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.

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.

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.

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.

Want Your Insurer To Be More Innovative?

Matt Josefowicz and Steve Kaye of Novarica have just written and published a twelve-page research report titled Innovation and Agility in Insurance IT.   The research included interviews with 31 insurer executives conducted last month through Novarica’s Insurance Technology Research Council, a moderated membership group of senior IT executives from both life/annuity and property/casualty carriers.

The preview page of the report includes a provocative graph which indicates these execs would like to see more emphasis on innovation from the top of their organizations.  It also indicates line-of-business execs are receiving too much pressure for innovation – pressure that should be on designated innovation groups as well as on the senior execs of a company. 

The report promises recommendations for increasing the agility and innovation quotient for a carrier.  Matt is highly regarded in the industry so the report is likely to receive attention.  (Among other accomplishments, Matt is a magna cum laude graduate of Brown University, though I hear Brown does not award summa so he could be a 4.0 for all we know.)   

A key question for those interested in increasing innovation in insurance is the formation of innovation groups in a company and how responsibility is shared between such groups and the line-of-business organizations.

The long-standing argument for innovation groups is that line-of-business organizations are too pressured for recurring operational results to have sufficient freedom to innovate.  The long-standing argument against such separate groups is that only line-of-business organizations can execute and achieve innovation so assigning the responsibility somewhere else just makes for organizational confusion.  While this report doesn’t seek to settle this debate, it does add useful information and advice for achieving the ultimate goal. 

By all means, let us innovate!

Beauty Contests For Vendors Abound

You may have seen on www.InnovationInInsurance.com notice about the Celent/Insurance Networking News VIP (Vanguards in Insurance Practices) Awards Program.  If not, you can participate in the survey at this link.  Just prior to that, there was the Insurer’s Choice survey (now closed) conducted by Financial Insights/TechDecisions (link here).  I guess this could remind you of Chicago-style voting (i.e. ”Vote early, and vote often”). 

Some people may take issue with multiple beauty contests like this, but I think it’s good for the industry.  Anything that gets vendors recognized and gives visibility to their offerings is a good thing.  Of course, it makes for an interesting situation when both awards are to be presented at the ACORD/LOMA conference in May (Imagine the Miss America and Miss USA pageants being held at the same time in the same building). 

Kudos to the research firms and the trade periodicals investing in these surveys.  Vendors will spruce up for entry and everyone in the industry will have greater visibility to these vendors who are bringing the software, data, services, and outsoucing that are so important to the advancement of the insurance industry.

And may the best man win!  (In the spirit of gender equality, I decided to mix the metaphors.)

Insurance Outsourcers Finding Strong Support

This week brought announcements about two of the insurance industry’s larger outsourcers – Long Term Care Group (LTCG) and ZC Sterling (ZCS) – changing owners (news reports can be found at www.InnovationInInsurance.com).  LTCG was acquired by a financial buyer and ZCS by a strategic.  Details were limited but both deals appear to be good for all concerned, which is all the more encouraging when you consider the financial/economic climate in which we now find ourselves.

LTCG is by far the largest processor of long term care insurance in the U.S. with approximately 20% market share.  The company has 1,200 employees and provides its service to over 30 carriers, including 9 of the top 10 writers of long term care insurance.  Interestingly, LTCG will become part of a larger play by affiliation with a provider of long term care services which should create scale and synergies. 

ZCS is also a leader in its market, being the leading provider of force-placed property insurance in the U.S.  They are expected to generate about $425M in written premium in 2009 and $525M in the following year.  Having been acquired by a public company (QBE, Australia’s largest P&C insurer), ZCS’s sale price was disclosed at close to a billion dollars ($575M upfront with a two-year $325M earnout).

The common thread in these deals is that outsourcing, while so far somewhat limited in its insurance deployment, can be very successful.  Each of these companies operates in a specific niche where it can achieve not only economies of scale, but economies of scope as well.  They move up the experience curve by narrowing their focus to a specific subject which they can master.  Contrast this approach with the one-size-fits-all historic outsourcing models used in other industries.  The former model succeeds while the latter model has struggled.

The ingredients for success in companies like LTCG and ZCS include proprietary technology, a strong and focused management team, and a workforce of domain experts.  When I say “workforce of domain experts” I’m not suggesting that every person needs know everything about the topic.  As a team, however, they need to collectively represent strong and deep knowledge of the business being served.  This begins with the leaders who must be dedicated enough to the success of their customers that they commit to truly understanding the customers’ business. 

LTCG and ZCS are both strong companies and should continue to grow with their new owners.  The insurance industry can grow more successful outsourcers by following the paths cut by these two firms.  That will mean good results for customers and for investors.

Aw, C’mon; Let ‘Em Dance!

As noted on www.InnovationInInsurance.com, the Federal Trade Commission (FTC) has decided to challenge the proposed merger of CCC Information Services and Mitchell International, two of the three software-and-data-based automobile repair estimating companies that are so integral to the settlement of auto insurance claims.  Their products and services support the relationship between insurance companies who pay the claims and auto body shops who perform the repairs.  The third major firm in this industry is Solera, which used to be a division of ADP but now is independent and publicly owned…NYSE-SLH).  CCC and Mitchell are both private equity owned (CCC by Investcorp International and Mitchell by Aurora Capital Group).

In cases like these, the FTC can’t rule unilaterally but must press its position in court.  Its point is that the merger is anti-competitive; that is, that it would reduce competition in the industry and therefore be detrimental to customers of these services.  CCC and Mitchell have stated their belief that the merger is actually pro-competitive; that is, it will bring additional benefits to buyers including more and better services. 

One of the difficulties faced by the insurance technology industry, of which this sector is a component, is the fragmentation of vendors.  That is, vendors are generally small and lack the resources to build out comprehensive services that compel the market to buy – thus vendors tend to stay small and under-resourced.  It’s a vicious circle.  This is exactly where this industry component has historically stood.  The three major vendors just end up competing on price and while it gives the buyer the lowest price, it prevents the vendors from differentiating themselves in ways that are more meaningful to their customers.  After all, price is important to customers but must be contextualized with value to have any real meaning.  You can’t view price in isolation.  Everyone is willing to pay more for something if the something is worth more than the increase in price.  And no one gains by paying less for something if that something is simultaneously reduced in value.   

At this point, had I paid better attention in my business school economics classes years ago, I’d whip out some sophisticated demand-supply curve argument that would make Schumpeter or Hayek proud.  Instead, I’m going to have to appeal to the judge’s common sense. 

“Your Honor, the market needs vibrant and energetic competitors who are competing for customers on all aspects of value – not just price.  Sufficient scale is an important aspect of vibrancy and energy.  Please don’t relegate these firms to a future of anemic offerings that just cut the price while providing less and less value.  Insurance business processes are in need of major innovative effort for the sake of the insurance-buying public.  Only healthy, growing vendors have the capacity to execute that level of innovation.  Aw, C’mon, Judge; let ‘em dance!”

Outsourcing That Innovates…versus Outsourcing That Perpetuates

The stock market roller coaster and 24/7 discussion of recession have everyone thinking about remedies.  Phil Fersht, analyst with AMR Research, who writes The Outsourcing Blog, prescribes The change imperative: it’s back-to-basics time.  If we’re going to get back to basics when it comes to outsourcing (and I think that’s good advice), then it’s worthwhile asking what the basics are.

For one thing, a basic of outsourcing is that a company relinquishes a task which it believes another party can execute better and more economically.  The improved quality and economics usually have to do with scale and focus.  That is, an outsourcer who specializes in certain transactions can do so many more of them than the customer that they can achieve economies of scale (the marginal cost of each transaction keeps decreasing) and economies of scope (by focusing on these transactions, the outsourcer learns so much more about them and is able to apply that knowledge to continually increase productivity).  Thus, companies have over the years outsourced their cafeterias, security forces, payroll, and so on.  (When I heard that some firms were outsourcing their internal audit, I figured the sky was the limit.) 

Another way of stating this rationale for outsourcing is knowledge, or intellectual capital.  That is, success of outsourcing assumes that the outsourcer will amass and deploy more knowledge or intellectual capital on the task at hand. 

This is basic alright.  Problem is, we’ve wandered away from this…or in some cases never truly approached it.  The blame can be shared by the customers as well as the outsourcers.  The customers are to blame (and in this they’ve been goaded by the advisors they hire to negotiate outsourcing contracts for them) for insisting on service-level agreements which essentially lock the outsourcer into executing business processes exactly the same way the customer did.  That may give you economies of scale, but not economies of scope which would allow you to alter the process to achieve a better result.  And it only gives you economies of scale if the outsourcer’s other customers execute their processes the same way.

Outsourcers are to blame when they don’t focus on specific business processes where they can build up meaningful intellectual capital.  Outsourcing, after all, isn’t a competency.  The competency is in knowing how to execute a specific set of business processes.  This is why I love to see insurance outsourcers steep their employees in industry education programs such as CLU and CPCU.  The insurance industry doesn’t need information technology (IT) experts, it needs IT professionals as dedicated to understanding insurance (or some discrete part of it) as they are to understanding IT. 

If customers demand business processes be executed the way they’ve always been executed and if vendors don’t go out of their way to become domain experts in their customers’ businesses, then outsourcing will only perpetuate the status quo.  But when customers unleash their vendors to apply domain expertise, economies of scale and scope can be realized, and genuine innovation can take place. 

The purpose of www.InnovationInInsurance.com is to facilitate greater innovation in the insurance industry.  After all, that is the purpose to which IT should be applied.  And that will lead to outsourcing that doesn’t merely perpetuate, but rather outsourcing that innovates.