 years old. Well, that 27-year-old has grown up using computers. He understands how to access information, how to shop on-line ... How are you going to attract him if you don’t have a Web site and a portal that he can actually work with? And don’t forget, next year you’re going to have another 27-year-old who’s even more technologically savvy, And the year after that, another one who’s even more advanced. The future of the insurance industry is in these 27-year-olds who want to do self-service and want to interact with the company in a variety of ways. If you don’t enable that, they’re not going to be your customer.”

So, insurance technology isn’t just about cutting some costs, and finding some quicker ways to do this. It’s about survival in the coming years. The steps the companies take today directly affect their future ability to compete and perform. And it’s not an easy task.

“The challenge we’ve identified,” says Vickers, “is the need for a common set of business rules and processes that can be applied to incoming information, regardless of the form it comes in—forms, faxes, documents, Web content ...”

And with that statement Vickers identifies the consistent theme of IT and business application integration that has confounded business for years: How to integrate the many silos of information and the many characteristics of the content into a common language under common management. “Regardless of where the information comes from,” says Vickers, “if they’re sure that certain business rules have been applied during the capture process, then they can put it ALL into the document management system or wherever it’s going and know that it’s consistent and can be retrieved later.”

Re-Thinking the Value

As an input management vendor, Captiva of course has a stake in this message. But his logic is hard to deny. “There are great search tools out there, but if you don’t input it correctly, you’re going to have huge problems later on. We know of companies that have 30 different types of systems that have departmentally grown over the years. It’s a giant mess. What they need is a standardized way to use all this information.” Only after this normalization of data sources and management environments is accomplished can the true value be derived from information systems, and these guys know it.

“Where do you see your business in the next four or five years?” asks Sarich, “because what you do now will determine that. Right now the industry is in a time warp. Processes are very linear, very manual, very sequential. Information is siloed, with systems that don’t talk to each other.”

“But,” adds Sarich, “if you want to be a real-time/right-time organization, you need to stop measuring your company on economies of scale, and start measuring the economies of access. How many people can access data from various sources, do it quickly and use that information to make a decision? Once you’re there, only then can you think about creating some kind of knowledge management.”

Pressures Mount

A very new pressure has been brought to bear on the insurance industry, and once again I was aware of only the tip of the iceberg: regulatory pressure. Insurance may be uniquely challenged. Besides the privacy demands of HIPAA that directly impact the claims and enrollment side of health and life insurance, insurance companies are also scrutinized under the same SEC requirements as any other public companies. On top of that, the states impose another layer of compliance in the form of prompt-pay restrictions. A triple whammy. And the noose is getting tighter, according to my expert group.

“These regulatory issues, such as Sarbanes-Oxley, HIPAA and prompt-pay requirements at the state level have dramatically increased the cost structure of the companies,” says Captiva’s Keough. “They’re trying to figure out how to address all these things with even fewer resources. It seems like everyone we meet is ‘on the HIPAA team.’ It’s amazing the amount of resources—hours and days—that are going into dealing with regulations.”

And as if the economic pressures already in play weren’t enough, insurers are now driven to focus on even more cost cutting, because they’ve encountered a brand-new set of unexpected costs! It’s like a vicious whirlpool that, once you’re in it, it’s tough to get your head above the water far enough to look ahead.

Regulations Compounding

Compliance reporting is not limited to unstructured documents or e-mail, as the current level of attention might lead you to conclude. Transactions are records, and the kinds of transactions that insurance companies conduct are especially sensitive. “When an enrollment or a claim form is scanned, and data is being taken from that form, there has to be a paper trail throughout the whole capture process, as well as the back-end processing process,” explains Keough. “What came in? When did it come in? How long has it been in house? Who touched it?”

Vickers concurs “What the auditors are looking for is not so much the information contained on the document, but what day and time the process was executed. They want evidence of when it was touched, approved and released. If you’re not tracking that sort of thing, you can’t prove whether the people looking at documents, and perhaps changing them, have the authorization to do that. That’s really what the regulators want to know.”

Keough adds, “It seems like every year, the states either add or make more stringent their prompt-pay regulations. Some states require a 15-day turnaround, and many companies don’t have systems in place to accomplish that. So they’re changing their processes very quickly to comply. The requirements are only getting stricter, and the penalties associated with failure to meet prompt-pay requirements can be steep,” he says. So that’s another cost that’s bearing down on the insurance companies. And the underlying “soft” costs lurk just beneath the surface. “If you don’t get the job done quickly, you not only have the penalty, but you also have a customer service issue with your providers.”

Isn’t outsourcing an option? “Sure,” says FileNet’s Sarich. “You can outsource your investment decision to a financial planning company. And you can outsource all your processing offshore. You can outsource this and outsource that, and eventually you end up outsourcing your reason for being.”

Breaking the Cycle

“If every insurance company has outsourced all its functions, how do you differentiate yourself in the marketplace?” asks Sarich. “Insurance policies are commodities. Most people don’t see any difference between companies, so they decide on price. How insurance companies differentiate themselves is through their business processes. Take a simple process like answering the phone: One company answers the phone with a smiling face; the other answers with an automated recording.”

How can the insurance industry get its head above the water far enough to see the value side of information management, when costs keep blocking their view?

Keough concludes with a note of optimism: “In the case of property and casualty, the companies do have great information stores from which they slice and dice to find the most profitable customers to match with new policy products. There is a great number of sources through which that information is flowing—customer service interactions, new policy applications, credit checks, submitted claims.”

But when these information sources are brought under control, there is potential to start turning information into value: “The success you have getting to information determines how well your marketing teams can create new products.”


Andy Moore is a 25-year publishing professional, editor and writer who concentrates on business process improvement through document and content management. As a publication editor, Moore most recently was editor-in-chief and co-publisher of KMWorld Magazine. He is now publisher of KMWorld Magazine and its related online publications.

As Editorial Director for the Specialty Publishing Group, Moore acts as chair for the “KMWorld Best Practices White Papers,” the “EMedia Innovation” series and the “EContent Leadership” series, overseeing editorial content, conducting market research and writing the opening essays for each of the white papers in the series.

Moore has been fortunate enough to cover emerging areas of applied technology for much of his career, ranging from telecom and networking through to information management. In this role, he has been pleased to witness first-hand the decade’s most significant business and organizational revolution: the drive to leverage organizational knowledge assets (documents, records, information and object repositories) to improve performance and improve lives.

Moore is based in Camden, Maine, and can be reached at andy_moore@verizon.net.


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