Life insurance industry challenges and the impact on projects and on IT applications

Thierry Flamand, Associ et Arndt von Reichenbach Manager Business Review, octobre 2008
The evolution of the life insurance market in Luxembourg The life insurance market has undergone significant changes during recent decades. These changes affect all major dimensions of the industry as illustrated in the table below:

Dimension Market Clients

The past The present Single market Multiple markets Retail / Mass Affluent Private clients / HNWI Products Standard products Tailor-made products Distribution Single channel Multi channel Business FoS (Freedom to FoS / branch / model provide services) subsidiary

Over time, we have observed an increase in complexity that has brought forward a significant change in the market. However, as of today, the business characteristics of the past still apply due to the existing portfolio and coexist with the present situation. This coexistence has emerged from a traditional growth of the insurance undertaking with its inherent gradual diversification and from mergers & acquisitions. Consequently, several business models subsist using different types of insurance products: classical life insurance products with guaranteed interest rates and unitlinked life insurance products. This evolution has strongly augmented the complexity of the processes and the IT environment. Today, there are multiple investment processes and multiple accounting principles (Lux GAAP, IFRS, other GAAP depending on subsidiaries and branches). This has triggered a need for multiple accounting / financial platforms and also for multiple systems regarding contract management. Current challenges From this context, life insurance undertakings are confronted with a number of challenges: Challenge #1: Business growth and cost efficiency

Falling profits and deteriorating market capitalisation have spawned a situation, where business growth and cost efficiency have become vital for the life insurance industry. Business growth can be achieved by enhancing innovative products / services and entering new or niche markets as well as new distribution channels. Cost efficiency can be achieved by process optimisation and by a better use of IT as outlined below. Challenge #2: Transparency and disclosure A continuously evolving regulatory environment and severe competition trigger the need for transparency on products for clients as well as for intermediaries. At the same time, disclosure requirements get more and more demanding. This ranges over several reporting levels: MIS for local and group dimension, regulatory, clients and intermediaries. Particularly group reporting becomes more and more complex regardless of the size of the insurance undertaking. Challenge #3: IT alignment IT needs to align to the business issues triggered by the first two challenges and to the business strategy. IT strategies must therefore be set up in a way that IT is not only operationally efficient but also cost-effective. For this reason, CIOs are experiencing a shift in their objectives from merely supporting the business by IT to increasing the value added of IT and creating a competitive advantage. In particular, growing complexity can significantly enlarge functional scope of an application and therefore strengthens the need for flexible systems. Yet many existing systems were not designed to withstand such an evolution. Rather often, data models and program modules are insufficient to match the new prerequisites. The impact on IT and on the projects As the scope enlargement of the core business application may be too significant, it may even become too costly to use the current application to support the new challenges so that a new application must be purchased or developed. In this context, several aspects have to be considered: Organisational aspects: the unavailability of internal resources for the project, missing internal project management experience, the software supplier may not have sufficient process know-how of the life insurance business. Implementation aspects: first deliverables are often below expectations, sometimes discouraging the team, products of the particular life insurance undertaking are less easy to implement than expected, too many nice-to-have features in requirements make the system needlessly complex and can delay the go-live, Data migration aspects: legacy data models may be difficult to reengineer, data quality in legacy systems may be insufficient augmenting time and effort to cleanse and enhance the data in the databases. Supplier aspects:

over-optimistic suppliers, lack of experienced resources.

These aspects have to be appropriately addressed, what may require external experts to: apply knowledge from preceding projects regarding the renewal of applications, apply a proven software selection methodology, apply well-known classical project management methods (PMBOK, Prince2, ) or agile project management methods such as Scrum, have an external and objective point of view on the project and who can bridge the knowledge gap between insurer and software supplier (particularly for testing), challenge the suppliers on their implementation plan, assure quality during the whole lifecycle of the project, help minimise the risk of failure with appropriate proactive risk management methods within project management. From a technical point of view, the new application must be easy to integrate within the existing IT environment and also very adaptive. In this context, a Service Oriented Architecture (SOA) becomes a must-have. Scalable applications covering a large functional scope and using a modern architecture should therefore become first choice. With regard to the project itself, as overall complexity increases, life insurance undertakings may require new expertise in project management as well as new, more sophisticated project management tools such as Enterprise Project Management solutions. Consequently, project managers are required not only to have excellent communication skills and sound knowledge of project management methodologies, but also a strong knowledge of the life insurance industry and a significant experience in working in an international environment. Ideally, project managers possess profound knowledge of the regulatory environment and the market itself for relevant target markets. For the project setup, it may be necessary to have the implementation team work at the company premises to ensure smooth communication between client and implementation team. Along with a proven test methodology, final tests should be based on real end-to-end processes, including printing and reporting processes over multiple periods. For this, a preproduction environment, containing realistic test data is a must-do. Finally, performance tests to examine scalability and stress tests to analyse the behaviour of the system in extreme situations should not be missing. Conclusion: The life insurance industry is confronted with numerous challenges. Although, the renewal of a business-critical IT application system represents a challenge itself, it also represents an important part of the solution to cope with the other challenges. However, easy-to-integrate IT applications based on a modern architecture remain necessary. New skills for project managers and their teams are required as they need profound

project management experience and at the same time deep industry know-how. Along with this, there is a need for new and more sophisticated project management tools as these projects require considerable time and effort.