Businessofgeneralinsurance

Business of
General Insurance
www.goto-psi.com
© 2000-2009 Performance Solutions International. All rights reserved.
[David Tompkins:] Welcome to the Business of General Insurance. My name is David
Tompkins, and I’m a partner with PSI. Joining me today is Mike Lichman, one of our senior
consultants.
PSI is a research and training firm focused on the global financial services industry. This course
is part of our industry training curriculum, and builds on our fundamental course Inside General
Insurance or Inside P&C Insurance.
© 2009 Performance Solutions International, LLC 1.866.468.6774 http://www.goto-psi.com

[David Tompkins:] Our topic in this course today is the general insurance industry, also known as
the non-life insurance industry, the property and casualty or the P&C insurance industry.
Upon completing this course, you’ll be able to:

Describe the important business processes, information flows and IT systems within the
general insurance industry
Discuss the issues and challenges facing general insurance companies today
Identify the IT opportunities created by these industry challenges
Identify important decision makers in general insurance and their perception of value
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[David Tompkins:] Now before we move into the course content and begin talking about some of
the industry challenges, the first thing we want to do is answer a quick question, and that
question is “Why?” Why focus on the general insurance industry?
We’re going to answer this question from a couple of different perspectives. First, why are
financial institutions focusing on general insurance? For one, despite pressures on the industry’s
long-term profitability, the recent profitability of the general insurance industry has been quite
good, and this has led to a renewed focus by general insurance companies and has been attracting
other providers of commercial insurance and risk management coverage.
Secondly, this is an industry that has a real opportunity to leverage economies of scale,
especially in areas like IT and operations. As a result, some of the leading players in the industry
are trying to improve their overall profitability by aggressively growing to take advantage of
these economies of scale available to them.
The second part of this question is why should you focus on general insurance? The quick
answer to this question is because this is an industry that spends money on a variety of different
IT solutions. In general, the financial services industry spends somewhere between $350 and
$400 billion on IT. And the general insurance industry represents roughly ten to fifteen percent
of that overall IT spend. So, we have an industry that spends somewhere between $35 and $40
billion dollars a year on IT. This creates a lot of opportunities for different IT solutions.
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However, to take advantage of these opportunities for your solutions, you obviously need to
understand your general insurance clients’ business, their processes and IT challenges, and we’ll
address these in the remainder of this course.
[David Tompkins:] The first step to understanding the challenges facing your clients or prospects
is to understand how they strategically position themselves within the industry. And there are
several different elements to strategic positioning when you look at insurance companies.
The first element is product scope: what products and services does your client offer to its
customers? The product scope will vary from one general insurance company to another. On
one end you have product specialists that focus on a very specific product niche or a small
number of different products. On the other hand, you have insurance companies that offer a very
wide variety of different products and services to their customers.
What we list here are some of the key product lines that general insurance companies will offer.
Personal lines are general insurance products offered to individuals. Homeowners insurance and
automobile (or motor) insurance are the two major products under personal lines for most
companies, although there are often other smaller products as well, such as flood insurance or pet
insurance. Most general insurance companies offer both homeowners and automobile insurance,
but some will specialize in one or the other.
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Commercial lines include products and services offered to businesses and other organizations.
These products include various commercial property and liability insurance, MAT or marine,
aviation and transportation insurance, is usually part of a company’s commercial lines as well.
Specialty lines include specialized products and services offered to companies and other
organizations. Some examples include directors and officers or D&O liability insurance and
medical malpractice insurance.
In addition, many large insurance companies are multi-line insurance companies, which means
they’re also active in the life insurance business.
The second major element of strategic positioning for general insurance companies is the
geographic footprint. On one hand we have the group that most general insurance companies fall
into. These are the national and regional players and include insurance companies that focus on
one specific domestic country or a specific region, such as the EU.
On the other hand, there’s a group of global giants that provide general insurance services around
the world. This includes companies like Allianz and Generali. As times goes on, it’s expected
these global giants will get a larger and larger share of the overall general insurance industry,
especially as they begin to use their economies of scale to their advantage.
The third major element of strategic positioning is around a general insurance company’s
distribution model, and there are several different models they can choose from. The first is an
integrated model, and this is the traditional model that insurance companies in most markets
have historically followed, at least on the personal lines side of the business. In this model, the
insurance company not only creates and manages the products, but also sells them through their
own sales force. However, this model is becoming less popular. We’re seeing a greater split
between manufacturers – companies that create products – and distributors – companies that sell
these products to their end customers. And, while many companies still do both manufacturing
and distribution, internally they’re beginning to manage them more as two separate businesses.
The second model is a manufacturing model, in which insurance companies – typically smaller
companies with a more refined product scope – create and manage the products but then rely on
outside partners to sell those products for them.
The third distribution model that most of the larger insurance companies are following is a multi-
channel model. Large insurance companies create and manage their own products and then sell
them through multiple channels, including internal agents, outside brokers, banks, etc.
Related to the multi-channel approach is an open architecture distribution model. This is one in
which a large insurance company not only sells its products and services through multiple
channels, but allows its own internal sales force to sell products and services from other financial
institutions. This is primarily an effort to leverage the strategic advantage their large captive
distribution force gives to them.
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The fourth and final area of strategic positioning for insurance companies is around their source
of competitive differentiation, and these are the three traditional ways that companies try to
differentiate themselves in the market.
The first is trying to be a low-price provider by offering comparable products and services at a
lower price than the competition. Second is product differentiation, which is having different
products than your competitors or having products with different features than your competitors
have. The third traditional source of competitive differentiation is customer intimacy. This
involves understanding your customers or understanding the market segment better than your
competitors do and designing products to serve the unique needs of that customer or that market
segment.
In many cases the source of competitive differentiation is driven by some of these other elements
of strategic positioning. So, for example, a general insurance company that focuses on a very
small product scope, primarily serves as a manufacturer and distributes through third parties will
often focus on low prices. It’s a way for them to get out there and grow market share since
they’re not physically in front of the end customer themselves.
On the other hand, if you have a large insurance company with a very broad product scope and a
multi-channel distribution approach, they will often focus on customer intimacy. They’re in
front of customers, and they have a wide variety of services to provide those customers. So, the
more they understand the customers, the more they can provide to them.
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[David Tompkins:] Next we’re going to look at the organizational structure of insurance
companies. Keep in mind each general insurance company will organize themselves a little
differently. What we’re showing you here on this page is an example of what you would
typically see at a large, global general insurance company. If you have clients that are smaller
and focus on certain lines of products or a certain geographical region, you would typically see a
sub-segment of what we’re going to show on this page.
Most general insurance companies will have a Personal Lines group responsible for serving
individual customers. This group is usually focused on domestic operations or serving customers
in its home market. Within this business unit, you will see groups focused on the major product
lines. So there will be a Motor or Automobile Insurance Group and a Homeowners Insurance
Group. Each of these groups will have an executive responsible for product development,
underwriting and ongoing product profitability.
Parallel to these executives, you will typically see executives responsible for sales and
distribution. Depending on your client’s distribution model, this may include Agency
Operations, which is the group or executive responsible for managing the company’s internal on-
staff sales force. You may see Business Development, which is the group or executives
responsible for recruiting and managing third-party distributors, such as brokers, banks, affinity
groups, etc.
You may also see a Direct Sales group, which is the group or executive responsible for Internet,
contact center and direct mail sales operations.
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In addition to these product and sales groups, you will also see two large operational support
groups. One is Claims Operations, which is responsible for claims processing, and the other is
Policyholder Services, which is responsible for billing, collections, customer service,
administrative services, etc. These groups work both directly with customers as well as agents
and outside brokers who may be interacting with the insurance company on their customers’
behalf.
The next major business unit is an International Group. This is the business unit responsible for
the company’s foreign operations. If the company is active in personal lines outside of its home
market, these markets will typically report up through the International division. In some cases,
a company’s international commercial lines operations may report up to this group as well,
although other companies will have these operations report up through their Corporate and
Specialty Lines Group. It depends on the company’s focus. If a company is primarily domestic
with some global operations, then any foreign operations they have will report up through the
separate International division. In other cases, if a company truly has global operations,
especially in the Corporate and Specialty Lines Group, then all of those commercial operations
will report up through the Corporate Group and the Corporate Group itself will have this global
perspective on its business.
The next group is the Corporate and Specialty Lines business unit itself. Similar to the Personal
Lines business unit, Corporate and Specialty lines typically have executives responsible for
specific product lines, which could include various property, liability and specialty product lines.
Some of the largest global insurance companies, companies like Allianz, also offer corporate
financing services, like a corporate bank or an investment bank. These are usually part of this
group as well.
Much of a company’s commercial business is conducted through brokers. So you’re more likely
to see a Business Development group then you are to see an Agency Operations group within the
Corporate and Specialty Lines business unit. There will also be a Claims Operations group
responsible for claims processing associated with these commercial insurance contracts.
The next major business unit is a Reinsurance group. If the company is active in reinsurance, it
will typically be a separate business unit reporting straight to the CEO. Many general insurance
companies, however, will have smaller reinsurance operations, and these often report up through
the Corporate and Specialty Lines group.
Lastly, as you would you see with any financial institution, or really any company for that
matter, is a series of support functions. The CFO and the Finance group are important in any
company, but they tend to play an even greater role within insurance companies. Similar to the
CFO in Finance, there will be a Chief Actuary and an Actuarial department that’s responsible for
product pricing and setting reserves on the company’s balance sheet. The Chief Actuary often
plays an active role in strategic planning for the company as well.
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Then there’s the CIO and IT group. For most large insurance companies today, there’s a
centralized IT group that sets policies and standards across the company. But then there are
individual CIOs and IT groups within each of the other business units.
There’s also an Investment Management group that manages the insurance company’s
investment portfolio. This group can generate as much as ten to fifteen percent of a company’s
revenue in any given year.
Then you’ll also see a series of other support function that are comment to most companies -
Human Resources or Personnel, Accounting, Legal and Compliance, Auditing, Marketing, etc.
[David Tompkins:] While organizational charts help you understand where the decision makers
fit within the overall company, it doesn’t necessarily tell you what these decision makers care
about, and that’s the purpose of this page.
Most executives within the financial services industry can be organized into one of the seven
roles we’ve identified here. The first role is that of a Product Executive. These are executives
responsible for a specific product. They're typically measured on overall product profitability,
product revenue, product growth, etc. And this is what they evaluate solutions on as well. An
example of this in the general insurance industry is an executive responsible for homeowners
insurance. They care about growing the homeowner’s business and making sure the
homeowners insurance business is profitable, but they don’t necessarily care about selling other
products and services to these customers because it doesn’t impact their group.
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The second broad group of executives is Distribution Executives. These are sales or service
executives, and they focus on things that we expect sales or service executives to focus on.
Things like growth of the channel the executive’s responsible for, providing appropriate levels of
customer service, all while keep costs low. A couple of good examples here in a general
insurance company would be someone in charge of Agency Operations or someone responsible
for Business Development. These are the executives responsible for growing sales and providing
service through their distribution channels.
The third major type of executive in a general insurance company is a Customer Segment
Executive. This is an executive that owns a specific customer segment. A good example in the
general insurance company is an executive responsible for Small Business in the Corporate or
Specialty Lines group. All they care about is growth of products and services to that specific
segment of customers. They don’t care about other customers, and they don’t necessarily care
about what products and services are sold, as long as they’re growing business within that
customer segment.
The fourth broad group of executives here are Risk Executives. These are people within a
general insurance company responsible for controlling losses and reducing or at least managing
the company’s exposure to risk. In an insurance company, underwriting officers are a great
example of this. They’re responsible for evaluating risk and making sure the company prices
that risk appropriately. Therefore, they measure solutions based on their ability to identify risks
and being able to identify that risk as quickly and accurately as possible.
The next broad group is Operations Executives, and includes executives or managers responsible
for Policyholder Services or Claims Operations. These are the classic backroom executives, and
they’re responsible for providing appropriate levels of service to either customers or other
business units within the organization. They’re also responsible for providing those services at
the lowest cost possible. So they will focus on things like the cost of transaction processing,
total cost of ownership, staffing levels, etc.
The next group of executives is Finance Executives. As they are with any company, these are
executives or people within an insurance company responsible for measuring the financial
performance of either a business unit or product line or measuring the projected financial impact
of a specific investment, such as a solution you may be offering to your client.
The last group of executives is IT executives. They're responsible for insuring appropriate levels
of functionality and providing the right technology while keeping IT costs as low as possible.
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[David Tompkins:] Next, let’s take a quick look of how general insurance companies make
money. It begins when general insurance companies collect premiums from their customers.
The amount of revenue they earn from premiums is referred to as premiums earned, and there’s a
difference between premiums earned and premiums written.
Written premiums are premiums that an insurance company has already collected from its
customers. Premiums earned is revenue the insurance company can recognize because it has
already provided a service to the customer. So for example, if you pay a $1,000 premium at the
beginning of the year, three months into the year, the company has earned 25 percent of those
premiums. So as a result, the company will recognize $250 of premiums earned.
From premiums earned, the company subtracts out claims and claims expenses. Claims
represent the actual amount that the company has paid out to customers associated with customer
claims. Claims expenses are the processing costs associated with processing those claims on
behalf of customers.
From that the company will then subtract out ongoing operating costs, which would include
things like operational support, sales and distribution costs. These are all subtracted out, and the
company’s left with underwriting gains and losses. From these underwriting gains and losses,
the company will add in investment income it has earned from its investment portfolio, and that’s
added into underwriting gains to give the company’s overall net income or loss.
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When you’re looking at the financial performance of your client, there are three key ratios you
want to look at to see how well their business is performing. The first is loss ratio. Loss ratio is
simply the amount of claims the company has paid in a given reported period divided by the
premiums earned in that reporting period. For example, if a company has earned $100 million in
premiums, but has paid out $75 million in claims during that same period, its loss ratio would be
75 percent. The goal of the company is to try and keep this number as low as possible.
The second key ratio that general insurance companies look at is the expense ratio, and this is the
company’s overall operating costs divided by premiums earned. So, if in that same reporting
period the company again earned $100 million in premiums earned but spent $15 million in
operating costs, the company’s expense ratio would be 15 percent.
General insurance companies then take these two ratios and add them together. They will take
their loss ratio, add it to their expense ratio and that gives them their combined ratio. In our
example before, we would take the loss ratio of 75 percent, add it to the expense ratio of 15
percent, and we would have a company with a combined ratio of 90 percent. The combined ratio
represents the profitability (or lack of profitability) associated with a general insurance
company’s ongoing underwriting business. In other words, if the combined ratio is under 100
percent, it means the company has an underwriting profitability for that reporting period. If the
combined ratio is above 100 percent, then the company has an underwriting loss for that
reporting period.
Typically you will see combined ratios somewhere between 95 percent and 105 percent in any
given reporting period. Remember though this doesn’t represent the company’s investment
performance. So in many cases companies will have combined ratios that may be at 102 percent
or 103 percent, which represents a loss in their core underwriting business. However, they more
than make up for that in investment income.
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[David Tompkins:] Now let’s take a quick look at the IT landscape associated with the general
insurance company.
We’ll begin by looking at the insurance company’s core systems, which are in the middle of the
IT landscape and which everything else revolves around. Core systems typically include the
systems associated with policy and product record keeping, general ledger, accounting and
customer information files.
Keep in mind that your customer may have multiple core systems, not just one core system that
everything revolves around. General insurance companies will often have different core systems
for different product lines. They may have different core systems for different groups within the
company associated with previous acquisitions. When they acquire another company, they
acquire their core systems, and will operate those core systems independently, at least for a
certain period of time. In many cases, insurance companies will also have different core systems
for different geographic regions.
Around these core systems are a series of other systems. First here we have a series of
departmental applications or systems. There’s the underwriting group, which includes quoting
systems, policy issuance systems and case management systems that help underwriters manage
different applications at they come into the company. There is a series of systems supporting
policyholder services, which includes billing and collection systems, as well as policy servicing
systems that allow this group to interact and support customers.
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Then there are various claims processing systems. This will include a lot of supply chain
management systems, because so much of this is outsourced today. It will also include various
fraud management systems as part of claims processing as well.
Then to the left we see various distribution and servicing channels. These are the channels that
touch end-customers. We have agency management systems. These are systems that sit on an
agent or a broker’s desktop or a laptop. There will be agency portals. We’ll talk more about
these later in the course, but these are essentially websites insurance companies create for their
distributors.
There will be various connections to other third-party distributors – banks, brokers, affinity
groups, whatever the case may be. Then there are the bank’s Internet systems that are out there
to support sales or servicing to end customers as well as the various call center or contact center
systems.
On the top of this page, you can see the various external networks and partners that an insurance
company works with. The ones we show here are primarily the ones that the underwriting group
will work with. There are outside appraisers, which are companies that will go out and evaluate
a property before the company agrees to underwrite it. There are fraud databanks in many
countries. These are databanks that various insurance companies contribute to when they believe
there is fraud associated with certain transactions. So these same companies will check these
fraud databanks whenever they have a new customer to make sure that the customer isn’t in that
existing fraud databank.
On the bottom are other external networks and partners. These are the ones that are primarily
involved in the claims processing business process. This will include partners such as outside
adjusters that a company will hire to go out and investigate claims. This will also include
automobile rental companies that the company may have partnerships with, automobile repair
shops, home contractors and other outside partners.
In the middle and to the right of this page are the various internal systems that a general
insurance company needs to run their business. We have reinsurance systems, we have various
marketing systems, auditing, legal and compliance systems. There are a large number of finance
systems, actuarial models, human resources and personnel systems, investment management and
then various IT systems and applications that you would see in almost any business today.
It’s important to also understand who owns these systems, and this can really vary a lot from one
company to another. There’s an effort by many companies today to try and centralize and
standardize IT primarily in an effort to improve efficiency and reduce overall costs. But in many
cases, the ownership of these various IT systems is still great dispersed throughout the company.
Part of what you need to do in understanding your company’s overall IT landscape is to get in
there and try to understand who owns these various IT systems today.
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[David Tompkins:] Now let’s turn our attention to the current challenges facing the general
insurance industry today, including:
The impacts of the global financial and economic crisis on insurers
The long-term factors impacting general insurance profitability
The focus on efficiency and cost management
Opportunities for revenue growth
Commercial insurance issues
Specific challenges facing reinsurers
Changes in risk management, and
Regulatory compliance
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[David Tompkins:] Although the global financial crisis and its economic aftermath have not
impacted the insurance industry as severely as it has other segments of financial services, its
impact on insurance companies has still been significant.
The biggest impact for most insurers has been the decline in the value of their investment
portfolios. Most insurers avoided losses early in the financial crisis, because their exposure to
sub-prime mortgage-related debt was relatively small. However, as the crisis has spread to the
broader economy, losses in other investments, such as fixed income and commercial real estate,
have begun to grow, and insurance companies do hold significant positions in these types of
investments.
Beyond falling investment values, general insurers active in certain commercial lines have
experienced or expect large losses as a result of the financial crisis. This includes companies
such as MBIA, Ambac and Financial Security Assurance, which was part of Dexia, a large
European bank. Originally, these insurance companies, also referred to as monolines, used their
high credit ratings to guarantee payments on municipal bond and other low-risk securities in the
event of default by the issuer. However, these insurers expanded into more complex asset-
backed securities, eventually guaranteeing more than $1 trillion in debt securities. As the ratings
of securities backed by these insurers fell during the financial crisis, these insurers lost billions of
dollars. Dexia required a €6.5 billion rescue package from the Belgian, French and Luxembourg
governments to avoid collapsing and was required to sell its FSA subsidiary. MBIA and Ambac
are struggling to survive.
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In addition, a surge in shareholder and other lawsuits against financial institutions relating to the
crisis is expected, and this could lead to large losses for insurers active in directors and officers
insurance as well as errors and omissions insurance. Leaders in this area include Chubb, Ace,
Travelers, Hartford, as well as AIG.
AIG, of course, is the biggest story involving insurance companies and the financial crisis. Prior
to the crisis, AIG was one of the largest insurance companies in the world. However, AIG was
also a leading issuer in the credit default swap market. Credit default swaps are derivative
contracts in which the issuer promises to pay the buyer if the creditworthiness of a specific debt
issuer falls. AIG had issued a large number of credit default swaps covering Lehman Brothers,
and when Lehman Brothers failed, AIG was unable to cover their position on these swaps. After
the initial bailout of AIG by the US government, AIG’s position continued to deteriorate in other
businesses as customers and counterparties stopped doing business with AIG. AIG ultimately
lost over $60 billion in the 4th quarter of 2008, the largest quarterly loss ever by a company. As
of this recording, the US government has taken large positions in various AIG businesses, and is
expected to break up or significantly downsize AIG.
As a result of this turmoil, rating agencies are focusing more on the financial stability of
individual insurers, which translates to a greater focus on underwriting profit rather than net
profit.
[David Tompkins:] Yet even before the global financial crisis began, the general insurance
industry faced significant pressure on long-term profitability.
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To begin with, revenues and costs fluctuate year-to-year for general insurance companies. Net
investment income is a significant source of revenue, and when markets are down, as they have
been, so is this source of revenue.
Of course, a general insurance company’s costs also vary dramatically from one year to the next,
primarily because of claims associated with natural catastrophes. According to Swiss Re and
Munch Re, insured losses associated with natural catastrophes were around $45 billion in 2008,
one of the largest years ever.
Intense competition in general insurance also puts pressure on underwriting discipline. In

general insurance there are hard markets and soft markets. A hard market is when premium rates
are rising, and general insurance companies are usually more profitable in hard markets. A soft
market is one in which when rates are falling, usually leading to lower profitability. The general
insurance industry is always in a constant cycle between hard and soft markets. As markets
harden, new providers move into a market, which creates additional capacity and puts downward
pressure on pricing, creating a soft market. At some point, unfavorable pricing or a large
catastrophe makes a specific line unprofitable, and many providers exit, reducing capacity. As
capacity is reduced, the market hardens and prices go back up. This continues until new
providers are again attracted by the higher pricing, and the cycle continues.
After the investment and underwriting losses of 2008, most analysts expect the markets to harden
in 2009 and into 2010, especially in commercial insurance, although this could be delayed by a
reduced demand for insurance caused by the global recession.
A harder market will help sales growth. In many mature markets, the overall growth of the
industry has been very slow. In 2007, general insurance premiums grew less than 2% in major
markets such as the US, the UK, Germany and Italy. In Japan, total general insurance premiums
actually fell nearly 2% in 2007.
In addition, some general insurance products, such as automobile insurance, are becoming
commodity products. These policies are relatively simple for consumers to understand, and they
are shaped primarily by regulations, so there’s little difference between the policies of different
carriers. This commoditization leads to pressure on pricing, which puts pressure on a carrier’s
profitability.
Lastly, insurance is a highly regulated industry, which requires insurers to make significant
investments to ensure regulatory compliance.
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[Michael Lichman:] So how are insurance companies responding? Because revenue growth is
difficult, insurers focus on efficiency and cost management. Number one, they look to leverage
economies of scale. The big get bigger and they do that for a reason. They believe that
ultimately it will allow them to spread their fixed costs over more customers and make them
more competitive.
They focus on improving internal management, their capital management, how they can best
manage their money, centralizing business processes and support functions, again, looking for
efficiencies across all lines of their business and then pressuring IT to consistently come up with
new ways of saving the company money.
There’s a focus on operational excellence, which is improving long-term efficiency. Process

reengineering – insurance companies, as we get into this, you will see, have many people who
have touched many things. Are there better ways of doing it? Is there automation available that
can make that work better?
Outsourcing is another big part of the insurance company landscape. More and more companies
find that they are adept at marketing and selling insurance policies. However, somebody can
manage their back office operations and do it at lower costs and more efficiently. They look to
leverage industry standards, such as ACORD and ISO standards. Anything that can help them
transmit information both internally and externally more efficiently and with less mistakes.
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[Michael Lichman:] In terms of operational excellence, let’s first look at sales and underwriting.
Everything starts with new product development. The products people determine what the
market wants. They come up with the product, they send it to the actuaries and the actuaries put
a price on that product.
Step number two: the new product developers send that price information to the underwriters.
Step number three: they are sending product information out to the field to be used in marketing
and sales.
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Step number four is the application process between the applicant, the field office and the
underwriters. This is a process where you can see information flowing to underwriting. In
addition to collecting information via the application, additional information will come into the
underwriters from motor vehicle bureaus, credit bureaus, appraisers, etc.
The underwriters then evaluate that information, come up with the appropriate pricing and send a
quote out to the field. Simultaneously, they send all of that underwriting file to some sort of
document storage, which unfortunately can be as simple as paper files or can actually be
electronic. Once that quote is accepted and it’s transmitted back to the underwriters, a policy is
issued – that’s step nine – back out to the field.
Signed policies are then gathered and sent back to policy administration in the home office of the
insurance company.
[Michael Lichman:] In addition to underwriting new accounts, underwriters face, usually on an

annual basis, a renewal underwriting process.
As you can see, it’s a more simplified process, but it’s still one that’s very important to them and
requires a little bit of work. It starts with policy administration sending appropriate status
information to underwriting. Underwriting then reviews claims. They will also tap into outside
resources, like credit bureaus and motor vehicle agencies.
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They then do renewal decisions and repricing. That is submitted to the field or communicated to
the field. The field then communicates that to the policyholder. The policyholder then consents
to the renewal and then updated policy information is sent back to that policyholder.
[Michael Lichman:] In the underwriting department, goals of process improvements include

enhancing automation. There’s a tremendous amount of manual processes in the underwriting
department. There are estimates that anywhere from 20 to 80 percent of applications can be
handled without a human intervention. So underwriters are looking to create decision speed and
policy issuance and also support higher volumes by creating technology efficiencies.
Separately they also look to improve their underwriting results. Those touches that people make
can lead to inconsistencies in decision making, can lead to mistakes in key punching and can also
create disconnects in terms of risk segmentation and underwriting expertise. So the underwriters
are not just looking to improve their speed, but they also want to improve their profitability.
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[Michael Lichman:] Insurance companies have a strong reason to focus on operational excellence
in claims processing. As we saw with underwriting, this is, again, very high touch aspect of the
insurance business that we’ve actually broken into three pages.
The first page looks at what occurs when there’s an initial claim. Typically the insured will
contact the insurance company or contact the agent. That starts a claim file. Policy information
is taken to be sure that the claim is actually covered. Underwriters are contacted to make them
aware that there’s now a potential pricing impact. The claim is initiated. Claim information is
sent to the finance people who then put away a reserve. A v ery critical part of the insurance
business is reserving accurately against claims.
Lastly the claim is dispatched and there’s a lot of work that goes on between the insurance
company and adjusters investigators, repair shops, etc. That flow of information currently can be
paper files, photographs, digital photographs, faxes etc.. More and more claims are being dealt
with over the Internet. But there’s not a tremendous amount of consistency, and, consequently,
there’s a terrific opportunity there.
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[Michael Lichman:] In this second phase of claims processing, we see some additional
correspondence and relaying of information back and forth, starting with claim information
going to vendors, such as parts suppliers, contractors, etc. At the same time, that claim
information goes to a fraud unit. This is a critical component of the analysis that insurance
companies do. Fraud is estimated to cost them literally billions, if not, tens of billions of dollars
every year.
From there, once the claim has fully authenticated, it moves for final adjudication. The claim
payment is finalized and agreed to between underwriting and claims payment. Simultaneously,
the claims people will send information to finance people, so they can update their reserving or
ultimately issue a check or some sort of payment going to the insured or to parties receiving
insurance payments.
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[Michael Lichman:] In this last page regarding claims processing, we look at what occurs post
claim payment.
As you can see, we show the claim payment going to the insured. Simultaneously reserves will
be updated. Typically that’s an annual process. Many claims have long tails and the reserves are
not really finite until some time well into the future.
Additionally, there can be correspondence or interaction with other vendors. Salvage companies,
for instance, if the insurance company is trying to get rid of property or goods that have been
damaged. There are attorneys for subrogation. Claims information has to go to the reinsurers.
All insurers work with reinsurers. They’re going to look for those reinsurers to kick in with
payments so they’re constantly in touch with those groups as well.
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[Michael Lichman:] For claims processing, there are a series of goals for process improvement.
Number one the good news is that progress has been made. As far as business goals, insurance
companies are obviously looking to lower costs. It's a simple statement of fact, if you can
automate a manual process, you will most likely lower the cost.
By automating those processes and moving payments out to consumers faster, you improve
customer service. Most buyers of insurance don’t complain about buying the insurance. They
complain after they have a claim that hasn’t been paid fully or they have some sort of customer
experience that is negative due to a claim. And the insurance companies want to change that and
address turnover.
They also look to reduce what is known as leakage in claims. And basically that means that the
sooner they pay a claim, the less likely the cost will escalate. The longer claims sit outstanding,
the more likely it is an attorney will get involved, the more likely it is that there will be litigation.
So faster processing of claims doesn’t just mean that the cost of processing is less expensive. It
also means the actual costs of the claims can be less expensive.
In terms of the IT challenges, legacy claims processing systems are old. This is often an affect of
merger and acquisition activity or just simply that the insurance company has had the resources
focused elsewhere. But those old systems have to be updated, and they have to be able to talk to
each other and other systems in order to work effectively.
Manual and redundant processes: we’ve seen already that the more manual process we can get
rid of, the better we’re going to run the company. Connectivity to partners: a real challenge.
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The good news is insurance companies are is adopting standards that make communication more
efficient between channel partners. And nobody wants to throw out old legacy systems. So rip
and replace is daunting.
From your perspective, there are some very important opportunities in terms of claims
processing. Document imaging, data management, fraud management, supply chain
management. All of these are opportunities for IT and information services to make a significant
difference in the profitability of insurance companies.
[Michael Lichman:] As far as operational excellence, there are important decision makers within
any insurance company. And what we got here is a generic set-up but this should be very useful
to you.
First off, insurance companies have been very focused on moving their commoditized business
to as much automation as possible. Personal lines insurance (auto insurance, homeowners
insurance) are relatively low touch, very unsophisticated products and really lend themselves to
automation. Insurance companies have spent a great deal of time in these areas, yet still have a
long way to go in terms of automating these commoditized services.
Claims operations, as we just reviewed, has a tremendous amount of data flow and information
flow across the company as well as outside the company with a variety of vendors and channel
partners. Clearly this flow has to be addressed through IT. Insurance companies cannot run
efficiently with 20 or 30 or 40 touches per claim. And so the claims operations are under
significant pressure to reduce their costs and achieve operational efficiencies.
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Looking across the support functions – on the CFO and financial side: automation of collection
of money, automation of payment of money, automation of investment of money makes an awful
lot of sense, particularly when you’re looking at the billions and billions and billions of dollars
that flows through the insurance business..
And then lastly, the CIO and IT departments: clearly, these are people that you need to be
touching base with, you need to be in front of them, you need to be bringing them the solutions
that they can apply to the overall company.
[David Tompkins:] In the previous section we talked about the importance of operational
excellence, efficiency and cost management within the general insurance industry today. And,
while the industry will continue to focus on improving efficiency and managing costs, many
insurance executives understand the old adage “you can’t cost cut your way to greatness.”
Investors reward companies that grow over time, so while insurance companies have been
successful in reducing costs in recent years, they know their long-term survival depends on being
able to grow. When we talk about growing the insurance company, there’s really two primary
ways that any company can grow.
The first is through acquisitions or partnerships. There have been a handful of significant
acquisitions over the past year or so including Liberty Mutual’s acquisition of Safeco in April of
2008 and Tokio Marine’s acquisition of Philadelphia Consolidated in July of 2008. In June of
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2008, Willis, one the largest insurance brokers in the world, bought HRH, another global
insurance broker.
One big area of focus for general insurers is emerging markets. Most large global general
insurance companies are looking to expand their activity into emerging markets, especially India,
China and the rest of Asia, as well as some other areas like Eastern Europe and Latin America.
In most emerging markets today, there are a handful of national champions that provide general
insurance, and this is primarily a result of local regulators encouraging and protecting national
champions from foreign providers. But many of the larger general insurance companies have
begun to find their ways into these emerging markets, primarily through joint ventures and other
partnerships with local providers.
The second way that an insurance company can grow its revenue is through organic growth. In
other words, continuing to do what they do with their current business activity but finding ways
to attract more new customers and keep more of the customers that they have.
This concept of keeping more of the customers they have is an important one. When insurance
companies talk about organic growth, it’s about not only attracting new customers, but it’s also
about retaining the existing customers they already have. Now why is retaining customers so
important if we’re really talking about growth? Well you have to remember that the general
insurance industry often involves product sales that create recurring revenue for the insurance
company. For example, customers buying new automobile insurance today are likely to renew in
paid premiums year after year after year. If an insurance company is trying to grow its revenue,
but it can’t retain and keep the existing customers it has, it makes it that much more difficult to
grow. They not only have to grow new revenue, but they need to make up for the revenue that
they lost from those existing customers that left.
In addition, it’s usually much more cost effective to service existing customers and provide good
levels of customer service than it is to go out and actually acquire new customers. It usually
takes years for an insurance company to make enough money on a new customer to cover its
original acquisitions cost.
Another reason retention is important is because a large part of organic growth is around cross-
selling and up-selling to existing customers. If the company doesn’t keep those existing
customers, there’s no one to cross-sell or up-sell to. So as cross-selling becomes a bigger part of
a company’s revenue growth strategy, customer retention and customer service become a bigger
part of the strategy as well.
To improve organic growth, general insurers are focusing more on customer insight and
supporting distribution and service channels. Let’s take a closer look at each of these…
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[David Tompkins:] Let’s start by looking by customer insight and management. Your clients
may have different names for this. You might hear your client talk about CRM, customer
centricity, customer data management, etc. There are a lot of different names for this area. But
no matter what they call it, the goal here is always the same. The goal is to use information
about customers to make better business decisions.
Tactically this can involve different areas of the business. One is around service delivery.
Insurance companies are trying to understand who their best customers are and making sure
those customers get the highest levels of customer service. They're also understanding what
levels of customer service other customers expect or will accept. Again, this is a very big part of
what insurance companies are trying to do today. As they’re trying to retain the customers they
have, they have to provide them with appropriate levels of customer service. In addition, as we
start looking at certain segments of the market that are really considered commodity markets,
like the personal automobile insurance segment, branding becomes very important. And a large
part of branding is providing appropriate levels of customer service. So, as many leading general
insurance companies move to improve their branding, they’re also looking to improve customer
service.
Improved customer insight can also support an insurance company’s efforts to segment risk
better. In many of the mature markets, there’s a widening performance gap between technology
innovators who use tools to segment risks better and those that don’t. Some of these leading
innovators are getting much better at understanding their customers and at matching the
appropriate levels of risk in certain customer segments with appropriate pricing. And that allows
the company to do a couple of things.
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One, it can provide better pricing to better customers and therefore attract more of that market
segment. Secondly, they can also go after higher-risk segments, because they now have more
confidence their pricing that risk appropriately. So better segmenting risks can give a general
insurance company a tremendous advantage in certain segments of the market.
Cross-selling is also a big part of customer insight and management. As a company learns more
about customers, it can better predict their changing product need over time and design or focus
sales and marketing campaigns appropriately.
What does this all mean from an IT perspective? Well, to be effective here really requires a
couple of things. One is it requires a single source of truth. In other words, it means having
consistent data across customers, across product lines, across business units, etc. This allows the
company to do meaningful analyses across the enterprise using the same information, the same
tools, the same terminology, etc.
Once this is in place, the company needs a consistent way of moving this information throughout
the organization. In other words, it needs the right supporting IT infrastructure. As you can see,
this leads to very specific sales opportunities for IT companies selling into the industry.
General insurance companies are looking for tools that’ll help them better centralize, clean and
store data. They're looking for business intelligence and other CRM applications. Once they get
those in place, they’re looking for an IT infrastructure that allows them to move this information
out to front line sales and service personnel so they have it when they’re interacting with
customers.
The IT infrastructure also needs to get customer information or product information to the right
levels of management within the company, so they can make appropriate analyses and adjust
business decisions on a timely basis.
When you're talking to your client or prospect, understand that this is not just about IT. It’s also
about changing the internal culture within the company as well. Insurance companies that
recognize this are starting to do more work around reengineering sales and service processes, so
they can leverage this information about customers and be more effective in cross selling or
providing better levels of service when talking to customers.
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[David Tompkins:] Another area insurance companies are focusing on as a way to drive organic
growth is making sure they appropriately support various distribution and service channels.
Most general insurance companies today are pursuing a multi-channel approach. Many leading
companies still have captive agents on staff, although they're declining in importance in many
markets. Insurance companies are expanding their relationships with insurance brokers and
other third parties, as well as expanding direct sales efforts.
One of the biggest reasons that general insurance companies pursue this multi-channel approach
is that in many markets they find different products are sold more effectively through different
distribution channels. For example, in mature markets, commoditized products (like auto
insurance) can often be sold most effectively through direct sales. Customers are comfortable
with the product, they don’t need a lot of handholding and they don’t need the products
explained to them. Therefore they're just looking for providers with the lowest price. By
providing these products directly – whether it's through the Internet, telemarketing, direct mail or
a combination of these – it allows the provider to keep costs very low and therefore compete on
price and still be profitable.
In other markets, especially in commercial insurance, brokers remain a critical component. The
needs in this market for multi-national coverage, technical expertise and customized coverages
all lead to a more complex market for buyers, and brokers play a key role in identifying
appropriate providers for clients.
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Today, insurance companies are trying to support all of these channels effectively. This includes
making investments in agency portals, which are websites designed to support a company’s
distributors. They are not designed for the end customer, but designed for the sales people that
serve those customers. Typically these sites include things like product information,
underwriting guidelines, a form repository, allowing the distributor to go in and make some
administrative changes for their clients, maybe get quotes for new business. The focus for most
insurance companies here is to make it as easy as possible for distributors to work with them.
Most distributors choose the insurance companies they want to work with based on how easy it is
to work with them and the level of service they get from those insurance companies. So,
insurance companies believe by making it easier to work with them, it makes them more
attractive to distributors, and their sales volumes will go up.
As time goes on and agency portals become the norm, we see insurance companies continue to
invest and expand the functionality on their sites. They’re giving distributors more things like
CRM tools built on customer data the insurance company has, doing analyses, and then pushing
this out to the distributors through this agency portal. So, this is a really big focus, and obviously
a good opportunity for IT solution providers to focus on things like Internet systems, business
intelligence, integration solutions, etc., because these play right into that.
Insurance companies are also continuing to work with third-party vendors who create and
maintain agency management systems. These systems are used by brokers to manage their
business, and these distributors look for carriers who are already pre-integrated with these
software packages.
The internet is also playing a larger role in insurance sales and customer service. Some insurance
companies are continuing to try and grow direct sales over the Internet. For the most part, this
has turned out to be very effective for commodity products. Again, auto insurance is a great
example of this. At the same time, even though more complex products encourage customers to
talk to a sales representative face to face, insurance companies find these customers still do a lot
of initial research online. So they’re trying to build up their websites and provide more
information online to get customers comfortable enough to then contact their sales people, so the
sales person can finish the explanation and close the sale.
Most insurance companies are also trying to expand the self service functionality they provide on
the internet, not so much because they are trying to reduce the cost of servicing customers, but
more because they are trying to retain those customers. They’re finding that there’s a segment of
their customer base (and in many cases some of their better customers) who prefer to do their
own self service rather than go through an agent, broker or the call center. So in an effort to
retain these customers, insurance companies are trying to make their self service sites better.
The IT requirements here are fairly straight forward. This requires insurance companies to
improve their Internet architecture, and improve or expand functionality on their sites. A lot of
this is about web enabling existing applications.
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[David Tompkins:] Who are some of the key decision makers you should talk to around this area
of distribution and service channels? Well, as you saw in the previous sections, the Finance
group and the IT group are important as they are in most areas.
But you're also looking for the executives in charge of distribution and service. You’re looking
for executives in charge of Agency Operations, and you’re looking for executives in charge of
Business Development who are responsible for working with outside brokers and third parties.
You’re also looking for executives in charge of the Direct Sales operations.
These executives will all act as distribution executives. Therefore, they’re looking for solutions
that support their efforts to sell more and provide appropriate levels of service through their
channels.
Lastly, Policyholder Services is also an important group here. This is the group primarily
responsible for customer service and will typically own call center operations. They may also
own Internet self-service, and, in many cases, this group also supports agents and brokers who
are working with their customers for policy administration and other service issues. So this is a
very important group to talk to as well.
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[David Tompkins:] Now let’s turn our attention to commercial insurance. We’ll begin by
looking at the distribution and underwriting process associated with large commercial insurance
transactions.
These large commercial insurance transactions are different than the underwriting flow
associated with personal insurance. One of the biggest differences is really the beginning of the
process. In personal insurance, an insurance company creates a new product, prices that product
and then offers it out to its customers. In commercial insurance, it really begins with the
customer. A customer identifies an insurance or a risk management need they have, and they go
out and solicit proposals from different providers to identify what is the right way for them to
address this insurance or risk management need. As a result, the large commercial insurance
industry is much more customized than personal or small commercial insurance is. It’s often
referred to as placement, because it’s identifying a risk and then “placing” that risk with the
appropriate insurer or other risk management provider.
Let’s take a closer look at this distribution and underwriting process. As I just said, the process
begins when a client identifies a risk management need they have. Most large corporations will
have an internal risk management group that’s responsible for identifying their risks and then
going out to the marketplace and seeking appropriate coverage for those risks.
The client will then typically contact an insurance broker to help them find the appropriate
coverage for them. This typically will be a phone call, or if it’s a more familiar ongoing
relationship, it might be initiated with an e-mail to the broker. The broker will then typically
respond by going back to the client and looking for more information. The client will then go
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and internally gather this information, put it together and forward it back to the broker. This
could be in the form of paper, it could be faxes, could be Word documents, could be Excel or
PDF files, etc. There are various different forms coming from the client back out to the broker.
The broker will then take all those files, print and store them on their end and then put together a
quote request. At that point they will then forward the quote request to an insurance company.
Again, that can be in the form of a fax, it could be e-mail, it could be other paper-based or
electronic-based documents.
The insurance company then receives that quote request, makes an initial evaluation and then
will return and go back to the broker seeking additional information. Again, phone call, e-mail
back to the broker. The broker then gets that information from the insurance company, turns
around and goes back to the end client. And, again, they’ll send them an e-mail or initiate a
phone call asking for more information.
The client will go back internally and, again, gather more information, provide it in various
formats back to the broker. This will then again be paper-based, electronic documents, PDF
documents, whatever the case may be.
The broker receives that second round of files, will print them out, store them, put together a
package and send that information back to the insurer. The insurer will then make another
evaluation. At that point, the insurance company typically will determine a need for reinsurance
to help them cover some of their exposure. So, they will then put together a quote request and
send that out to a reinsurance company.
The reinsurance company will take that information, they’ll make an evaluation on their end.
They’ll put together a coverage and rate, send that back to the insurance company. The
insurance company will receive that, put that into their price and their packaging. They’ll put
together a final price and a coverage quote for the broker, forward that back to the broker and the
broker finally sends that back to the client.
Now as you can see here, there’s a lot of different steps involved, and there’s a lot of different
participants involved.
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[David Tompkins:] However, what we saw on the previous page is really a very simplistic
example of how this process works. It’s actually much more involved than this.
There will be multiple groups also involved within each step of the process. Not only does the
client have a risk management group that’s initiating and driving the entire transaction from the
client’s perspective, but they also need to gather information from other groups within the
company as well. There could be other locations. It could be gathering information from
various operation centers if the company happens to be looking for coverage to protect their
operation centers. There could be information from other groups – accounting groups, finance
groups, sales and marketing groups, customer service groups, etc.
In addition, the client may have other outside partners that are involved in the process as well. It
could be the client’s bank that’s insisting the client get coverage before they’ll give them
financing. It could be the client’s law firm, or it could be vendors that work with the client and
are part of the client’s supply chain. So we have internal client groups as well as outside partners
working with the client in this process as well.
On the broker’s side, there are typically multiple brokers or at least multiple locations of the
same broker. So the client may involve a large global broker, but they may be working with
their London office, their Hong Kong office, their New York etc. So there’s a lot of different
locations going on the broker’s side as well. In some cases, the broker may involve the services
of a correspondent broker. If the client has coverage in a market where the broker is not familiar
or not active, they’ll work with a local broker to help them put together that part of the deal.
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Then broker, in most cases, is not working with a single insurance company but rather is working
with multiple insurance companies. It will send a quote request out to multiple insurance
companies to try and find the best deal for its clients. So every step that went back and forth
between the insurance company and the broker actually involves many different steps, because
the broker is interacting with many different insurance companies all at the same time.
Lastly each insurance company may be sending their quote requests out to multiple reinsurance
companies. So, again, they have multiple parties they need to coordinate with as well.
[David Tompkins:] The result here is that we have a business process that involves a large
number of steps, a large number of participants with a high level of collaboration between those
different participants. We have a business process that is still very much paper-based, and even
when there is electronic documentation, a lot of it is heavily reliant on unstructured data (Word
documents, e-mail, etc.).
There’s really a lack of standards here for any kind of electronic communication. This has a lot
of business implications for your clients. Record-keeping here is out of control. Audit trails are
difficult or impossible to establish. Different team members maintain their own records, whether
it’s paper, e-mail folders, document folders, etc. Storage can include dozens of different e-mail
inboxes, dozens of different physical document folders, team rooms in different locations and
documentation is inconsistent. There could be duplicate policies or missing or incomplete files
from one location to another.
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Client trust has been eroding. Some clients are seriously concerned about their provider’s ability
to recover from a disaster. If there is a problem and my provider loses their records, how do I
know they’re going to give the coverage that I think they’re going to give me?
This inefficient business process also has direct financial implications for your clients as well.
Costs here are unnecessarily high. It’s estimated that about 20 percent of commercial insurance
transactions result in an error at one point or another. It’s also estimated that the industry could
reduce its costs associated with this process by as much as ten to fifteen percent simply by
removing paper from the process.
Lastly, renewal underwriting is a real burden here for clients. Remember, general insurance
policies typically renew every single year. So once a year the client has to go through this
process of gathering massive amounts of information to provide to the insurer. They need to get
information from multiple locations, such as gathering loss summaries and claims histories from
different locations, financial records, banking records etc. and put it all together and give it back
to the insurance company every single year. And that’s a very time-consuming error-prone
process from a client’s perspective. Therefore they’re looking to reduce that as much as
possible.
The result is that your clients here are really looking for ways to automate this process and
automate it both from a processing perspective as well as from a storage and auditing
perspective. They’re looking to begin to introduce standards here to improve efficiency and
make this easier for everybody involved in the process.
The second big trend here you may see as you’re talking to your clients about the commercial
insurance area is that many of them are now beginning to target smaller and mid-size businesses.
The competition here for the large commercial insurance business is very intense, and therefore
it’s difficult to be profitable in this business. So a lot of your clients are expanding coverage that
they provide to small and midsize businesses in order to be more competitive. By expanding
coverage, what they’re trying to do is take larger commercial insurance products and change
them and tailor them for smaller businesses. Yet at the same time, they want to provide those
products and services in a way that’s much less staff and paper intensive than the large
commercial insurance businesses.
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[David Tompkins:] Who should you talk to at your client about their commercial insurance
business? Well, you want to find that Corporate and Specialty Lines business unit. Within that
business unit you’re then looking for the business groups responsible for Business Development,
and that’s the group that’s out there trying to establish relationships with brokers in an effort to
bring more business into the insurance company. They’re looking to make that process as easy
and as efficient they can for their customer, which is the broker, much like agency portals are on
the personal insurance side.
You also want to look for the Claims Operation group within the Corporate and Specialty Lines
of business. This is the group that’s looking to improve auditing, improve efficiency and reduce
the amount of paper all involved with claims processing in an effort to reduce cost and provide
superior customer service to their corporate customers.
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[David Tompkins:] Risk management is obviously an important part of success in general
insurance.
One of the most difficult areas of risk management is managing catastrophe risk, because losses
are infrequent but severe when they do occur. Insured catastrophe losses were around $45
billion in 2008, according to Swiss Re and Munch Re, which makes 2008 the third costliest year
on record. The largest insured losses were caused by hurricanes Ike and Gustav in the US and
the Caribbean, as well as winter storms in Europe and China. The largest catastrophe in 2008
was the May earthquake in the Sichuan province of China, but few of those losses were insured.
The general insurance industry continues to try to improve risk modeling related to catastrophes,
although it is difficult to model. Many general insurance companies buy modeling software
from outside companies, and over the last couple of years, it’s believed these models have
improved greatly. As with any statistical modeling, the accuracy of risk modeling is driven in
large part by the accuracy of the data coming into the model. As a result, insurance companies
are looking closely at improving their data warehouses and ensuring they’ve got clean data going
into their models to maximize their accuracy.
Beyond catastrophe risk, general insurance companies also worry about other large risks that are
difficult to predict today. This includes ongoing environmental risks, such as mold and asbestos
exposures, as well as the next generation of risks, which includes potential risks related to
climate change, pandemics and new technology, such as nanotechnology.
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However, one of the biggest goals in risk management today is to not only improve the way
individual risks are managed, but to improve overall risk management through enterprise risk
management. Enterprise risk management (ERM) is the name commonly given to efforts to
integrate all of risk management across an insurance company. These efforts will allow insurers
to better understand their overall risk exposures. Rating agencies that rate the viability of
insurance companies are also beginning to take a closer look at insurance companies’ enterprise
risk management frameworks.
At the same time while insurance companies are trying to improve enterprise risk management,
there’s actually efforts in some areas of the industry to simplify risk management. This is
primarily and effort to improve efficiency within the company. For example, in the US personal
automobile insurance market, there are some providers that literally have thousands of different
risk classifications they're trying to put customers into. This makes it very difficult when they’re
trying to place each individual application that comes in.
There’s also an increased focus within the industry on operational risk management. Part of this
is driven by the concentration of more customers, more premiums and more assets in a smaller
number of players. Therefore the exposure to a problem with one provider has a bigger exposure
to the overall industry.
When insurance companies look at improving their operational risk management, some of the
key areas for them are around customer data. They need to ensure customer data is secure and
that access to customer data is protected.
There’s also a big focus, as you would expect from this industry, on business continuity and
disaster recovery. They focus on things like ensuring the company has redundant network
infrastructures in place. There’s a focus on wireless connectivity, so if there is a natural disaster
and phone lines are down, the insurance company can still respond as quickly as possible
through a wireless network. There’s also a focus on remote backup of desktop systems, load
balancing of key systems across wide geographic areas, creating offsite mirrored systems that are
frequently updated with live data, all of the things you would expect them to do as they increase
their focus on business continuity and disaster recovery.
From an IT perspective, a lot of this comes down to a focus on data management. Ensuring the
company has centralized integrated risk management data across the enterprise. It also involves
storing more detailed data and collecting alternative forms of data, whether it’s pulling data from
spreadsheets, e-mails and other forms of unstructured data. They also need to gather data more
quickly than they have in the past.
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[David Tompkins:] Most reinsurers have been hurt by the global financial and economic crisis,
but have weathered the storm fairly well. Like other insurance companies, reinsurers lost money
on their investment portfolios, but strong underwriting discipline generated underwriting profits,
even in a year with large catastrophe losses.
Most analysts expect the reinsurance market to harden. Obtaining capital today is difficult and
expensive, even for large reinsurers, so they have been lowering their risk appetites and raising
prices. At the same time, the demand for reinsurance is growing as direct writers seek more
reinsurance to mitigate their own risk positions.
The reinsurance business has always been about measuring, predicting and pricing risk
appropriately. As a result, this segment of the industry will continue to invest heavily in IT to
improve their risk management, including investments in high-end servers and grid computing
infrastructures, as well as super computers to help them better understand the impact of global
climate change and changing weather conditions. In addition to high-end hardware, reinsurers
also invest in analytical tools, knowledge management systems and other sophisticated software
programs to leverage this high-end hardware.
Much like direct writers, the accuracy of these models is driven largely by the quality of data
going into the models. Reinsurers today are focusing on improved data management, including
efforts around data capture, data accuracy, data completeness and data cleansing.
One of the biggest opportunities for improved risk management is capturing accurate, consistent
data from the primary insurance carriers. This has lead to the growth of on-line reinsurance
exchanges such as eReinsure and R13K to standardize information exchange.
Page 43
Lastly, like all participants, reinsurers are concerned about regulatory compliance.
[David Tompkins:] The last industry challenge we want to look at is the area of regulatory
compliance.
Probably the single biggest compliance issue for insurance companies today is Solvency II.
Solvency II involves the new capital and solvency guidelines created by EU regulators for the
insurance industry. Solvency II includes:
New capital requirements based on an insurer’s business mix
Revised asset and liability valuations
Supervisory reviews of internal risk management and controls
Increased disclosure of risk and capital levels
The deadlines for implementing Solvency II continue to be pushed back, and they are currently
scheduled to be implemented by 2012. Beyond the EU, other countries are evaluating
Solvency II-like guidelines, and some countries such as the UK and Switzerland have already
started implementing similar requirements.
Insurance companies are also facing changes in international accounting or financial reporting
standards. Until recently, accounting principles have varied from one country to another,
creating differences in how financial results are reported. In an effort to create a level playing
Page 44
field and promote financial transparency around the world, the International Accounting
Standards Board (IASB) has developed (and continues to refine) a set of international financial
reporting standards (IFRS). Today, approximately 100 countries require or allow publicly-listed
companies to use IFRS, although many countries have made some modifications to the
“standards”. For example:
The EU has adopted all of the international financial reporting standards, with a couple of
exceptions
Australia and New Zealand have adopted national standards that they describe as IFRS-
equivalents
Canada and India have announced plans to fully adopt international standards by 2011
The US is currently planning to adopt international standards by 2014, although some
companies may be allowed to adopt IFRS sooner
The IASB has established a working group to specifically focus on accounting issues related to
insurance contracts. In May 2007, this working group published a discussion paper proposing
insurers should measure insurance contracts at their current exit value. Despite an initial target
for a revised standard by year-end 2008, the IASB Insurance Working Group continues to review
responses from this initial discussion paper, and the IASB is currently planning to publish an
Exposure Draft in late 2009 and a final standard in 2011.
The insurance industry is also preparing for a larger change in its regulatory environment, largely
as a result of the global financial crisis. There are efforts in many countries to create financial
services “super-regulators” that would have responsibility for regulating all of financial services,
including insurance, banking and securities. There are also discussions to improve global
regulation of insurance by standardizing regulations or at least improving coordination between
national regulators. While true global regulation is highly unlikely, increasing standardization of
regulation is likely, especially across the EU countries.
In the US, efforts to create an optional federal charter for insurance companies are growing.
However, many companies fear increased federal regulation of insurance companies won’t
replace state regulations, but will simply add new federal regulation on top of existing (and
unchanged) state regulations.
Page 45
[David Tompkins:] Who do you want to talk to in your clients about these issues? Well, it
depends on which issue you're talking about.
If your client is active in reinsurance, you want to look for that group to talk about the
reinsurance issues. In some cases, there will be a separate business unit focused on reinsurance
that reports right up to the CEO. In many cases, customers will have smaller reinsurance
operations, and they’re typically part of the Corporate and Specialty lines of business.
If you’re looking at risk management, look to see if your company has created a centralized risk
management group. In most cases, that will be a relatively new group within the company and
that’s obviously that a great group to get into and understand what their focus is around
enterprise risk management.
If you’re looking at regulatory compliance, you want to look for a compliance group, an auditing
group, and, in some cases, a legal group.
Regardless of which of these areas you're focused on, again, the IT group is going to be a big
part of the decision making process as well.
Page 46
[David Tompkins:] Before we finish the course, we’d like to talk about one more thing, and that
is “Where do you go next?” What do you do now that you’ve gone through this course and
learned more about the general insurance industry, the challenges they face and the IT
opportunities these challenges create for you?
The first step is to make sure you understand your client. Go through the beginning of this
course and look at some of the things that we’ve talked about before. What’s your client’s
strategic positioning? What’s their distribution strategy and model? What are their product
lines? What's their geographic footprint? What’s their financial performance been over the last
few years? Answering these questions will help you understand what their high level challenges
are going to be and where they might be feeling the most pain today.
After you do that, you want to start identifying how your client is addressing the industry
challenges that we talked about in this course. What are they doing to improve efficiency? What
are they doing to improve business processes like underwriting and claims processing? What are
they doing to grow revenue? Are they investing in tools to improve customer service, to better
understand their customers? What are they doing to invest and support their distribution and
service channels? Are they active in commercial insurance? What are they doing to improve
this business? How are they improving the risk management? Are they investing in new
models? Are they moving to enterprise risk management? And lastly, what are they doing in the
area of regulatory compliance? Much of this information you can get about your client from
publicly-held sources. Go to their website and get a copy of their annual report and other
shareholder presentations.
Page 47
Once you do that, you want to start thinking through how your solutions support your clients’
efforts to address these industry challenges.
Then begin to target important decision makers within your client. Start with existing client
contacts and begin to ask them bright questions. This is where you can really use some of the
information in this course to make a difference. Instead of going in and saying, “What are you
doing today?”, go in and say, “What are you doing to improve your claims process? What are
you doing to improve your agency portal? What’s your plan for implanting Solvency II
guidelines?” By asking these questions that use more of this industry terminology, you can
really begin to demonstrate your creditability, your understanding of the industry and get your
client talking more about what it is that they’re trying to do. When your existing contacts have
trouble answering these kinds of questions, you can use that as a way to leverage into other
contacts and other executives within the organization.
Lastly, make sure you stay current in industry issues as well as changes at your client. There’s a
number of really good industry resources available on the Internet today, and rather than list
them all here, what we’ve done is list them on our website. If you go to the link on this slide,
this will take you directly to a page that lists different industry resources, and you can use those
to keep up to date on the industry.
[David Tompkins:] This now concludes the Business of General Insurance. If you have any
questions as you listen to this presentation or as you begin applying some of this information to
your own clients and prospects, feel free to e-mail us with any questions you may have. You can
e-mail us at questions@goto-psi.com and one of our industry subject matter experts will respond.
Page 48

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© 2009 Performance Solutions International, LLC 1.866.468.6774 http://www.goto-psi.com

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