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Despite the shortage of computer programmers, few commercial property/casualty insurers are turning to outside programmers for additional help, findings from an insurer benchmarking study show.
Meanwhile, many insurers are evaluating whether to outsource certain data processing functions, the study found. But insurers should outsource functions only under some specific circumstances, said John L. Ward, chairman of the insurer management consultant and investment banking firm that conducted the study.
The firm, Cincinnati-based Ward Financial Group, conducts the benchmarking study to determine which business practices constitute the best practices among a group of 125 insurers. Among that group are 27 of the 100 property/casualty and life/health insurers Ward Financial has determined are the safest and most profitable in the industry.
The following findings are based on the business practices of the 100 property/casualty insurers involved in the study.
Even with growing information technology demands and a shortage of IT talent, fewer than one-third of the commercial insurers commit at least 10% of their IT budget to obtaining services from outside contractors, the study found.
Unlike personal lines insurers, management at commercial insurers want to keep that work in-house, even if that means taking longer to complete a project, Mr. Ward said.
When commercial insurers use outside contractors, usually it's for developing new systems. Those insurers rarely use outside contractors for systems maintenance. The trend is just the opposite among personal lines insurers.
But few commercial insurers use non-U.S. contractors, which are more popular with personal lines insurers, the study found.
Many non-U.S. software service companies have sprung up in recent years, particularly in India and Ireland. Those contractors have generated much interest throughout corporate America, because they offer 24-hour programming resources at extremely low billing rates of around $25 per hour, Mr. Ward said.
Many companies use them for Year 2000 programming. Some also use the contractors to develop new systems based on personal computer client/server technology.
Mr. Ward expects that more commercial insurers will turn to those non-U.S. contractors as a stopgap in the next year.
Application systems are among the systems that some of the commercial -- and personal lines -- insurers in the study prefer to develop in-house. Those software systems provide the computerization rules for a specific activity or function, such as claims handling or underwriting.
But a purchased system usually would be cheaper and function at least as well and probably better than one developed in-house, Mr. Ward said. He puts little stock in arguments from individual insurers that their methods of running their business functions are like no others, forcing the insurers to develop their own systems. "They're really not that unique," he said.
Mr. Ward said many insurers now at least are considering purchasing application systems as the need for new systems arise. In some cases, integrating a purchased system with others built in-house could be difficult, "but it can be done," he said.
For basic processing systems, more commercial and personal lines insurers rely on purchased systems, the study found. But those insurers generally do not contract with the system vendors for system upgrades. Instead, the insurers develop their own upgrades to modify systems according to their specific needs.
Insurers have had "good success" with that approach, Mr. Ward said. "That's close to a best practice." Purchasing a basic system gives insurers a much better jump-start on system architecture and eliminates their development risks, Mr. Ward said.
Few commercial or personal lines insurers are evaluating the merits of outsourcing their entire data processing function, the study found. But many are considering outsourcing specific data processing components such as telecommunications or help desks.
Outsourcing some functions rather than all data processing is more logical, Mr. Ward said. Noting that most functions can be outsourced, Mr. Ward said the trend is a healthy one for business. "I'm not a big fan of outsourcing," he said, but "it puts pressure on managers to be at their best."
Insurer management should not make outsourcing decisions lightly, Mr. Ward advised. Many companies outsource because they have a problematic department. "They think by turning it over to a third party, those problems would be magically fixed. They seldom are," he said.
He advised outsourcing a function only when management is certain that doing so costs less than managing the function internally.
In addition, the insurer has to be able to bring the function in-house again. "If it's a big and important department to an insurance company, it may not want to give up control for the long term," he said.
But, Mr. Ward warned, many outsourcing vendor contracts make reclaiming a function difficult.