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How insurers manage their investment in information systems strongly influences their financial performance, according to a benchmarking study involving insurers identified as both the safest and most profitable.
Systems management is not the most critical indicator of financial performance, but it ranks among the leading factors, said John L. Ward, chairman of Cincinnati-based Ward Financial Group, an insurer management consulting and investment banking firm that conducted the study. And, "every day that goes by, its role is more important."
Another promising factor is call center management. Although there was not enough data to conclude definitively that call center management is a best practice, Mr. Ward said the available data suggest that is the case. Under the call center concept, an insurer develops a single center to handle calls from its policyholders nationwide (see story, page 14).
The benchmarking study determines what constitutes the best business practices by a group of 125 insurers. Among those are 27 of the 100 insurers Ward Financial has determined are the safest and most profitable in the industry.
Based on data that insurers provide state regulators, Ward Financial annually identifies the 50 property/casualty and 50 life/health insurers that have done the best job of consistently balancing solvency and profitability over the past five years. When an insurer's solvency or profitability is measured in isolation, the result may not rank among the 50 strongest in the insurer's industry segment. The combination of sustained solvency and profitability vaults an insurer onto a Ward's 50 Benchmark Group list (see story, page 14).
Ward Financial develops various aggregate solvency and earnings measures for both benchmark groups. Then, the consultant compares each group's aggregate financial measures to those of individual companies and peer groups in that industry segment. Ward Financial publishes the comparisons in two voluminous reports -- one for each industry segment -- titled Ward's Results.
Although a few financial measures cannot fully illustrate the balance of safety and profitability that an insurer has achieved, they can show how the two Ward's 50 groups stand out from the rest of the industry (see story, page 15).
After identifying the 50 companies in each industry segment that have done the best job of consistently balancing solvency and profitability, Ward Financial then compares some of those companies with other insurers to derive benchmarks and identify best practices.
One hundred property/casualty insurers and 25 life/health insurers participated in the benchmarking study. Among the property/casualty insurers, 21 qualified for the 1998 Ward's 50 list. Six of the life/health insurers in the study made the Ward's 50 list for that industry segment.
The benchmarking study found that the amount of capital property/casualty and life/health insurers invest in technology is not nearly as crucial as how insurers direct that investment. The financially strongest insurers in the study typically spent one-third less -- measured as a percentage of written premiums -- on their information systems, compared with other insurers in the study.
However, systems adopted by the more frugal insurers often are more effective than those the more extravagant insurers installed.
"The difference relates to mistakes, and it's easy to make mistakes in the technology area," Mr. Ward said. "You don't make $100,000 mistakes in information technology," he observed. "You make $1 million mistakes."
Several best practices helped the best-performing insurers in the study avoid costly mistakes while installing more effective systems, according to Mr. Ward. Those insurers:
* First developed a well-articulated business strategy to drive their information systems strategy. Input from end-users in the company underpinned the systems strategy.
* Were willing to experiment with advanced technology but initially made only small investments in such technology and only in non-critical areas.
* Committed to implementing a single computer system architecture companywide.
* Heavily relied on outside contractors to achieve Year 2000 computer compliance.
"There's always a lot of reasons why systems development efforts fail," Mr. Ward observed.
"No. 1, typically they're not sliced into small enough pieces," he said. That is done by identifying the specific steps in the process, holding individuals accountable for implementing the plan and tracking the plan's progress.
"It's a simple process, but it's seldom done right," Mr. Ward said.
In addition, insurers often do not adequately involve the operating departments -- the end-users of technology -- in designing systems, according to Mr. Ward. "Often the risk is that the wrong system will be developed" as a result, he said. "So, you get the cost but not the effectiveness."
To guide them, the high performers in the study have developed strategic information systems plans that take into account all of their business practices.
"The high performers are doing things to better link the thinking of the operating departments with the priorities of the data processing department," Mr. Ward said.
Insurers can link those two groups by establishing one or more steering committees, Mr. Ward said. Ward Financial has not determined, though, whether establishing a single steering committee or multiple committees is the best practice.
"Either can work, and either can blow up," Mr. Ward pointed out.
In a multiple committee scenario, high-level executives from the chief executive officer down would form one committee and meet quarterly to develop the company's strategic technology plan. A second committee of department heads would meet monthly to make decisions about how to use information technology resources, Mr. Ward said.
The disadvantage of multiple committees is that "they have to act in tandem, so there's a bigger communication challenge," Mr. Ward said.
A single steering committee would consist of high-level executives and department heads. The committee usually would meet monthly.
The disadvantage of a single committee is that department heads often feel intimidated in the presence of their CEO. That stifles effective communication, Mr. Ward said.
Many insurers mistakenly measure their level of automation by the size of their technology investment, Mr. Ward said. The benchmarking study found, however, that insurers with less effective systems on average spent 9% of written premiums on technology, while companies with more effective systems spent 6%, or one-third less of their premiums.
"It all comes down to where you spend it and how you manage it," Mr. Ward said.
Insurers with more lavish but less effective systems often have committed additional capital to advanced technology.
Those insurers did not err by experimenting with new technology, Mr. Ward noted. Indeed, the benchmarking study showed that such tests are best practices. However, another equally important best practice is limiting those tests to a non-critical function in the company.
"Make it work, then roll it out" companywide, Mr. Ward advised.
Digital imaging is an example of advanced technology that many insurance companies heavily invested in before testing it, according to Mr. Ward. The technology allows users to load their computer systems with data from printed material, such as claims forms or coverage applications, by passing the material through a scanner.
But the expensive technology is difficult to use, according to Mr. Ward. "A lot of people have tried it, but few have made it work where it helps them improve their performance."
The top-performing insurers in the benchmarking study expect to realize additional cost savings and run more efficient systems by implementing a single information system architecture in their respective organizations.
Ward Financial has determined that implementing a single information system standard is a best practice. Insurers will spend less by purchasing, training on and maintaining a single system than multiple systems, Mr. Ward said.
For example, many top-performing insurers in the study recently have committed to using only the Windows NT operating system for personal computer client/server platforms.
While the selection of that operating system is not a best practice per se, committing to a single operating system is, Mr. Ward explained.
Although the trend among best performers is toward fewer systems, Mr. Ward said, many insurers currently use three distinct types of computer systems: a mainframe computer, a personal computer client/server platform, and some form of midrange platform in between the mainframe and PC.
Insurers got into that situation by allowing each department to make its own systems purchasing decision, Mr. Ward said.
Insurers also could eliminate multiple database management systems on their mainframes, Mr. Ward said.
Maintaining several systems is more expensive than maintaining one, he said.
Ward Financial has determined the best practice for funding Year 2000 compliance programs, but Mr. Ward said that how insurers handle this effort has more leeway than other technology-related projects.
Most commercial property/casualty insurers that Ward Financial has studied have deferred investment in other projects to focus capital on the Y2K problem. However, the best practice is to increase the information technology budget incrementally and not delay other important projects, Mr. Ward said.
Ward Financial's recommendation to a particular insurer, though, would depend on the size of the incremental increases and the importance of the projects that might have to be deferred to fund Y2K compliance efforts.
In any case, the top-performing insurers rely on outside contractors for achieving year 2000 compliance.