Cognizant 20-20 Insights Achieving Transformational Results from Policy Administration Insurers can dramatically improve results from policy administration investments by taking a more scientific approach to legacy modernization and focusing on the impact to customers, advisors and employees. Executive Summary As unlikely as it may sound, updating policy administration isn t about IT modernization. It s about connecting complex policy administration systems to business outcomes such as revenue lift and customer retention. At the heart of that crucial link and central to insurers investments in new policy administration systems is legacy system conversions. But choosing which legacy systems to keep and which to jettison has savaged more than a few IT efforts. Decision-making has been haphazard, and tools have not been deployed to aid in analysis. The insurance industry has struggled with these challenges until now. Instead of a Big Bang approach, insurers are making smaller, more targeted investments to transform policy administration. Equally important, they now have the opportunity to apply science to legacy conversion decisions with a scoring system we call Cognizant Platform Conversion Score (PCS). PCS provides a comprehensive framework to evaluate older systems usefulness. It enables organizations to take a more thorough and less risky approach to legacy conversion, removing the guesswork from legacy assessment. This white paper identifies ways for insurers to utilize PCS to infuse rigor into policy administration modernization efforts and achieve, if not exceed, business objectives. History of Unsuccessful Projects Insurers first steps toward policy administration were indeed about modernization. In general, property and casualty insurers have moved more quickly than life and annuity focused insurers in modernizing their policy systems. But efforts by carriers in both sectors followed the same path: consolidate sprawling technology systems, sunset systems deemed too costly to maintain and invest in new technology to aid growth and efficiency. The results of insurers policy administration upgrades have been mixed. Approximately half of these efforts experienced cost and schedule overruns and failed to fulfill the original benefit requirements, according to research by PricewaterhouseCoopers. 1 Another third were abandoned or canceled after falling short Cognizant 20-20 Insights august 2013
of expected costs, schedules or customer expectations. But interest remains intense. One-third of insurers have new policy administration systems underway or planned, according to research advisory firm Novarica. 2 Research firm Celent counts 130 new policy administration initiatives kicking off next year alone. 3 Targeting the Right Factors Insurers that think exclusively in terms of cost savings narrow their field of view. What makes for successful policy administration change? Typical drivers are IT and operational cost savings, most often in terms of consolidating hardware and software licenses and having fewer systems to support. Therein lies the problem: Insurers that think exclusively in terms of cost savings narrow their field of view. Make no mistake that lower costs and technical achievements such as straight-through processing are desirable, as is a mobile-enabled front end, for example. But getting the technology right is only part of policy administration. A more important metric for insurers is whether the changes truly impact customers or producers and generate noticeable outcomes, such as revenue lift, increased policy retention and new sales channels. This is the difference between policy administration modernization and transformation. To be transformative, policy administration improvements need to consider three factors: Market objectives. Identify what changes will result from the proposed project. That is, how will modernizing policy administration enable your organization to run differently? How will it ensure that your operations run better? What financial impact will the initiative have? Too many policy administration projects are IT-only. Think more expansively. Key constituents. Focus on the beneficiaries of transformation. Will the new system be obvious to your customers? Will it help agents and advisors run their businesses better? Maybe its goal is to empower employees to serve customers and advisors more effectively and to distinguish the carrier from competitors. Successful policy transformation programs have clearly defined the benefits for customers, agents and employees. Metrics. Use metrics to determine whether the changes are working and to measure constituent awareness and impact. How can your organization quantify whether the policy administration initiatives are producing changes that enable the business to run differently and better? We helped a leading insurance and financial services company transform its approach to policy administration by aligning its initiative with these three factors, resulting in noticeable benefits to both policyholders and the business (see sidebar). Making Better Legacy Decisions Although legacy conversion is central to transforming policy administration, insurers that support a sprawling maze of outdated systems often find it challenging to prioritize conversion. Legacy systems are the icebergs of IT: The complexity and magnitude of conversion projects are at first largely unseen. What is needed is a more rigorous and scientific approach to legacy conversion evaluations, whether the goal is tightening IT budgets or planning policy administration overhauls. Cognizant PCS provides a framework for making more informed decisions. It measures the risk of converting each legacy policy platform and helps facilitate a broader dialogue between business and IT stakeholders to improve decision making. It standardizes conversion decisions, similar to the way the FICO score is used to assess consumer credit. As with the FICO system, the higher the PCS score, the lower the risk. A key distinction for PCS is that it provides the weighted score of every function s participation. Too many conversions begin in the finance and IT departments and then work their way outward through the organization. PCS drives participation from all constituents right from the beginning, ensuring that the opinions of finance and operations are considered, as well as those of IT. PCS measures four essential dimensions of insurers legacy systems: Revenue opportunity. The greater the revenue opportunity, the more challenging the move. Estimate the legacy systems revenue potential by calculating the annual premium to be gained, as well as the policy cognizant 20-20 insights 2
count and potential retention rate. How well is this legacy system being served in a multichannel environment? Cost of realizing revenue. How often and how complex will service interaction be? How will agents or advisors be involved? Product considerations. How extensive are the product variations? Is the product s design easy to replicate? How well can your organization map the product to a new platform? What are the contractual and historical amendments? Are there complex riders attached? Technical feasibility. Does your staff possess the skills needed to execute? Can support be adequately provided? How easy is it to port the business rules, and how easily can the data be extracted and moved? The PCS s base score is then adjusted by calculating business and technology experience coefficients. Business experience coefficients include service disruption, operation and actuarial bench strength, tax and legal exposure, and training time. Key Legacy systems are the icebergs of IT: The complexity and magnitude of conversion projects are at first largely unseen. coefficients for IT experience include the bench strength of source and target platforms; staff skills for data mapping, modeling and extraction; Quick Take Leading Insurer Corrects Course to Transformation with Smaller, More Targeted Investments For one of the U.S. s leading insurance and financial services companies, fast growth had bred too many legacy systems. Through a string of acquisitions, the insurer had grown by several hundred percent, eventually reaching more than one million active policies sold through an independent field force of direct marketers and independent brokers. Behind the scenes, the company juggled 6,000 product variations on 14 platforms. In need of a system to process new business more efficiently, the insurer developed elaborate business requirements in hopes of converting its legacy systems, handling all product variations, managing policies and improving its employee and customer experience. Tens of millions of dollars and 18 months later, the results of the overhaul fell far short of the vision. While the insurer successfully implemented a new system to issue term life policies, it continued to run the old one, effectively adding to, not reducing, its support burden. The insurer s experience is common. Half of IT projects with price tags exceeding $15 million massively blow their budget, according to McKinsey in its review of 5,400 IT projects with the University of Oxford. 4 On average, complex IT projects run 45% over budget and 7% over time. Worse, they deliver 56% less value than predicted. Software projects run the highest risk of cost and schedule overruns. In the insurer s case, it eventually regrouped and moved forward with a decidedly more targeted approach. This time, it made smaller, more strategic investments, selecting initiatives that both mattered to its business and could be measured. It chose to focus on efforts in customer service, client-data consolidation and a Web self-service strategy that lets policyholders pay premiums online. The results were significant. Policyholder satisfaction increased 25% for the first year and consistently outpaced competitors. Call volume dropped 4% a substantial reduction in the one million calls logged annually. Customer service transactions, meanwhile, dropped 2%. By learning from its experience, the company honed a smarter strategy for changing its approach to policy administration and produced genuine results. Further, the client will apply the PCS framework to improve its future decisions on converting any remaining legacy policy administration systems. cognizant 20-20 insights 3
Cognizant Platform Conversion Score Worksheet Dimension Maximum Score Actual Score Revenue Opportunity Annual premium Policy count and retention rate Cost of Revenue + Frequency of interaction + Service preference of policyholders + Producer business activity factor Technical Feasibility Identification of additional business rules Complexity of data extraction and transformation Product Considerations Number of product variations Product design replication Contractual and historical amendments 100 50 150 125 150 125 100 75 Base Score 500 375 Business Confidence Coefficient (0 1) 1 1 IT Confidence Coefficient (0 1) 1 0.75 Final Score (Base Score * Sum of coefficients) 1,000 656 Score > 600: Convert Score 400 600: Possibly convert; select blocks Score < 400: Don t convert Convert Figure 1 and the ability to shield legacy changes by implementing a front-end system. Figure 1 provides an example of a scorecard generated by a client that used PCS to evaluate its policy platforms. The scorecard provided additional context to help inform a decision on conversion risk and also boost confidence in the decision. Looking Forward It is abundantly clear that carriers unsuccessful efforts to improve policy administration have helped increase their certainty about what does work. In addition, a new generation of tools and technologies can better prepare carriers for the rigors of large, complex systems. Your organization can improve its cost structure and overhaul its operations through a disciplined two-step approach that first aligns market objectives, key constituents and metrics, and then applies a comprehensive framework to making legacy conversion decisions. Cognizant PCS can provide a rigorous, scientific scorecard that measures how well your legacy systems are working for your company. The results are clear: A more informed approach to policy administration and legacy conversion can generate business benefits and Carriers unsuccessful efforts to improve policy administration have helped increase their certainty about what does work. help carriers achieve their market objectives by dramatically improving customer, advisor and employee experiences. By thinking more broadly about policy administration investments, insurers can gain more confidence in the investment returns. cognizant 20-20 insights 4
Footnotes 1 Eyes on the Prize: Implementing Fast, Flexible Policy Administration Systems in the P&C Insurance Sector, FS Viewpoint, PricewaterhouseCoopers, April 2013. 2 New Novarica Report on Insurance Policy Administration Systems Helps Insurers Navigate a Complex Market of More Than 80 Vendors, Novarica press release, May 24, 2012. 3 2013 North America Insurance CIO Survey: Pressures, Priorities and Innovation, Celent, April 25, 2013. 4 Michael Bloch, Sven Blumberg, Jurgen Laarz, Delivering Large-Scale IT Projects on Time, on Budget, and on Value, McKinsey & Co., October 2012. About the Authors Kevin Kraft is an Insurance Practice Lead with Cognizant Business Consulting, where he is responsible for the life, annuity and retirement services market teams. Kevin has over 25 years of experience designing and executing growth, customer and distribution strategies for insurance, financial services and healthcare companies. Kevin can be reached at Kevin.Kraft@cognizant.com. Rohit Gupta is a Senior Manager in Cognizant s Insurance Business Consulting Practice. Rohit has 15 years of management consulting and IT experience in the insurance industry, where he has advised client senior management on top strategy, operations and technology issues. Rohit can be reached at Rohit.Gupta@cognizant.com. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 164,300 employees as of June 30, 2013, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com for more information. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ 07666 USA Phone: +1 201 801 0233 Fax: +1 201 801 0243 Toll Free: +1 888 937 3277 Email: inquiry@cognizant.com European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) 207 297 7600 Fax: +44 (0) 207 121 0102 Email: infouk@cognizant.com India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, 600 096 India Phone: +91 (0) 44 4209 6000 Fax: +91 (0) 44 4209 6060 Email: inquiryindia@cognizant.com Copyright 2013, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.