Open Letter to Arun Jain, CEO of Polaris…About SEEC

Dear Arun Jain, Chairman and CEO of Polaris Software Lab:

Congratulations on your successful acquisition of SEEC!  Congratulations also on the success of Polaris over the years.  From your beginnings with Citigroup in India, you have accomplished much.  Though your company background is banking, you have also achieved success in insurance even before the acquisition of SEEC.  You have much of which to be proud.

As you know, SEEC has achieved visibility in the insurance industry with its unique approach and its support of ACORD and SOA.  Those of us who care about the success of the insurance technology industry are hoping that this merger between your companies will bring more resources – talent, time, and treasure – to SEEC customers and prospects.  We know that Polaris has confined it strategic focus to what we in the U.S. call financial services (insurance, banking, and securities) – what you in India call BFSI: banking, financial services, and insurance.  We see that as positive because disciplined focus can bring about better results.

A focus such as your, however, is narrow in one sense, and yet broad in another.  Two notable banking technology firms in the U.S. (Fiserv and Jack Henry) decided to expand into insurance (ten and five years ago, respectively).  It seemed to many observers a natural extension of interests.  After years of trying, however, both of these firms recently began withdrawing from insurance and returning to a more exclusive focus on banking (Fiserv by divesting 51% of its insurance assets and Jack Henry by divesting 100% of its insurance assets).  They found the synergies between a banking focus and an insurance focus elusive.  For more detail see my posts on this blog from a few months ago: Financial Services Divergence and Insurance Technology v. Banking Technology.

We remind you of these examples not because we think you will fail to be strong in insurance, but because we hope that you will succeed in being strong in insurance.  Insurance stands to gain more from improvements in technology deployment than almost any other industry.  Its fundamental product is intangible and its current applications of technology are dated in many instances.    Polaris can participate in great innovation and productivity gains if it is thoroughly committed to the insurance industry.  Lukewarm commitments to serving the insurance industry seldom prevail.  The industry is too complex and arcane to be served well by any other than fully-committed suppliers.

So here is wishing you the best of success with SEEC.  May Polaris be an important part of helping the insurance industry become what it can be: the world’s most innovative user of technology in the 21st century (because it wasn’t always in the 20th).

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.

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. 

Insurance Technology v. Banking Technology

My previous blog, Financial Services Divergence, briefly described the history of “financial services convergence” – the mantra of the 90’s, which implied that banks would get into the insurance business and insurance companies would get into the banking business.  The brief history is that not much happened.  It’s true that banks did start selling a lot of insurance, but they left the underwriting and everything else to the insurers.  And it’s true that some insurance companies started banks, but nothing like what was predicted.  The two businesses just didn’t mix as easily as many people thought they would.

This blog takes that analysis a step further – to look at why there hasn’t been technology convergence among the IT suppliers to insurance companies and banks.  After all, just because there wasn’t much convergence between loan officers and underwriters, doesn’t mean that the information technology needs couldn’t be supplied by the same firms.  Last month’s news that Fiserv and Jack Henry were both divesting their insurance operations, however, demonstrated that there must be incompatibility at the underlying technology level as well as at the retail service level.  Why is that?

Since banking and insurance both financial services, it stands to reason that the information technology needs of each would be similar.  They are in many ways.  Both industries use much of the same hardware and much of the same system software.  It’s at the point of application software that the differences between the two industries become very apparent. 

The most graphic way to illustrate the difference is to lay a check next to an insurance policy.  One is short, with few data elements, all in the same location on the document.  The other is multiple pages of legal size paper with variable data elements showing up in the variety of places.  This is emblematic of the true reason banking and insurance technology have so far proven resistant to integration.  That true reason?  Banking is generally regulated by the federal government while insurance is regulated by the 50 states. 

Because banking is regulated nationally (I know there is some state regulation of banking but it is nothing to compare with insurance), banking technology and outsourcing can be scale games.  If your application software can process a bank deposit in Missouri, then you can market in California and New York just as easily as in St. Louis.  Insurance is a vastly different matter.  Just because your software can issue an auto policy in Missouri does not mean it will work for Illinois or Kansas, never mind California or New York.  The differences in auto insurance from state to state may be minor (e.g. length of notice time before being able to cancel a policy), but they add up and slow down the building up of scale for a service provider.  Moreover, we’ve just been talking about auto insurance.  Now figure you have to do the same thing for Homeowners policies.  And then there are Businessowners policies.  And we haven’t even mentioned life and health insurance.  Every line of business requires accommodation to 50 different state insurance departments.  Now go back and compare that to processing a check or a debit card transaction.  It’s the epitome of complexity versus simplicity.

The fifty-state regulatory burden, however, is not the only way that insurance is a more complex business to automate than banking.  Think of it this way: The insurance industry can be divided into three different sectors: Property and Casualty, Life and Annuities, and Health.  Moreover, most insurance companies outsource their distribution so that agents and brokers are distinct entities from the companies that write the insurance.  Therefore, there are six different permutations and a technology service provider usually has to choose which of those sectors to serve – at least in the beginning – because the software for one will not do much good for the other five, without significant modification.  The only comparable issue in banking is the difference between commercial banks and credit unions.  That is, the software for the one generally will not work in the work, without significant modification.

None of this is to say that automation in banking is easy, or that very sophisticated and complex problems don’t exist there.  Of course they do.  Having worked in that arena, I know firsthand how challenging it can be.  My point here is that insurance has some additional mountains to climb because of its regulatory environment in the U.S.  If you wanted to identify an even deeper root cause, consider the product itself and ask, “How much do most folks understand about their bank accounts?” and then ask “How much do most folks understand about their insurance?”

Fiserv and Jack Henry didn’t throw in the towel because they’re weak, dumb, or incompetent.  They are the opposite of all those things.  They threw in the towel because insurance and banking are different enough to require separate focus. 

 

 

Financial Services Divergence

It’s a coincidence worth noting that these two press releases both appeared last week, and within a day of each other: Fiserv Spins Off Its Insurance Group and Jack Henry Spins Off Its Insurance Group. 

Unwinding a trend begun in the mid to late 1990’s these two bank technology giants announced divestitures of their insurance technology activities.  Fiserv’s divestiture was much larger, and it was only a partial divestiture at that (selling 51% to Stone Point Capital), but the message couldn’t have been clearer: insurance and banking have not mixed in the way that many people thought they would ten years ago.  A decade ago, the business world was abuzz with Gramm-Leach-Bliley (The Financial Services Modernization Act), the Citigroup-Travelers merger, and all things financial services convergence.  The reality turned out much differently than the prediction. 

This week’s transactions are good news for the insurance technology industry because they both free up insurance technology assets from parent companies whose interests and core competencies lay in other fields.  The increased focused will mean that more genuine innovation can occur.  That will make life better for insurance carriers, agents, and policyholders.

Fiserv Insurance Solutions, Inc. will be piloted by its existing management team, including Fiserv veteran Mark Damico as its CEO and President.  Stone Point is an established player in the insurance industry (having had its origins in Marsh Mac’s private equity activities).  They will likely bring more insurance focus, more commitment, and more capital to the insurance operation.  All of this is good news for customers who will benefit from a more energetic and focused technology supplier.  A key determinant of success will be how much autonomy the new organization enjoys (i.e. will the 49% Fiserv ownership in any way hamstring the insurance operation from aggressively re-asserting itself with the insurance marketplace).

Insuritas, the insurance distribution arm of Jack Henry, will also be led by its existing management, including Jeff Chesky who will be the CEO.  Chesky founded the organization and led it through its acquisition by Jack Henry.  That he has stuck with the operation and take on this new responsibility speaks positively of the market opportunity he continues to see.

This was a good week for the insurance technology industry: new capital, experienced players, more focus.  Bring it on!