Web 2.0 and Insurance Are Meant For Each Other

No, I’m not suggesting people will want to sit in front of their PC’s with a latte forsaking their Facebook and MySpace friends for scintillating exchanges about the nuances of insurance coverages. Web 2.0 technologies are about much more than comparing notes on your favorite ice cream with friends. Fundamentally, Web 2.0 is about interactivity.

Insurance is itself a social networking business: individuals coming together to share their risks. One of the limitations of insurance has been the information flow. Insurers seek information from applicants in order to determine acceptability. After that, it’s mainly the insurer issuing mounds of information to the insured – mainly pages of policy terms which are practically incomprehensible – and the policyholder barely able to get a word in edgewise.

The advent of the web didn’t alter this one-way dynamic – it reinforced it. Now torrents of information spewed forth from insurer web sites. Consumers were drowning in information they simply lacked the capacity to process.

Web 2.0 allows a balancing of the communication flow. It gives insurers, agents, and policyholders the means to interact – to communicate in productive ways. For insurers to simply throw up a few social networking tools on their web site would be gimmicky and unhelpful. But to deploy Web 2.0 thinking and methods offers great promise for improving the utility of insurance in society.

Ori Fishler, Director of Internet Commerce at Edgewater Technology, will be offering his version at the upcoming ISOTech conference. Whether you’re going to that conference or not, take a look at his introduction to the subject, Insurance and Web 2.0.

There is no question that Web 2.0 tools belong in the insurance industry toolbox; it only remains to be seen the myriad ways in which those tools are going to be used.

Since America Is Sneezing, Will The IT-Enabled Services Industry in India Catch a Cold?

Gaurav Oberoi, an insurance-focused Project Leader at Larsen & Toubro Infotech in India, writes and asks about what the Indian vendors (IT service providers to insurers) are facing and what should they do to cope up with these challenges.

About 60% of India’s IT and related services business comes from the U.S., and almost half of that work is financial services in nature, which, of course, includes insurance.  This IT and related services business (including call centers, and all sorts of back office operations in addition to common IT processes like programming and quality control) are often called IT-enabled services (ITES). 

In a posting from its Indian bureau, The Washington Post reports that while new hiring has slowed, there have been no major layoffs.  In fact, it’s possible that the crisis could help employee retention issues at Indian firms that have caused wages to escalate.  If employees are concerned about the economic environment and don’t seek to move around as much, training costs could go down and the pace of salary growth might slow – helping the margins of those companies.

The Hindu Business Line publishes a vendor scorecard in tomorrow morning’s edition that shows growth slowing until the end of the second half of 2009.  Of course, you have to remember that slow Indian ITES growth rates are still torrid by U.S. standards.

Technology sourcing advisory firm TPI is predicting a similar slowness for the next few quarters, primarily based on the third quarter results just posted by the five leading Indan ITES vendors: Tata, Wipro, Infosys, Satyam, and HCL. 

Of course, vendors do not perform uniformly – whether in growing markets or retracting ones.  Some always do better than others.  It will be interesting to see which vendors distinguish themselves in this challenging environment.

Is the Insurance Industry Risk Averse?

It’s often said (and I’ve said it myself) that you can plot the major sectors of financial services – insurance, banking, and securities – on a continuum of risk attraction/aversion with respect to technology adoption.  Insurance would be on, say, the leftmost side as the most risk averse, securities would be on the right as risk attracted, and banking would be in the middle of the two.  Thus, it explains, capital markets have the most sophisticated information technology, insurance has the least sophisticated, and banking is somewhere in the middle.  You also see this reflected in the technology provider arena of each of those three sectors with insurance technology providers being many and fragmented, banking providers being more consolidated and mature, and securities with advanced outsourcing solutions (instead of each firm licensing and deploying software or, even less, building its own software applications).

That the insurance technology provider community is fragmented is obvious from the size of the vendor directory at www.InnovationInInsurance.com.  But is this because the insurance industry is risk averse…or are they just averse to technology risk?  And if it’s just the latter, can something be done about that? 

An insurance company CEO marveled to me recently that his board of directors would heavily scrutinize every million dollar IT decision he proposed while his underwriters and claims examiners were making million dollar decisions every day without such scrutiny.  He knew, of course, that his directors were distinguishing risks which it was the company’s core competency to manage (e.g. the limits on an insurance policy) and those risks (e.g. the licensing of enterprise-wide software) that were outside of its core competencies.

When it comes to insurable risks, insurance companies are not only not risk averse, they actually embrace risk.  In fact, risk is their business model.  They accept risks that others don’t want, and then manage those risks by amassing enough of them to make them manageable.  After all, when it comes to whether a house will burn down next year, it’s impossible to know.  But if you are considering a thousand of them or more, while it’s not possible to know which ones will burn, you can be pretty sure of the number of them that will.

If technology vendors just assume that insurance people don’t like risk, they will deny themselves opportunities.  Nathan Conz makes that point well in his Oct. 21 blog at Insurance & Technology in which he points out that “The Curse of the Bambino” which was supposed to explain why the Boston Red Sox couldn’t win the World Series was not only debunked by their winning of the 2004 and 2007 series, it was an urban myth which gained currency only in the 1980’s when Boston sportswriters wanted a clever way to express their frustration.  “The Curse of the Bambino” was a canard, and Conz’ point is that assuming insurers have always lagged, or will always lag, in technology adoption is similarly distracting and counterproductive.  (At least credit him with productively channeling his own frustration with the Sox bowing to the erstwhile last-place Tampa Bay Rays.)

Insurers will adopt technology that will increase their profits sufficiently as long as the risks associated with implementation and usage can be properly managed.  If we want them to buy more, therefore, we simply need to give them more compelling value propositions – value propositions that address the management of risk as well as the return on investment.

ACN v. GW: Why I Hope Guidewire Wins Against Accenture

Let me first say that the one exception to my wish is that if Guidewire has in fact infringed on Accenture’s patent or other property rights. If that’s the case, I hope Guidewire loses. I just don’t think there has been any infringement, nor do I know anyone else in the industry who thinks there has either. Do we bystanders have any way of knowing that for sure? No, and that’s why I state this potential exception.
Having stated my exception, let me also say that I do not favor Guidewire as a company over Accenture. I respect and admire both companies and I hope they both continue to enjoy success in the marketplace. And to sound a personal note, I know and greatly admire Vic Guyan, the Accenture partner who was largely responsible for their claims system and whose name is on the US Patent and Trademark Office paperwork as the lead Accenture person (see the front page of www.InnovationInInsurance.com for the link to the USPTO file). Although Vic is now retired and I seldom interact with him, I treasure my friendship with him. Vic is widely known for his keen intellect and his solid integrity. He has every right to a patent for his outstanding work, and Accenture has every right to protect it.

Why then do I – and many other people – hope that Guidewire wins? Because we 1) find it illogical that Guidewire would attempt to copy the Accenture work, and 2) an Accenture victory would supress innovation in our industry because firms – - especially smaller ones – would be discouraged from developing new systems where any larger firm held a patent. Let’s take these reasons one at a time.

First, it’s illogical that Guidewire would have copied Accenture’s invention. There would be no need to do so. Moreover, it would have stifled the creativity of the developers. There is so much need for automation of insurance business processes that you simply map the process, design the system, and start coding. Consulting someone else’s work just slows you down. My fear would be that someone versed in patent law but not in insurance claims would look at the two systems, see similarities, and conclude one was copying the other. However, the far more likely reason for the similarities would be that claims processes are claims processes and if you’re going to automate them with information technology there are common best practices. Put two teams of developers in separate rooms, tell them each to develop a claims, or some other insurance, system using state-of-the-art technology and the systems are going to look alike to some degree. I have no doubt that there are similarities between Accenture’s system and Guidewire’s; I just doubt that those similarities are the result of imitation.

Second, an Accenture victory would discourage innovation. We’d have a situation where large well-heeled companies would obtain patents and that would make those domains off-limits to conpanies with more limited resources. The way you usually protect yourself in court against an accusation of intellectual property theft is with “prior art.” But if you develop your system at the same time as, or after, the larger firm, you can’t have any art that is prior. Innovation is not the sole province of start-ups, but start-ups HAVE to innovate to become viable. If we discourage them from innovating, we discourage them altogether. It’s not healthy for the industry that rich companies get to cordon off whole areas – such as claims – because they have enough cash to procure patent exclusivity because the Patent Office doesn’t know enough about insurance to distinguish between a fundamental of insurance process and a unique way to automate it.

In summary, I believe innovation in our industry will be encouraged by a Guidewire victory and discouraged by an Accenture victory. We don’t need any company to have a monopoly on new claims systems…or any other insurance systems.

Who Wants to Help the CIO?

In their most recent blog, Deb Smallwood and Cindy Maike quote from their IBM-sponsored white paper, Insurance: Realizing the Full Potential of Change.  (E-mail dsmallwood@smallwoodmaike.com for a copy.)  In their writing, Smallwood and Maike state that’s it’s important for insurers to change…and that the business side of the carrier must lead that change while the technology side supports that leadership.  They then promote the use of Business Process Management (BPM) and Service Oriented Architecture (SOA) as enablers rather than technology, and as disciplines of effective change management.

This white paper makes me think about what an overwhelming challenge it is to be an insurance company CIO today.  Unless the carrier CEO is already proactively formulating clear strategy for the CIO to follow, the CIO must induce the CEO to do so (ever tried to convince your boss to do something he or she is not already doing?).  Then, the CIO must make sure his or her organization is educated on the proper use of BPM and SOA to execute that strategy (how many people in the organization thoroughly understand these concepts – in the same way?)…AND…integrate the myriad applications and systems that comprise today’s insurance company (is hodgepodge too strong a word?).  Consider that at least half the energy required by any new system is often the energy to integrate it into the spaghetti of home-grown and vendor-provided systems that is currently operating.  It’s exhausting just thinking about being an insurance company CIO.

This overwhelmed CIO provides a great opportunity for insurance technology vendors to be a part of the answer instead of part of the problem.  Think about your product or service not merely in terms of its features, functions, and benefits – but equally as much in terms of what it does for “the integration problem” (if we can call it that).  Maybe BPM/SOA provides a standard paradigm for addressing the integration issue that arises, to whatever degree, with the consideration of each new piece of software or component of outsourcing. 

I think when a carrier CIO sometimes resists what seems to be a no-brainer innovation of installing a vendor product, it may be because behind the scenes there’s an integration complication, or the CEO has not provided an overarching strategic context, or some other broader, background issue.  Maybe Smallwood and Maike are providing a better roadmap for vendors to support the CIO’s.

ACN v. GW: Details Emerging

In my blog from a couple of days ago, ACN v. GW: The Industry Is Declared the Winner,” I wrote that, while “details are sketchy and confirmation is lacking,” verdicts had been rendered in the case between Accenture and Guidewire.  I then chose to celebrate what appeared as if it might be the end of the dispute.  Indeed verdicts had been rendered on aspects of the disagreement.  However, there is also ongoing legal activity as spelled out by Anthony O’Donnell’s reporting in Insurance &Technology. 

Alas, my celebration was premature and we have to put the champagne back on ice for now - but let us hope only for a little while.  Unless there is actual violation of property rights involved in this situation, litigation is counterproductive to our purpose as an industry: bringing greater efficiency and effectiveness to those who provide insurance to individuals, families, and businesses around the world.

Insurance Regulation: State or Federal?

All of us have seen increasing news coverage over the last year about the possibility of the US Congress enacting legislation to alter the current state-based regulatory system to allow insurers to opt for federal regulation.  This would give the US a dual regulatory structure.  There are industry forces aligned on both sides of the issue.  The recent financial crisis, and especially the woes of AIG, don’t seem to have changed any minds.  Rather, it’s just made each side more sure it’s right.

Usually, the argument is about whether the individual states or the federal government can do a better job of regulating insurance for the public.  Proponents of federal chartering say the states should have made sure AIG didn’t fail; proponents of state regulation say that the insurance subsidaries regulated by the states are strong and that the problem is with their holding company which was under the jurisdiction of a federal agency.  I don’t think, however, that regulatory proficiency, or even competency, is the issue.  In fact, I assume that the quality of regulation will be roughly comparable between the two.  What I think is far more important is which system could result in more good for the public.  After all, that’s who the regulation is intended to serve.  And I believe the public would decidedly prefer the benefits of a much more efficient industry. 

It’s clear that insurance technology (software, outsourcing, and services) are inhibited in the degree of efficiency that they can bring to insurers because they have to allow for fifty different ways to do something.  A vendor may produce software that administers auto policies in 5 states.  Now, their target market is all carriers who write auto insurance in those five states.  That reduces the addressable market significantly.  Such inefficiencies abound in the current system.

Insurance was officially exempted from the Interstate Commerce Act in 1945 by passage of the McCarran-Ferguson Act.  While all other fundamental processes of commerce had been deemed to transcend state boundaries, insurance was arcane enough to justify as an exception.  This exception, however, has been stifling to innovation for the last 60 years.  Do policyholders in Kansas City, Missouri really need different rules for insurance than policyholders in Kansas City, Kansas?

Every hour a programmer spends making sure a function works for all fifty states is an hour that can’t be spent on reducing policy issue time, or providing more convenient purchase options, or producing online access to information for policyholders, or settling claims faster and more fairly.  Moreover, how do you atract and retain superior IT talent when  their assignment is to codify, or allow for, the minutia of fifty inconsequentially different ways to do something?

It’s time to give federal regulation a chance.  Imagine the ways vendors and insurers could innovate if they were freed from the tyranny of having to satisfy fifty different rulemakers.  Systems that could operate nationally could be produced in a fraction of the time and cost of systems that have to be constructed one state at a time.  Vendors could devote the time saved to genuine improvements and enhancements to policy, billing, and claims service.  The insurance-buying public would receive the greatest benefit: a far more efficient, and therefore less costly, insurance industry.

ACN v. GW – The Industry is Declared the Winner!

Although details have been slow in getting published, it appears that a federal judge settled the dispute between Accenture and Guidewire on October 8th.  You’ll recall that Accenture sued Guidewire, alleging that Guidewire had infringed on Accenture’s patent for a claim system.  Guidewire countersued.  Each seems to have filed a motion for dismissal of the other’s suit…and it seems the judge granted both motions, which would effectively end the dispute.  But, as we said, details are sketchy and confirmation is lacking.

Let’s assume for the moment, however, that the dispute is settled.  That is great news for the industry.  The lawsuits were casting a cloud over what has been one of the bright spots of insurance technology innovation.  Guidewire has won numerous awards for its software solution.  Claims departments personnel, having been overlooked for years, were thrilled with the attention that the Guidewire system gave to their needs.  Guidewire’s competitors were inspired to kick things up a notch. 

Accenture had already made a postive mark with its own claims system, though its business model was more about large-scale customized implementations than mass marketing of software to carriers.  Having Accenture, Guidewire, and other motivated competitors was good for the industry because it offered a variety of good choices to insurers. 

I don’t know enough about either system to have an opinion on whether or not what was alleged in the suit or the countersuit was true.  Most industry people I have spoken with believe that similarities between the two systems were coincidental.  After all, lock two teams in separate buildings on opposite sides of the country, tell them each to develop a P&C claims system with the state-of-the-art technology, then there are going to be similarities even if they never heard of each other.

I’m glad that a judge seems to have ended the dispute, which has been a distraction to innovation for our industry.  We need Accenture, Guidewire, and every other vendor doing its dead-level best to make better products for our industry.  Let everyone’s intellectual property rights be respected, but don’t let fear of incidental similarity quench the drive to build new products and make existing products better and better.

Now is the Time for Bold Moves in Insurance Technology

Over the past decade or two, numerous attempts have been made to carve out insurance operations, or portions thereof, from insurers to create dedicated technology, service, and outsourcing companies.  Private equity firms have spent countless hours and days in analysis with carriers analyzing and quantifying the benefits of, for example, spinning out the policy processing operations, or the claims operations, or the customer service operations.  The idea was that as dedicated service providers were created for multiple insurers, then economies of scale and scope could be achieved, resulting in lower costs for all carriers who used them.  Insurers could focus on managing risks, and service providers could focus on managing execution.  Of course, these efforts have largely gone unnoticed because they usually ended with the insurer saying, “Thanks, but no thanks; we’re better off just continuing to do things the way we’ve always done them.” 

Contrast the experience just described with the banking industry where great companies have been created by carve-outs or spin-offs from bank operations.  In fact, the three biggest vendors in bank technology – Fiserv, Fidelity National, and Metavante – all began life as operations of banks.  They became vendors either through the initial financing of their parent company or private equity.   Because of this success in banking, a number of private equity firms have tried to do it in insurance but have found the going much harder.

Why is “now the time” for bold moves in insurance technology?  The Wall Street Journal’s influential Heard on the Street column recently blared “Insurers Feel the Heat” (Friday, October 10, 2008).  The point of the column is that while banks have felt greater pain than insurers at this stage of the credit crisis, insurers will feel their own pain with depressed investment portfolios (whether debt or equity).  This pressure will be relieved by one thing:  more capital.  In addition to the virtues of efficiency and effectiveness mentioned above, carve-outs and spin-offs generate cash for the divesting party.  The first companies to act in this regard will gain the greatest benefit. 

All observers agree than the insurance technology industry is currently more fragmented and less mature than the banking technology industry.  Perhaps now insurers have sufficient motivation to act boldly and create strong vendors for themselves.  On the other side of the equation, it’s now time for incumbent vendors and private equity to grow great companies to serve a great industry.  Incremental steps and half-measures will not be sufficient in this financial environment. 

IT Spending for 2009 – Five Precincts Reporting

This is budgeting season for insurance technology vendors and the big question is, “What will be the IT spend for carriers in 2009?”  More specifically, “What will be rate of growth in that spending over 2008?”  Here are five data points that have turned up recently. 

1) According to Gartner and the Property Casualty Insurers Association of America (PCI), the growth in IT spend for P&C carriers in the US next year is likely to be about 2%.  This compares to 8% last year, and 11% the year before that.  This multi-year decline is deemed to be a function of the decline in revenue growth of insurers, and does not incorporate the stock market’s latest gyrations.

2) Deb Smallwood of Smallwood Maike has recently predicted that 2009 IT spending for insurance carriers will be flat when compared with 2008.  She likens this period to that following 9/11 when  “IT decisions were stalled,” and “spending shrunk.”   

3) Writing in Insurance & Technology magazine, Jonathan Steiman, analyst of Financial Services Technology for Datamonitor, asks “Will Insurers Spend More or Less in 2009?“  The answer he gives is hopeful, based on insurers strength relative to the more-battered banking industry and the assumption that the underwriting cycle will now harden, braking the decline in revenues and margins.  He does not, however, quantify his hope in the article.

4) Anthony O’Donnell, Executive Editor of Insurance & Technology wrote last Thursday “Insurance IT Spending Unlikely to Shrink.”  Drawing on his interactions with industry analysts and researchers, he concludes that because of achieved…and expected…productivity gains, and competitive pressures, that insurers will continue spending on IT.  In his article, O’Donnell gives some helpful data points from specific research analysts that are worth studying if you’re responsible for budgeting revenues for your product or service.

5) Twenty-four hours later, the same Anthony O’Donnell was writing “Austerity Looms for Insurance Industry” for his magazine.  He wasn’t hedging his comments from the previous day so much as reflecting the volatility of the financial environment in which we find ourselves (the Dow had lost almost 700 points by the end of the day Thursday and another 700 in the first hour of trading on Friday…so you could almost see his hands shaking as he typed).  In such an environment, confident predictions are hard to come by.

So, there are some current reference points.  There is reason for hope.  Insurers need technology more than ever, and if the environment is challenging, then all the more so..  They have to be more efficient, they have to understand and manage the risks they are taking, and they have to be able to respond quickly to a business environment that could change quickly.  This means technology: software, outsourcing, services.  These are not niceties that insurers buy in halcyon times, they are the necessities for survival and growth.  Make sure that what you provide carriers is what they need to survive and thrive in whatever 2009 brings and you should do well.