Explaining the Hiatus

Wondering why I haven’t posted to this blog in a while?  I’ve been working with the Moore Business School of the University of South Carolina (USC) this summer to enable them to assume ownership and operation of Innovation In Insurance – the web site of which this blog is a part, a site focused on improving the insurance experience for consumers and businesses all over the world by dedicating itself  to all things insurance technology (software, services, data, outsourcing). 

The most interesting and exciting aspect of this transition and new phase is that Moore School students will operate the site.  In fact, the transition has already begun with two students and a professor becoming trained and doing most of the site’s work this summer.  Plans for the fall semester call for ten students to comprise the operational team.

The Moore School of USC is the logical institution to take up the charter of Innovation In Insurance.  Its graduates have been actively involved in making Columbia, South Carolina a center of innovation in insurance for over 100 years.  The file cabinet was invented here in 1898, the industry’s first fully-integrated online policy management system was launched here in 1972, and today more health insurance claims are processed here than in other city in the country – perhaps the world.  (For more on this history, see article in middle of this page.)

I have loved launching and managing this site, but its demands have outstripped my semi-retired time resources.  I had a decision to make, and allowing it to become a research program of a world-renowned business business school and research university (for 20 consecutive years its international MBA program has been ranked number 1 or 2 by U.S. News and World Report; more on its rankings) was by far the most attractive alternative to me.  I believe the site can become the nucleus of a host of research and innovation activities involving not just students, but faculty, administration, graduates, and, of course, the broader industry and its community.  The scope of the site’s interest will continue to be worldwide (not merely U.S.) and this fits perfectly with the Moore School’s reputation.

We’ve been working on installing leadership for the effort.  Managing Director of the site will be Jeff Thompson, adjunct professor at the Moore School.  Executive Director is Ernie Csiszar, Special Assistant to the Dean of the Moore School and former president of the National Association of Insurance Commissioners.  As Executive Director, Csiszar will also co-chair the site’s Board of Directors.  The other co-chair, representing the business community, is Eddie Jones, Senior Vice President of Marketing and Communications for StoneRiver, formerly the Insurance Group at Fiserv.  In addition to its Board of Directors, the site will also have a Board of Advisors (executives who give guidance to students about industry needs for the site) and a Board of Contributors (organizations that donate time and expertise to help students operate and enhance the site).  Membership for these  boards is being secured and announcements regarding the individuals involved will be made over time.

Official announcement of all this will be made by the Moore School, probably in September (if you’re with a news organization, please await that announcement before publishing this news – thanks).  I am very excited about  how Moore School students will grow this site to better serve the insurance technology industry.  If you’ve appreciated the site and would like to follow its progress as it reaches for new levels, be sure you are signed up for its news update e-mail sent at the end of each week by clicking here.

Digital Businesses Are More Temporary Than Most

Perhaps you’ve heard that Microsoft is pulling the plug on Encarta.  Seems the Internet (most specifically, Wikipedia) has made Encarta obsolete – the same way that Encarta made print encyclopedia obsolete in the 90’s.  Only difference was that the print versions did well for hundreds of years while Encarta did well less than a tenth of that!  This year, all physical Encarta products will be pulled from store shelves and all Encarta web sites will be closed down.  You can’t have a more definitive death than that.   

When Microsoft was being accused of violating antitrust law, one of Bill Gates’ defenses was that monopolies couldn’t truly exist in the digital realm because there’s always some new technology that can quickly undermine it.  He didn’t get many believers at the time, but even while he was speaking Google was on its way to making Gates and Microsoft look like buggy whip makers.  The swift rise and swift fall of Encarta is a sign of the digital times.

If the insurance industry is going to fully benefit from information technology, it must recognize that it will be harder and harder to exploit rapidly evolving technologies without relying more heavily on a strong set of suppliers: software companies, outsourcing companies, and the like.  A do-it-yourself mentality for insurance company IT departments is not a reasonable option for any carrier who wants to take advantage of the ever-increasing – and ever-changing – advantages of today’s digital technologies.  

It’s hard enough to manage and insurance enterprise, without also trying to keep up with changes that even brains like Bill Gates can’t stay on top of. 

    

Where the Internet Is Going – Can Insurance Keep Up?

If I say the name Mary Meeker, what do you think?  She was one of the luminous equity analysts during the gilded dot.com age which now seems so long ago.  I met her in the late 90’s and was favorably impressed by her intelligence, knowledge, and no-nonsense attitude.  She loaned me the only copy of a report she had and trusted me to get it back to her by the end of the conference…so her judgment can’t be all bad either (yes, she got her report back).  Her reputation was sullied when media types began casting about for villains to fit their morality tales about the dot.com meltdown, but little of the mud stuck because she was guilty of nothing more than evangelizing for an industry she believed in. 

Mary continues to analyze and write for Morgan Stanley.  Her latest five-year prognostication (along with some good current metrics) on the Internet is now available, and I’d say it’s required reading for insurance technology types who want to know where the waves are going in order to be able to ride them.  If you want a summary of her report, check out Alacra’s Barry Graubart here.  If you want to dive directly into her 147-slide Economy + Internet Trends, here you go. 

Not only do I hope insurance technology will keep up with the Internet, I hope it will fully leverage the platform, the software, the computer, and the tool…that the Internet is.

Speaking of thought-stimulating presentations, many of you saw the YouTube classic Shift Happens a year or two ago but you may want to check out the most current version: Did You Know 3.0  Alvin Toffler coined the term Future Shock with his book of the same name forty years ago…but the future keeps shocking us.

Why Not Nationalize the NAIC?

Insurance in the United States is, of course, historically and currently regulated not by the federal government but by the individual states.  However, the 50 state insurance commissioners have for decades coordinated their activities through the National Association of Insurance Commissioners (NAIC), an organization of their own creation and support.  Why not make the NAIC an arm of the federal government and give the U.S. President the right to appoint its leadership (just as he appoints the head of the Treasury and the Federal Reserve).  We could call the head the national insurance commissioner.  The NAIC would thus become the federal regulatory arm for insurance, and the 50 state insurance departments would be its field organization.  We would thus no longer need high-level insurance commissioners for each state (maybe there could be a deputy commissioner for each region of the country), and we could save a lot of money by consolidating many functions which are duplicated in the 50 individual state insurance departments.  The money saved could be used to fund any additional staff required in Washington (the NAIC already has some staff there, by the way) and for strengthening the oversight functions which are sparse and beleagured in many states.  With this approach, we would have federal regulation, but with a local touch.  And we wouldn’t have increased the size of government vis-a-vis the private sector – only made the governmental function more effective by uniting its fragmented energies.

No new taxes would be needed to fund this approach.  States typically aren’t spending on regulation all the premium taxes they collect from insurance companies anyway.  In fact, states typically spend only a fraction of the premium taxes they collect on the operation of their insurance departments.  The majority of those funds go into the general revenues of the states. 

While we’re at it, as part of this change, why don’t we require premium taxes to be disclosed on each policy?  I sure wouldn’t like it if sales taxes were not disclosed on the receipts from my retail purchases.  Would you prefer that sales taxes be buried in the price of the products you buy and not be disclosed to you?  Premium taxes are levied on all forms of insurance written but are not disclosed to the consumers and businesses who are ultimately paying the tax.  But I digress.

I like the idea of nationalizing the NAIC (i.e. having single federal-state system) better than an optional federal charter for a couple of reasons.  First, one regulatory system for insurance will be cheaper than two.  Second, one regulatory system will be fairer than two.  Critics of the optional federal charter are right when they say it creates the environment for regulatory arbitrage, where insurers will choose the regulator they assume will be most supportive of their interests.  That won’t always be in the interests of policyholders for whom the regulatory function exists in the first place.  Sports teams don’t get to pick their referees. 

So what’s wrong with state regulation and why shouldn’t we stick with that?  Well, I do concede that the devil we know is sometimes more desirable than the devil we don’t.  And I don’t believe federal regulators will individually be better than state regulators.  I do believe, however, that state regulation is an anachronism in our time.  It is one of the few commercial activities that is still regulated this 18th-century way, depriving insurance of the scale advantages enjoyed by almost all other financial services, not to mention manufacturing and other industries.  Its most destructive effect is to retard productivity and innovation by essentially requiring that there be 50 different ways to do something.  Having worked in both banking technology and insurance technology I can tell you that banking automation (including debit cards, ATM’s, credit cards, etc.) wouldn’t be where it is today if there were 50 different sets of rules about how to process a deposit or withdrawal.  So, even if the quality of regulation did not improve with nationalizing the function, the road to greater productivity and innovation, and therefore lower prices and better products, would be paved.  Do auto insurance buyers in Ohio have needs so different from drivers in Indiana that each requires its own separate regulatory agency?  Do policyholders in those two states know they are paying for this redundancy? 

There is yet another rather glaring and current argument for national and against state regulation: AIG.  Now the argument that proponents of state regulation have made regarding AIG has been that the insurance subsidiaries of AIG are all in good shape, and indeed that seems to be the case.  But if the doctor says that all the body parts he was caring for were in good shape when some other body part caused the patient’s death, what good is that?  We need a regulatory function of sufficient size and scope to oversee the size and scope of companies that it’s regulating.

So, there you have it.  No more 50-state regulation.  No more talk of optional federal chartering.  Just convert the NAIC from its advisory status to having full regulatory status as an extension of the executive branch of the federal government.  No, it wouldn’t be painless.  And it wouldn’t be easy.  But it would be logical.  And practical.

AIG Disgraced; Who’s Next?

Far from restraining the AIG lynch mob (see most recent post: Will No One Restrain the AIG Lynching Mob?), politicians continue to fall over themselves trying to get to the front line of that mob.  The president appeared on Jay Leno last night to express his shock and dismay that AIG would pay bonuses (Obama Talks Economy, Puppies With Leno) while his Congress was advancing a bill to tax practically all of the bonuses paid this year to employees of bailed-out firms (House Approves 90% Tax on Bonuses After Bailouts).  You’d think AIG was the source of all evil in the financial world, and that all that was necessary to right the country’s economic ship was to make sure AIG is blamed…and is made to suffer.  And you’d think our government leaders have no more important problems to solve than to take charge of incentive compensation planning for the financial services industry.

Much of the public can be forgiven for its rage against AIG since all they know of the firm are those three letters and whatever snippet of fact the media has doled out to them in the bite-sized chunks in which news is now consumed.  But our government leaders cannot be so easily forgiven for pandering to fact-starved populist rage.  Neither can those of us in the insurance industry who know AIG as a fellow participant in that industry be so easily forgiven if we join in the chorus that would seem to blame AIG for all that is wrong with our current financial and economic world.  

You and I know that AIG is composed of individuals much like us: people who have mortgages, pay bills and taxes (oh, yes, lots of those), send children to college, have health issues, and on and on.  To a bruised public, AIG is just a bunch of greedy rich guys…because that’s what their government leaders and the professional news media are telling them.  In fact, the moral of their story is that “Wall Street greed” has brought on this crisis, as if greed knows no other address.  On the contrary, the dictionary defines greed ”an overwhelming desire to have more of something, such as money, than is actually needed,” and there’s not a door in America where that temptation has not knocked.  Greed is not defined by how much you have, but by how much more you want than what you have or need.  Some of the biggest critics of greed are themselves animated by envy – and such baser motives know no class distinctions.

I am in no way trying to whitewash AIG and whatever errors may have been committed by them.  And if there are scoundrels there, they ought to be identified, tried, and made to suffer for their mischief.  But to tarnish an entire company, largely for decisions that the government had approved before they became public seems at best a waste of precious time and at worst a wrong that harms not just the victims but the perpetrators and the observers as well.

When the country sobers up after lynching AIG, they will recognize that we are no closer to getting our economic engine on track.  When that happens, will we begin to focus on solving problems or will we just look for another whipping boy?  If the latter, be careful – it might just be your employer.

Will No One Restrain the AIG Lynching Mob?

Apparently, the most pressing economic issue of the last few days is that AIG is paying out bonuses.  We’re told by the news media that the public is highly outraged.  Politicians are competing with each other to see who can be the most offended by it.  The president has ordered the Secretary of the Treasury to pursue every legal avenue to stop payment and Congress says it can enact a tax to confiscate 100% of those bonuses from the recipients.  Whoa!  We need leaders to restrain mobs, not egg them on.

Do I think AIG is justified in paying out bonuses?  I don’t know whether they are or not because I don’t know the particulars.  If a bonus is a contractual commitment and especially if it is owed to an employee who worked in a division of AIG completely unrelated to the need for government aid, then I don’t see how you can automatically rule it out.  When you start saying it’s okay for government to abrograte contracts between private citizens, you’re giving the politicians an awful lot of power. 

The purpose of a bonus is to make part of a person’s compensation contingent on what they do.  If the person fulfills his or her part, is it fair to unilaterally, without discussion, to deprive them of what they earned?  If I analyzed the specifics of each bonus payment I might be against them all, but how can I be against all of them if I have not analyzed the specifics of any of them?

I have a number of concerns about the AIG bailout – all of them more important than whether or not bonuses get paid.  The biggest one regards credit default swaps (CDS).  Since this was an unregulated market and parties entered into these contracts fully aware of the risk of default without government guarantee, then why are these parties being bailed out?  Nonetheless, I don’t pretend to have enough facts or intelligence to unravel the AIG bailout, much less how to get the economy growing again.  I have to trust that brighter minds with full-time dedication will do that.  But how can they if a mob mentality urges them to major on minors?  And they then succumb to that temptation?

Let’s put it this way, if AIG were allowed to recover all the bonuses paid since the bailout, and if it never paid out another bonus as long as it existed, how much better off would we be as a country?

Right now the country is very frustrated with our ecomomic plight, and rightfully so.  But if our leaders allow that frustration to be focused on peripheral issues and don’t help channel energy in the right direction, we’ll stay mired in the problems and postpone our turnaround.

Anecdotal Brights Spots for Insurance and IT in Buffett and IBM

Given the comments to my recent post Recent Signs of IT Spending for Insurance Remain Encouraging, I know that many of us are watching developments week by week, if not day by day, looking for indications of economic direction for our industry.

In the midst of all the darkening economic reportage we’ve seen two bright stars in recent days: one was in Insurance and the other was in Information Technology.  For people in insurance technology, that’s the best daily double you can get.

Insurance was highlighted in Warren Buffett’s annual letter to Berkshire Hathaway shareholders (click here for the complete text).  After a beginning in which he acknowledged the worst year in Berkshire Hathaway’s history and that he foresaw continuing economic woes for the U.S. and the world in the short term, he then emphasized that the future was on our side.  And he went to to describe how pleased he was that the insurance business was foundational to BH:

[W]e are fortunate that Berkshire’s two most important businesses – our insurance and utility groups – produce earnings that are not correlated to those of the general economy. Both businesses delivered outstanding results in 2008 and have excellent prospects. 

 

That the industry our technology serves is so prized by the most famously successful investor of our generation should be strong comfort to us.  And that his conviction is undaunted by the current negative circumstances is all the more encouraging.

As for technology itself, this week IBM reaffirmed its profit guidance for 2009 resisting the negative direction of the S&P 500 and the Dow Jones Industrial Average, both of which slid into new negative territory (see Bloomberg story here).  A lot of bad news has come forth since IBM first announced their expected 2009 earnings on January 20th.  That they would now reaffirm that guidance is therefore particularly encouraging.  We know that IBM is not only a giant as information technology companies go, but it is also especially strong in the insurance industry.  Information technology provides the greatest source for productivity improvement in any industry.  Economic downturns don’t lessen the need for improvements in productivity; if anything, they increase it.  It’s no surprise then that a technology supplier would have better prospects than other suppliers at a time like this.

Thus we have in recent days seen specific examples of leaders in both insurance and technology expressing strength and optimism – albeit a cautious optimism.  Therefore, to be in insurance technology at a time like this is one of the better places to be.  I know that these “anecdotal bright spots” are indeed only anecdotal.  But they are also bright!

Wipro Makes It Interesting

While some are still wringing their hands about Satyam, Wipro has announced that it has developed and will market a software-based solution called Insurance Claims Analytics (ICA).  This business intelligence solution is designed for P&C carriers, and is expected to be followed by other solutions for the insurance market.  This move, of course, takes Wipro beyond its bread-and-butter business of providing people to execute processes and into the field of providing proprietary technology.

Wipro is not the first Indian outsourcing company to take such a tack, nor even the first to do it in insurance.  That distinction probably goes to Majesco Mastek whose chairman, Sudhakar Ram, formulated and began executing this strategy several years ago.  He believed that proprietary software was an important weapon to add to his competitive arsenal.  Wipro is a far larger company, however, and its move in this direction sets up some interesting possibilities.

It’s natural that Indian firms would take advantage of the business process knowledge they’ve gained from the work they’ve been doing for insurers.  To leverage the domain expertise they’ve gained as a result of aggressively growing their operations is a wise move on their part.  On the other hand, it will be interesting to see how other competitors respond – will everyone step up their game?  The insurance industry should benefit from the heightened competition that will occur.

It will also be interesting to see if the Indian firms are willing to develop software that reduces process steps, automates processes, and, as a consequence, reduces the headcounts required to execute an insurer’s business processes.  After all, the Indian outsourcers have grown their revenues by “adding seats.”  If this new revenue stream of proprietary software reduces seats, will the owners be as aggressive in pushing it?  It’s not easy for any company to alter its business model or do anything that might cannibalize its core business. 

Of course, it’s much too early in the game to wonder whether an analytics solution like ICA is going surface all these issues.  But if the major Indian outsourcers are going this direction of converting their ever-increasing domain expertise to technology solutions, we’ll see some of the answers in the next few years.

Recent Signs of IT Spending for Insurance Remain Encouraging

Sungard, one of the leading technology providers for financial services, recently reported 11% organic growth for Q4.  Meanwhile, the four major bank technology providers (Fiserv, Fidelity National, Metavante, and Jack Henry) all reported good quarters.  They struggled to varying degrees with licensed software sales, but other components of revenue are holding up well.  Moreover, the shortfall in license revenues may be deferrals rather than revenue that will never show up.  These vendors largely serve the community bank market in the United States and so the woes of the largest banks do not impact them severely.

Gartner is reporting that global IT spending for financial services will be off 70 basis points in 2009 from last year’s spend.  However, this may simply reflect that things in the U.S., bad as they are, are better than they are elsewhere in the world.  Returning again to bank vendors, Temenos, one of the leading bank technology vendors outside the U.S., reported year-over-year decline in Q4 revenues and declined to give any guidance for 2009 earnings, citing market uncertainty.  When contrasted with the U.S. bank technology vendors mentioned above, it points again to greater weakness outside the U.S. markets. 

The assumption in my thinking, of course, is that as goes financial services, so goes its components (banking, insurance, capital markets).  Health, which to some extent is a component of insurance, is projected by Gartner to show a 2.2% increase in IT spending for 2009. 

All this published evidence is consistent with all the anecdotal evidence I’ve encountered.  That anecdotal evidence is that while everyone speaks cautiously, they all report a continued interest IT investments for financial services including insurance.  I’ve heard of no major shutdowns of IT spending.  More thoughtful spending, yes; but no mindless moratoriums.  Therefore, in spite of the doom and gloom pouring forth there’s ample reason for cautious optimism.  The insurance industry needs technology – perhaps even more than ever in difficult economic times.

The Insurance Technology Industry Is Growing

Berkery Noyes, a New York-based M&A Advisory firm, reported this week on Software M&A activity for 2008 across all vertical industries and, lo and behold, the two biggest transactions were insurance-related.  First, there was the proposed acquisition of Mitchell International by CCC Information Services (still awaiting approval of the FTC) for $1.4B.  Second was the private equity acquisition of TriZetto by Apax Partners for $1.26B.  This was during a time when activity in the broader financial services vertical was down.  (Click here to the see the report; Click here to see coverage in Insurance Networking News.)

These transactions demonstrate the increasing scale of vendor size in insurance technology and the industry consolidation that is underway.  Granted, insurance technology is still a far less mature field than banking technology where very large vendors dominate the landscape.  Moreover, the insurance technology consolidation that we see is greater on the claims side of the business than on policy administration.  This is because state regulations allow the former more easily than the latter (far more state-by-state regulation differences exist on the underwriting side than on the claims side).  All three of the vendors mentioned above serve the claims side of the business (CCC and Mitchell for P&C, and Trizetto for Health).

There are a large number of vendors in insurance technology.  The Vendor Directory on www.InnovationInInsurance.com lists over 500.  That gives a lot of raw material for consolidation.  Moreover, there are yet more firms to be formed simply because there are so many functions in insurance that beg automation.  I’m not suggesting that you will ever remove the need for people making decisions in insurance, but I am suggesting that there is still a lot of paper-pushing going on.  Hence, insurance is one of the most fertile vertical fields for information technology growth.