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Introduction
Of the multiple business disciplines found in a P&C carrier –  underwriting, policy administration, billing, reinsurance, client management, and claims – claims has traditionally been the underfed stepchild. The P&C insurance industry is no exception to the rule that enterprises invest enthusiastically in revenue generation and only reluctantly in their cost centers.  Guidewire Software, which was founded as a provider of next-generation P&C systems, has argued for years that this bias overlooks the significant economic potential locked in claims organizations constrained by legacy system environments.  This argument was built on the consulting work of firms such as McKinsey and Accenture, who quantified for their P&C clients that process inefficiency and indemnity “leakage” through systematic handling errors could be costing their organizations several points of combined ratio.  The root cause of many of these errors was a system environment that underserved the needs of claims adjusters and managers for data, workflow, analysis, and best practice enforcement.  Guidewire ClaimCenter is a modern claim system directly targeting these challenges.
Through countless discussions with a broad cross-section of carriers domestically and internationally since 2001, however, Guidewire has come to identify the challenge of modernizing claims technology as just one part of a larger story about the future of P&C core systems overall.  Core systems – the transactional systems-of-record at the heart of a carrier’s business processes – are the immensely complex “mother ships” around which many ancillary sub-systems extract and feed data.  Guidewire has arrived at the estimate that approximately 90% of the global P&C industry relies on legacy core systems: 15-30 years old, mainframe-based, written in COBOL, and sustaining the minimum enhancements necessary to continue processing business.
The encroaching obsolescence of these systems imposes three strategic dilemmas on today’s CIO:  First, how to distribute finite IT resources between current and new systems overall?  Second, in what sequence should business areas be targeted for modernization?  Third, should investment in new systems take the form of building or buying new systems?  Whether, and how, to modernize a carrier’s claims technology are questions that must be answered in this larger enterprise context.
The conclusions we shall reach are: First, it is vital that carriers develop a long-term strategy for core system management and eventual replacement.  Second, that the inherent challenges of initiating and succeeding in core system projects often support beginning with claims versus other business domains.  Third, that the evolution of software technology and the industry track record of P&C core system projects argue strongly for “buying” versus “building” new systems.
The case for core system replacement
Any consideration of these questions should start with the null hypothesis, why not forego investment in future core system platforms altogether?  A system’s age and legacy status alone do not render the case for replacement open-and-shut.  Optimized for high transaction volumes and tested by hundreds or thousands of person-years of use, the legacy generation of core systems that replaced the filing cabinets now set a high standard for reliability and performance that any new system must meet or exceed.
There are four broad reasons to undertake core system replacement.
First, legacy systems have become structural obstacles to higher performance in every processing domain of a P&C carrier.  Precisely because they were designed as transaction engines, legacy core systems provide minimal support for the evaluative and interactive dimensions of P&C insurance work.  In the best practices paradigm of the 70s and 80s, the human actor – the underwriter, adjuster, or billing specialist, for example – relied on paper files, notes, phone calls, and his own judgment to make decisions and communicate externally, while only the transaction execution was left to the system.  Today, virtually every carrier aspires to a significantly more automated and controlled business environment in which routine decisions and many standard tasks are handled without involving human action.  While the specifics vary widely by business process and organization, some key examples are:

• Rule-based automatic evaluation of risk quality, claim severity, fraud and litigation potential;

• Automated segmentation, division, and assignment of work on individual cases to different specialists;

• Automated workflow supporting complex, high-volume, rule-driven processes such as new submissions, recoveries, and policy renewals;

• Exception-based monitoring of data quality and service level achievement;

• Automated support of complex cross-functional business models such as loss-sensitive programs and aggregate policy limits; and

• Real-time or near real-time presentation of operational and financial data tailored appropriately for each level in the supervisory hierarchy.

Target enhancements such as these reflect the increasing adoption by P&C carriers of process management philosophies pioneered by manufacturing industries.  It is now typical for P&C executives to measure their operations in terms of quality control, productivity, cycle time, and customer service level attainment – beyond the traditional insurance metrics of sales production and underwriting profit. Optimized for batch transaction processing, legacy core systems are poorly architected to support this more data-intensive, business-rule-driven, process automation paradigm.
A second, related reason for replacement is core system flexibility.  Legacy architectures are ill-equipped to support continuous change.  In any COBOL-based system, business logic and data structures are densely packed in procedural code.  Any change to logic or data – or to higher-level business entities such as products, customer segments, and billing plans – requires extensive custom design and development work.  Consequently, even the most agile organizations expend months or even years of expensive effort to respond to changing business and regulatory requirements.  This rigidity is inherent in the architecture of legacy system environments and has long been endured simply as a cost of doing business.  Providing core system flexibility for products, data, and processes in an environment of continuous business change is hence a key requirement domain for the next generation of core systems.
Third, while the Internet has not yet dramatically transformed P&C distribution, it has raised expectations for new models of self-service by policyholders and producers.  Compared to its peers in retail and financial services, the P&C industry has much further to go to enable its customers and distribution channels to manage interactions through web-based self-service. True “no-touch” models for new business, endorsement processing, billing, account management, and claim lodgment are still early in their development – but few question that they will become the eventual norm.  This introduces a new category of end-user and integration requirements on a generation of systems designed long before the Internet was a household word.  It is only through numerous compromises and ingenuity that a batch-based, code-driven, monolithic architecture can serve as the transactional platform for a widely distributed population of ad hoc end users expecting an Amazon.com-like experience.
The final motivation for core system replacement is human-, not system-related.  The language of legacy core systems is overwhelmingly COBOL, which has been almost entirely displaced throughout the IT and software industries as a programming language.  Very few university computer science curricula offer COBOL programming classes today since object-oriented and web-native architectures have become the norm for enterprise software development.  Moreover, because legacy systems are adapted only through custom programming, each has become a unique artifact quilted through countless waves of modification and enhancement.  Consequently, it is all too typical for even the largest carriers to have the true understanding of the workings of its core systems concentrated in the heads of a handful of employees approaching retirement.  Addressing this key point of enterprise risk provides for many CIOs the most “non-negotiable” motivation for investing in future core system platforms that both align with evolved technology standards and are fundamentally more transparent than procedural languages such as COBOL.
Over the next decade, P&C carriers will be split into two categories: those who respond to these four motivations – process control/automation, core system flexibility, self-service enablement, the retiring legacy system knowledge pool – and those who do not.  Those who do respond will invest steadily in new core systems with fundamentally different architectures, while those who do not will continue to make tactical fixes that extend the life of, but do not ever aspire to replace, existing systems. These performance trajectories of these two categories will be close in the early years of this transformation.  Over time, however, they will diverge dramatically as those carriers who successfully make the transition to next generation core system environments are able to deploy fundamentally more automated and efficient business processes while providing customers and agents more compelling products and web-based service models.  If this is true, carriers who bet on our “null hypothesis” years earlier will find that working the traditional levers of P&C performance – such underwriting focus, expense discipline, and claims leakage management – will be inadequate in themselves to support competitiveness with the other group.
Investing in core system replacement: three key challenges
Concluding that to neglect investment in core system replacement would be foolhardy only scratches the surface of deciding how and how much to invest.  Because carriers vary widely in their current states, quantifying a “proper” range of investment for all organizations is of little value.  But there are relevant generalizations: Guidewire’s experience over dozens of core system projects has uncovered three key challenges that typically confound carriers as they grapple with core system replacement.
First, unlike more tactical IT projects, core system initiatives require long timeframes. The full transition to a new transactional system-of-record will take multiple years for all but the simplest of enterprise IT landscapes.  In order for a project phase to deliver meaningful value, its scope must encompass a large portion of the legacy system, if not complete replacement.  This entails the broad canvassing of end user and management requirements, redesign of business processes, development of numerous integration interfaces, and a testing period which can amount to a quarter or more of the total project duration.  Guidewire’s own experience has been that – regardless of the technology involved – the sheer complexity of current state business and system environments entail standard project durations of one to two years for a single phase project on a single core system area.  And since there are multiple core systems areas, time spans as long as five to ten years would not be unreasonable for a P&C enterprise to achieve complete sunset of its legacy system environments.
Such a long horizon of change gives rise to multiple challenges.  Rushing a project to achieve an arbitrarily designated completion date and allowing a project to limp along interminably are opposite but equally dangerous pitfalls.  There is no substitute for the hard analytical work of defining an achievable scope that delivers meaningful business value and then rigorously estimating how long it will take to complete with high quality.  For an organization to “internalize” and clear-sightedly accept the duration and level of effort required to replace its core systems is the most vital step it can take toward eventual success.  Yet this challenge is heightened by the inevitably high expectations of business end users and management generated by the prolonged effort invested in a core system project.  These expectations may not appreciate the extensive amount of foundational technology work necessary to define a new architecture and to achieve functional parity (let alone superiority) with the status quo.  Because project teams are pressured by these expectations, there is a great risk that decisions to “get something delivered” will trump making the right long-term investment.  As will be discussed further below, this is one of the most important motivations to begin with a properly architected vendor-delivered product that provides a concrete representation of the end-state.
A second challenge arises from the blind spots of corporate decision making and financial planning. While the requirements of quantitative business cases, ROI models, projections of payback periods, and cost-benefit analyses all have their place in imposing financial discipline on capital investment, they are ironically the most limited when the stakes of an initiative are the highest. To take an analogy from everyday life, tactical financial decisions such as whether to refinance a mortgage, invest in a mutual fund, or pay for the help of a tax accountant are readily estimated in their cost and benefit.  In contrast, decisions which have far more profound effects on one’s financial well-being – such as paying for a university education or changing one’s career – are virtually impossible to quantify. The costs may be clear, but the benefits are open-ended and include the option value of new opportunities not clearly visible from the starting point.
Similarly, core system projects fit uncomfortably into the framework of financial analyses appropriate for tactical system modifications.  A cost-benefit model well-suited to estimate the value of avoiding regulatory fines from a missing data element will typically struggle to quantify (or even identify) the value of such open-ended benefits as improving product and pricing flexibility, enhancing claim quality by superior data capture and presentation, and increasing retention of skilled personnel by creating a more automated and professionally fulfilling work environment. In deciding the proper allocation of resources between current and future core systems, far-sighted organizations overcome this quantification challenge without compromising financial discipline, while “follower” organizations often talk themselves out of all but the most tactical of system fixes.
The gravest mistake is to undertake a half-hearted core system augmentation effort which may deliver some short-term benefit, but which brings no closer the eventual retirement of the legacy core system.  While it can be perfectly appropriate to decide consciously on tactical enhancement versus a strategic replacement initiative, too often short management attention spans and the pressures of internal funding abandon a once ambitiously scoped project at the “Phase 1 front-end” stage, thereby only complicating the IT landscape in the long-run.  That so many P&C IT environments are littered with orphaned “Phase 1” systems is a testament to the difficulty of planning and following through on core system replacement.
The third challenge in core system replacement arises from the disparity in skills required for the maintenance of existing systems versus the development of new systems.  In Guidewire’s experience, even large IT organizations that have successfully maintained and evolved a legacy core system platform for decades often find themselves lacking the skills to design a new system from the ground up.  Analogous to a team of mechanics proficient at repairing cars but unequipped to design new ones, most P&C IT teams are neither trained nor organized to design and develop a modern, web-native enterprise application.  In part this is because they lack expertise in newer software technology disciplines such as object-oriented programming in languages such as Java, web-based user interface design (including recent advances such as AJAX), clustered architectures, relational object mapping, metadata-based data model design, automated performance tuning and tooling, and web security infrastructure.
More important than specific technology knowledge, however, is the inexperience and missing organizational structures to manage foundational application development.  For example, in most P&C organizations, the task of framing requirements for fulfillment by a development team rests on the shoulders of “business analysts.”  These analysts are often drawn from the ranks of former business end users, who draw upon on their field experience to articulate necessary changes to existing systems.  The division of labor between the business analyst and the technical staff serves maintenance needs well, since requirements are always incremental to an existing system framework.  Developing a core system from the ground up, however, requires much deeper technical design skills – namely, the synthesis of a vast set of business and technical requirements into a coherent and achievable system design.  Because software companies live or die by the quality of their software products, they recruit, cultivate, and reward this “product manager” skill.  It is less common for P&C carriers to do the same.
A core system replacement initiative must therefore plan for a multi-year sustained effort, achieve internal justification without complete quantification of value, and assemble an entirely new corpus of skills even before it gets off the ground.  In light of such challenges, Guidewire strongly recommends to carriers contemplating different core system initiatives to choose based on maximizing the chance of project success –rather than by business preference or even by the potential value to be achieved.  After all, a failed project is worse than useless, no matter how valuable the starting aspirations.  From this perspective, claims projects often have key advantages over projects in other P&C business domains.  In particular, claims projects involve shorter timeframes, fewer integration points, and simpler business processes than policy administration replacement projects.
“Buy” versus “build”
This leads us to the last of the dilemmas posed earlier: should investment in core systems take the form of implementing a core system product from a software provider, or custom developing a solution (either alone or with the help of a consulting partner)?  That is, to buy or to build?
Historically, simple necessity answered this question for many P&C carriers: either building an application was simply impossible given available resources, or there was no procurable packaged solution that would meet the need.  While this may still be the case for many, there have been developments on both the “buy” and “build” sides that render the question potentially more complex than before.  On the “build side,” the emergence of numerous offshore development firms offer to smaller carriers access to large pools of technical labor. Also, the evolution of certain software components, such as workflow tools, rules engines, application servers, and object-relational mapping tools, seem to offer a set of building blocks that could accelerate internal development efforts. On the “buy” side, the emergence of a new breed of vendors has proven that highly configurable packaged core system applications can support the varied needs of a wide array of P&C carriers.
We believe that, appearances of “balance” notwithstanding, technology advances of the last decade overwhelmingly favor P&C carriers buying over building core systems. Specialized software providers have numerous advantages over any custom development initiative.  Let us consider why.
First, the huge costs of developing these enterprise software applications can be distributed over numerous customers and amortized over years of distinct initiatives, rather than concentrated into a single project.  Software companies must justify their development expense not by potential business benefit to any given project, but by the tougher standard of market adoption: either the application proves itself in the market and is broadly adopted, or it fails and never repays its cost of development. As an example, Guidewire’s market success has been built on a product-based strategy of distributing the cost of the 150 person-years of development invested to date in each application (PolicyCenter, ClaimCenter, and BillingCenter) over its growing customer base.  As in many other domains, the pressure of the free market to meet demand as fully as possible is a much more efficient and accurate guide than any management directive.
Second, software companies are better equipped to recruit and mobilize the skilled engineering teams necessary for modern enterprise software development. As business processes, integration requirements, and automation expectations have risen, the minimal “table stakes” for a mission-critical enterprise system have steadily risen.  Today, the technology requirements of a P&C core system include:

• Clustered and multi-threaded architecture to support massive horizontal scalability;

• A metadata-based data model enabling unlimited extension and automated upgrade;

• User interface frameworks supporting building large numbers of screens with complex components such as sortable listviews, filtered typelists, cross-field validation and embedded functional “widgets”;

• Support for complex screen flows with extensible business logic;

• Security and community modeling enabling a rich hierarchy of users, groups, and roles, including external users and organizations;

• An integration layer supporting multiple integration channels including event-based messaging, web services, custom adapters, and dedicated APIs;

• Security infrastructure and design principles to thwart sophisticated new models of Internet-based security attacks; and

• Native performance testing and tuning tools, including dedicated test harness, automated test suite, and large volumes of sample data.

Despite being well-established, standards such as J2EE and .NET do not yet provide extensive enough development frameworks simply to dive in defining business logic and creating screens.  To fulfill these “platform-level” requirements, a development team cannot merely select attributes from a menu of choices.  Rather, many person-years of technically demanding foundational work must be invested before end user-visible functional work can even begin.  Most P&C carriers have rationally concluded that there is little value and significant risk to re-invent the wheel at this foundational level, unless there were good reason to believe no vendor has gotten it right.
A third consideration is flexibility.  If indeed business process and product flexibility are key motivations for undertaking core system replacement, replacement systems must support dramatically greater and easier adaptability to changing business requirements.  This is an especially vital requirement in light of the high switching costs, and therefore extended target lifespan, of core systems.  In short, a new policy administration or claims system must not only meet the universe of business requirements specified today, it must be architected to maximize support of future requirements not yet specified, or even imagined.  The requirement for generality, therefore, is not merely the concern of software vendors striving to meet as broad a segment of the market as possible; rather, it should be an inherent requirement of every organization maximizing the longevity of its IT investments.  Unlike the legacy generation of core systems, modern applications can be architected for upgradeability and configurability in virtually all its key dimensions: user interface, business logic, data model, organizational hierarchy, screen flows, and so forth.  Building for this level of future adaptability imposes a considerable additional development burden – a burden which both the software engineering skills and investment disposition of most P&C carriers are ill-equipped to bear.
Fourth, the buy decision supports a logical division of labor between the competencies of a software vendor and a carrier’s IT organization.  The internal resources who thoroughly understand the business and system environment can focus on requirements gathering, legacy system documentation, business process re-design, and planning for system migration while the software vendor remains accountable for system architecture, product features, product performance and quality, and integration.  Because business analyst personnel and end users are on the more solid terrain of interacting with a working base application, their input and gap analysis can be fine-grained and iterative, rather than high-level and theoretical.  Because legacy system experts can write integration code against a working system, they can proceed more rapidly to testing actual integration, rather than planning potential code on whiteboards. Because the vendor application has an implementation history at other customers, the joint implementation team can estimate project tasks and overall duration with far greater confidence.  And because the software vendor is highly motivated to continue to evolve the application, an upgrade path of enhancement avoids the functional stagnation inevitable in a custom development effort which must eventually declare victory or failure.
Fifth, a vendor solution can offer a surer course to true core system replacement than a build effort which may lose its will before achieving the goal.  For all but the smallest of P&C carriers, both buy and build approaches will typically require multiple phases – organized by function, line of business, or business unit – before a core system and all its integrations can be replaced.  Regardless of how many phases are planned along the implementation path at any given customer, leading-edge applications are designed with the functional target of assuming full system-of-record responsibility, eliminating the technology risk of a “stranded Phase 1” lacking the functionality or architectural foundation to replace the legacy system with which it may initially coexist.
In the aggregate, these five considerations have less to do with cost than risk. Because of the scale and effort of any core system project, the consequences of even an “inexpensive” failure can exact a devastating cost on an organization’s focus, morale, and future competitiveness. And if it is true that replacement of legacy core systems is not a luxury but a necessity over the coming decade, then no organization can afford to spend years in an effort that brings it no closer to its next generation system platform.  Hence, while any potential “build” effort is limited only by an organization’s optimism and imagination, the inherent risk and complexity of a core system development heavily weight the tangible assets and implementation track record – even if limited – of a packaged application built on the right architecture.
Conclusion: Finding the right technology partner
The multiple advantages of “buy” just described, of course, assume that a quality vendor alternative is available at all.  Guidewire Software itself was founded precisely because of its founders’ conviction that the P&C industry had in fact been underserved by software solutions during the past decade, and that the industry would need next-generation core systems to replace the faithful, but superannuated mainframe systems supporting all of its core processing.  Hence, in arguing for the long-term urgency of legacy replacement and the clear advantages of buying rather than building, this paper does not suggest that carriers have an abundance of equally good options.  Guidewire believes it may be unique in approaching the challenge of delivering the next generation of policy, claims, and billing systems to the P&C industry as a lifetime goal worthy of assembling world-class development and implementation teams to serve.

Marcus Ryu is co-founder and Vice President of Strategy and New Products for Guidewire Software, Inc. Guidewire is an enterprise software company focused entirely on the development and delivery of superior web-based core systems to the property and casualty insurance industry. Marcus’ responsibilities for Guidewire include product strategy, corporate development, and product marketing; he also serves on Guidewire’s board of directors. Before co-founding Guidewire in 2001, he was Vice President of Strategy for Ariba, Inc., an enterprise software and consulting firm providing procurement and spend management solutions. Prior to Ariba, he was an Engagement Manager at McKinsey and Company. Marcus has an A.B. from Princeton University, and a B. Phil from New College, Oxford University.

Introduction
To begin a discussion of excellence in policy operations, we should ask, What differentiates customer-centric from policy-centric operations? Simply put (and to state the obvious), the customer-centric approach places the customer at the center of policy-related processes instead of the policy: a policy is not bound, a customer is bound; a policy is not endorsed, a customer is endorsed, and so forth. As such, it may appear that this is simply an exercise in semantics; it is not.
Consider a business process that sends a welcome letter to a customer the first time a policy is bound for the customer. When business processes, and by extension, business systems are policy-centric, it is difficult to determine whether a policy has been bound for a new or an existing customer. After all, a policy can hardly be “aware” that there are other policies in effect for the same customer. The result is that the welcome letter either is not sent at all or sent each time a new policy is bound.
To illustrate this further, consider a surgeon and his wife who have life, health, automobile, home, and medical-liability policies. The fact is that these policies are most likely written by at least four, and perhaps five different operating companies. In this circumstance, it would be virtually certain that this couple would receive five welcoming letters. Now if two or more of the carriers involved belong to the same corporate parent, this customer will receive multiple letters from what appears to be the same company. If this were the extent of the problem, there would be little issue. However, many more examples of the lack of customer focus exist. Being asked for the policy number when calling in a claim, receiving multiple bills for multiple policies from the same carrier, not automatically receiving multi-policy discounts, having to endorse five policies for a change of address – the list is actually quite long.
The downside is not limited to the customer’s experience. From the carrier’s perspective, even if two or three issuing companies exist under the same corporate parent, it’s highly unlikely that they’re aware of exactly how much revenue they generate from this one customer. Absent this information, individual carriers make decisions without a complete understanding of the organization’s relationship with a customer; as such, significant opportunities for revenue may be foregone.
By contrast, if all of the related companies adopted a customer-centric policy administration model, all of the information about an individual customer would reside in one place. Not only would just one welcome letter be sent out, but the customer would actually receive thanks and discounts for buying from the same corporate entity as well. The family in our example would receive one bill, and if they moved, they would have to make one request, not five or six, for a simple change of address.
Two clarifications are needed at this point.
First, we are not advocating that carriers offer all lines of business to all of their target customers simply to satisfy them. What we are advocating is that carriers look at customer needs, and determine whether those needs are being adequately met by their current product- and service-related processes.
Second, customer-centric design does not magically transform “bad” processes into “good” processes. Instead, all of the ‘good’ features of the customer-centric approach arise from the process designer asking the question, “What does this (whatever this is) imply from the customer’s perspective?” and “Does this make sense from the customer’s perspective?” In other words, absent a customer-centric worldview, it’s likely that a “customer-centric” system will be deployed that fails to meet expectations.
Disclaimers aside, we’re confident that given adequate pre-implementation analysis, a customer-centric approach will usually deliver better results than a policy-centric approach, and leave the door open for incremental improvements over time.
Who or what is the customer?
To become customer-centric, it is necessary to understand customer needs, divide customers into segments based on shared needs, and finally create insurance product and service offerings that focus on each segment. Before one can do this, however, one needs to correctly define the customer and ensure that all relevant customer attributes are captured and understood.
In insurance terms, the failure to adequately understand and define the customer will cause the carrier to lack awareness of possible insurable assets, exposures, and perils. Over time, this may lead to underwriting losses and stunt premium growth based on product and coverage extensions.
Personal lines carriers
As the outset, a personal lines carrier may define “customer” as an individual. This definition, however, works only in limited circumstances, most often where single people require coverage. However, when an individual gets married or begins to share a residence with someone, the definition of customer ostensibly changes to “family-unit” or “household-unit.” To revisit our earlier example, a couple insured by the same carrier that receives two bills for auto insurance may no longer find this acceptable (nor practical, given the discounts that may be available adding insureds to existing policies). As such, a customer-centric carrier would do well to support a “consolidate billing” transaction, something which may be foreign to a policy-centric worldview. Divorces or other breakups as well may cause the customers (now plural) to ask their carrier to segregate the consolidated bill into two, mandating a “split billing” or a “split policy” transaction.
Further, considering the person who also maintains a trust for the benefit of his children that owns some of that person’s insurable assets (e.g., a vacation home), the personal lines carrier has to deal with an additional complication in accounting for an entity – the trust in this case – as part of the customer definition.
Additionally, we have issues of family hierarchies. A teenage child who leaves home and goes off to college with the family car introduces yet another complication. While at some level, the student is covered by policies of the parent household, she may need to eventually split off and become a new, although related, household.
Finally, we have the fact that families may own a wide variety of assets that require insurance. These include the usual homes and cars, and also include exotica such as collectible cars, RVs, mobile homes, boats, etc. As such, when selling a liability policy to a customer, it is recommended that the insurance company be aware of these assets.
Based on the above, we can identify several customer-based processes that can be initiated both by the customer and the carrier:

• Child leaves for college – implies potential out of state auto coverage, either through the parents’ carrier, or through a partner that writes in the state where the child is moving. This presents an opportunity to market apartment rental coverage as well as health coverage to supplement the university health plan, again by the same carrier or a partner. The key here is to make this easy for the customer.

• Family Moves – implies changing the address and risk locations once, which then triggers the creation of appropriate endorsements. Moves also present an opportunity to insure the family’s possessions during the move. Again, the key is to make this process easy for the customer, as well as the agent or broker who represents the customer.

• Family buys a home – this is an opportunity to sell not only homeowner’s, but also title and other types of insurance. Additionally, there are many insurance opportunities in the renovations that most families perform on the homes they buy.

Before going on to commercial lines, we’d like to point out that these examples are not exhaustive, rather just a few of the many changes that personal lines customers experience that present opportunities for the insurer to expand the relationship. In addition to making the process of reflecting these changes to their coverage simple, this level of service offers real utility to the customer.
Commercial lines carriers
In addition to the ownership, hierarchy, and asset issues of personal lines, commercial lines also add the complexity of business entity to the mix.
Businesses can take many forms. Sole proprietorships, partnerships, limited liability companies and corporations are just a few examples. The assets of a business entity, particularly the larger ones, tend to be more complex than those covered by personal lines. In addition, the activities of a company are far more diverse and risk-laden than those of individuals. As a result, the customer definition becomes substantially more complex, since these activities, while creating new exposures and perils, also provide opportunities to provide coverage.
Personal & commercial lines carriers
If we consider carriers that offer both personal and commercial lines, the definition of a customer becomes even more complex, since an individual may be part of a household that is the owner of several personal lines policies. However, the individual may also be the owner, partner, or significant shareholder of a business that has an additional set of commercial lines policies. Unfortunately, personal and commercial lines systems tend to operate independently. No matter how comprehensive the definitions of personal and commercial customers, the lack of connectivity between these systems complicates the policy administration process considerably for individuals requiring personal andcommercial lines coverage.
Customer definition inputs
It should be clear from the above examples that the definition of the customer is perhaps the most important decision that process designers at insurance companies can make.
Unfortunately, there is no one good answer or solution for insurers, since the complexity of customer definition depends entirely on the carrier’s book of business, product offerings and expansion plans. However, no matter how focused and specific a carrier’s offerings and target markets, there is absolutely no excuse for not focusing on the customer. It is also advisable to consider the following criteria:
From the customer’s perspective:

• What are the customer’s needs?

• What are customer’s service expectations from the carrier?

• How is this likely to change with time? (e.g., an auto policy customer replaces his car, a homeowner’s policy customer pays off her mortgage, etc.)

• How is this likely to change due to the customer changing status? (e.g., if an individual client gets married, a small company becomes larger, a company expands overseas, etc.)

• What are the implied customer originating processes?

From the carrier’s perspective:

• What information does the carrier need from a customer relationship management perspective?

• What information does the carrier need from an underwriting and rating perspective now?

• What information is the carrier likely to need from an underwriting and rating perspective in the future?

• What are the various carrier originated processes? How do these interact with the customer?

Customer definition
Based on the questions posed above, it should be clear that the customer definition for a carrier that sells travel insurance will be very different from one that sells life insurance, which in turn will vary from a broad-based personal lines carrier. The same is true for a group health carrier catering to the commercial space, a workers’ compensation carrier or a broad-based commercial lines carrier.
There is no single solution that will work for everyone. Excessive complexity will lead to higher process and systems costs, as will  a lack of adequate support for the inevitable complexities that arise in systems implementations. Furthermore, process models must take anticipated changes in the marketplace into consideration, because it is unlikely that a suitable model today will be equally relevant two to three years from today.
Changing course: policy-centric to customer-centric
For new companies, the adoption of a customer-centric process model is relatively straightforward, since processes are typically designed from scratch. As long as the “we’ve always done it this way” attitude does not prevail, the company should expect a decidedly easier time than one with an already imbedded policy-centric orientation.
The challenge for firms with established cultures, organizational structures, books of business, processes, and systems is somewhat greater. To increase the likelihood of success, our suggested approach for achieving a transition to customer-centric operations mandates attention to the following areas:

• Culture & organization structure. This is a prerequisite to everything else, since the acceptance of change is highly dependent on a competent and motivated staff that is correctly aligned with organizational objectives.

• Customer definition. A definition of “customer” that incorporates desirable consumers, their attributes and means for measuring how they perceive the insurance company’s offering and processes.

• Product gap analysis. A definition of how a carrier’s products (or their packaging) might be enhanced to make them more attractive to customers.

• Process gap analysis. Defining the gap between existing processes and the processes needed to sell and service insurance to customers, to ensure that customers are satisfied by the outcome of these processes.

• Systems gap analysis. Defining the gap between the services provided by existing systems and those needed to adequately support the processes defined above.

• Process/systems conversion. Migrating existing processes and systems to the new model.

Culture & organization structure
When considering culture and organization structure, it is instructive to note that the foundation of an insurance business – a policy – is somewhat of a virtual construct. From the insured’s perspective, what is important is the protection of household assets and individuals against certain risks. The fact that insurance companies do this via life, homeowner’s, auto and health insurance policies written by multiple operating companies is not of consequence to the insured. To distribution partners, on the other hand, carriers that handle multiple risks may be preferred, as their worldview tends to already be customer-centric.
Accordingly, carriers would do well to redefine themselves by their target customers. For instance, “We provide commercial lines in Idaho” needs to change to “We cover all risks for Idaho ranchers”. Having done this, the next step is to transmit this message and its implications throughout the carrier organization. While culture change is not within the scope of this paper, cultural considerations are of paramount importance when transitioning to a more customer-centric worldview.
We also suggest that carriers identify a small, committed and competent team of individuals who are influential in their respective groups or departments to drive the remainder of the transformation. Senior managers by themselves rarely have the time or personal influence to accomplish such culture change.
While changing the organization as part of this phase is not strictly necessary, it is useful to consider carrying out some modification in structure to underscore the importance of customer focus.
For instance, personal lines underwriting could be lumped together to create teams, with each team responsible for all policies owned by a certain set of customers. In other words, by using “city” to group customers, one might create a Boston team, a Westchester team and a Providence team – each with home, auto and umbrella underwriters. Having established teams, it would be constructive for each to examine a dozen or so customers from their designated city. It is virtually certain that each individual will learn from the team, and equally likely that the team will devise customer-centric underwriting criteria far superior to line-specific criteria. Much the same can be done with actuaries, marketing, etc.
Another example would be to establish a single relationship manager for each agency or broker across all lines, including personal, commercial, surety, etc. While this is not directly customer-focused, there would finally be individuals within the carrier with a truly broad view of the customers of their allotted broker or agent. In other words, the hope here is that the customer-centric nature of brokers and agents may well rub off on their carrier counterparts.
Customer definition
We have already discussed some aspects of customer definition above. Now, having reached agreement on the definition of the customer and their attributes of interest, the next step is to segment these customers by need.
Customer segmentation by need or other attributes is not a new concept in insurance. After all, in commercial lines, program business is built around product bundles aimed at specific customer segments. Interestingly, however, these programs are often created by brokers, and backed by products, coverage enhancements and risk-mitigation components provided by multiple carriers and service providers. Does program business represent customer-centric nirvana? Quite possibly, though many carriers have not made yet made the leap.
Similar efforts can be seen in personal lines, where segmentation is based on marketing mix, channel and of course, need. Examples include programs based on religion, ethnicity and gender as well as need/channel-based programs such as those designed for military personnel or wealthy individuals.
The point is that no matter how focused a carrier’s offering is today, carrier management personnel need to:

• Understand the customer;
• Understand the customer’s attributes;
• Understand the customer’s needs; and
• Reevaluate the carrier’s offerings in light of these needs.

It is noteworthy that traditional carrier metrics such as combined ratio, loss-ratio, expense-ratio and reserves are really not pure measures of customer satisfaction or the attractiveness of a carrier’s offering from the customer’s perspective. The closest insurance companies come to measuring their customer centric performance is via their retention and hit-ratios. Let’s examine these.
While retention is a significant success factor in high-turnover, competitive markets such as personal auto, in other markets it is a less meaningful determinant of success. Retaining a risk in a non-competitive market merely means that the carrier has not changed its pricing and commission structures in a radical enough way to drive off a customer or the producing broker. Put another way, the carrier has not done anything to overcome the natural inertia of policyholders.
Hit ratio is more interesting in that it measures the attractiveness of a carrier’s offering to customers or distribution partners. However, it represents the combined effect of price and non-price considerations such as commission levels, service quality, etc – and is therefore not a pure-play metric either.
We would recommend coming up with some variations on these, such as “revenue per customer” and “revenue change per customer.” Let’s begin by defining as “customers” (i) all distinct policyholders, (ii) all policyholders who were lost to other carriers, and (iii) any prospect who gets a quote. If we next evaluate the ratio of premium to this number of defined customers, an increase in revenue per customer essentially means that the company:

• Is up/cross selling better;
• Has products that are more attractive to prospects; and/or
• Is able to increase prices without losing customers.

Other process- and customer satisfaction-based metrics include:

• Call volume. Number of customer support calls per customer, number of broker calls per customer, where more calls may equate to poorer service (and lower profitability) as something about the carrier’s processes causes customers or brokers to call frequently.

• Response time. Time to quote, time to issue as a way of measuring the responsiveness of the underwriting process.

• Process automation. Ratio of straight-through processed transactions to total transactions to measure the level to which the process has been made automated.

To conclude, customer definition is not only about understanding and appropriately segmenting the customer, but also about defining metrics that help the carrier shape its offering to meet the expectations of its target customers.
Product gap analysis
Having identified one or more customer segments to target, the carrier must then consider the gap between the product offered and the coverage needs of the segment. As with culture change, product design is beyond the scope of this document, but there are a few points for carriers to consider.
First of all, carriers should decide whether they wish to be coverage focused (e.g., sell workers’ compensation insurance in California) or focus on the broad-based insurance needs of their market (e.g., insure Idaho ranchers). If a broad-based approach is taken, the carrier should attempt to address the coverage real estate adjacent to their current offering. For instance, if Idaho ranchers are missing workers’ compensation and commercial auto from their mix, they should find a partner who is suited to complement the current offering with the missing lines, or at least provide a stop-gap until Idaho ranchers can design and file their own products.
The point is that in order to prevent being commoditized, carriers’ offerings should be differentiated by the target customer. This requires segment-specific coverage enhancements, whether provided by the carrier or a partner. A classic case in point here is Hartford Steam Boiler, which provides the boiler insurance component of many carrier packages.
The point about offerings being capable of being differentiated by the customer is even more relevant in light of the fact that the direct-to-consumer channel is rapidly growing in volume.
Finally, it’s instructive to examine the website of small community banks. Virtually every one of these banks offers checking, savings, investments, bill-payment, etc. In most cases, a majority of these services are provided through OEM arrangements with outside vendors. From the customers’ perspective, however, this third-party relationship is immaterial, since all of their needs are met through a single source.
Process gap analysis
At this stage of a customer-centric transformation we’ve arrived at a clear definition of customers, customer-segments and the insurance products to be marketed to each segment. Now we need to consider the processes through which this mix will be sold and serviced. Since a large number of these processes already exist in one form or another at policy-centric carriers, we will evaluate and contrast them with those mandated by the customer-centric model.
New business quoting
In policy-centric systems, a new business quote is specific to a policy, and typically starts out with some information about the prospective insured followed by information on covered assets and coverage levels. Additional questions that reflect the adoption of a customer-centric orientation include:

• Is the prospective insured or any of the individuals to be covered by the policy already insured by the carrier?

• Was the prospective insured or any of the individuals to be covered by the policy insured by the carrier in the past?

Policy-centric systems cannot really address these questions in any deterministic way. This lack of knowledge can adversely impact the carrier’s relationship with the customer. For example,

• A customer who is cancelled for failure to meet underwriting guidelines may become a de facto insured again by naming his spouse as the insured.

• A person unaware of a multi-policy discount may not receive one, and as a result, may choose to do business with another carrier.

• If someone is applying for a GL policy and the property is already insured by the carrier, requests for location and other asset-level information, such as class codes, industry, etc., may be duplicated. This results in redundant data entry and discrepancies between the assets for the property and GL policies.

• The GL underwriter might want to review property coverages and details when doing an underwriting review – a policy-centric system could not accommodate this.

• If restricted to quoting one line at a time, a carrier cannot effectively put together a customer-centric package of coverages that span multiple policies simultaneously.

• Finally, the issue of coverage duplication and broker of record resolution becomes much more difficult in policy-centric systems.

Separate customers and assets from coverages
The design of customer-centric processes and systems mandates the need to view customers and their assets (locations, vehicles, etc.) as distinct from the coverages associated with one or more of their assets. This unbundling allows customer and asset information to be viewed as a common resource across multiple quotes for multiple lines of business.
Enable multiple, simultaneous lines of business
Separate the process of acquiring customer, asset and exposure information from the concept of lines of business. In other words, the customer should be able to state his needs from his perspective, and the carrier should then bear the burden of determining the product/coverage mix that best addresses those needs.
To visualize this, imagine the user interface required to write a policy for an insured in the plumbing industry. In this case, the insured would not be asked to specify whether they wanted property, GL or commercial auto coverage. Instead, the focus shifts to the assets of the insured, and having identified those assets, the appropriate coverages would be recommended. For a particular location “asset,” therefore, GL, property, crime and inland marine coverages might be suggested based on the fact that the customer is a plumber. If the reader recognizes the similarities of this approach to consumer websites such as Amazon.com or Orbitz®, they’re spot-on, as this is exactly the approach we are advocating.
Emulate TurboTax®…
An excellent model for this design (separating customer needs from the underlying products that satisfy these needs) is TurboTax®.
A key feature of TurboTax® is that it does not ask users to pick the tax forms to be filed, rather, it asks them about their earnings, situation, investments, etc. – and automatically determines the forms that need to be filed. Repeating what we have said earlier, the customer does not care about the distinction between property, crime and inland marine coverage. These are completely artificial divisions invented by the insurance industry that have absolutely no utility from the customer’s perspective.
Secondly, as the process “learns” about and determines the underlying products that represent appropriate coverage, more information is required from the user, but one never has to answer the same question twice. For instance, if a user chooses to pay for e-filing a tax return with a credit-card, they only have to provide this information once, and this information is validated once.
Contrast this with policy-centric systems, where the credit-score is ordered twice, the payment information is entered twice, and basic information such as address, locations, buildings, industry and square footage is entered twice.
New business: quote rejection
Now consider a process which really does not exist for most policy-centric systems – dealing with a quote that was rejected by the prospect or his broker. For a policy-centric carrier, this decision is usually final; a customer-centric carrier, however, has several options.
First of all, if the prospect is already a customer for a different line of business, the carrier must evaluate whether it is worthwhile to give a larger discount to get the additional line. Clearly, if the customer has better-than-average credit and loss experience, this is a very desirable prospect for the new line.
Even if the prospect is not already a customer for another line of business, the carrier now knows a lot about the prospect. This is certainly enough information to determine whether the customer falls into a desirable segment for the carrier. If so, the carrier can re-market the same line on renewal, possibly with better terms or coverage enhancements. In addition, the carrier also has the option of marketing complementary products to the same customer.
Accordingly, we highly recommend this process be added. As with many of the ideas in this document, this is already in place at many brokers and MGAs who employ both automated and manual processes for re-rating and re-proposing coverage many months after the rejected quote’s effective date.
New business: request bind
The point at which a customer or broker requests that coverage be bound is critical. This is because at this point the customer has decided to buy – an excellent time to introduce additional coverages and services.
Particularly when the customer needs multiple policies, the information provided by the customer is usually sufficient not merely to price the desired policies, but also a number of supplemental coverages and other lines of business as well. For example, people buying home and auto insurance have typically provided enough information to quote umbrella.
Given this, the “request bind” process is an excellent place to up- and  cross- sell additional products.
Emulate Orbitz®…
People who have booked tickets with online travel portals will notice that when the customer clicks on “buy,” the page returned not only confirms the purchase and flight details, but also

• Offers upgrades at a price;
• Offers better seats at a price; and
• Offers limo service, theater tickets, car reservations, etc.

From an insurer’s perspective, this is analogous to:

• Offering higher limits or lower deductibles;
• Offering additional coverages;
• Offering complementary products.

The point here is that whether the sales process involves a broker, a call-center or the web, the ability to present additional revenue opportunities should be added. We should stress, however, that this up- and cross- selling needs to be designed with the customer segment’s needs in mind – irrelevant offers, or those with limited utility are unlikely to succeed and may actually damage the customer relationship.
Underwriting
If we examine underwriting from a customer-centric perspective, we’re most concerned with:

• Customer specific issues. These include situations where the customer has issues with credit, location, their form of business, etc.

• Customer individual issues. These include situations where one or more individuals associated with a customer has declared bankruptcy, has been convicted of a crime or has more than three similar problems.

• Asset/exposure underwriting. This refers to underwriting the specific exposures of the assets being insured.

Typically, policy-centric processes focus on the third area of concern, often at the expense of the first two. To highlight the industry-wide lack of customer-centric underwriting processes, consider the following examples:

• When underwriting a BOP, how many carriers run credit-checks on each owner and partner?

• While the property line of business requires an answer to the question, “Have you ever been convicted of arson?,” the workers compensation policy does not.

As we pointed out earlier, individuals that own or control insured assets should be considered to be exposures in the same way wind, hail and earthquakes are. A customer-centric underwriting process or operating model implies that:

• Traditional or policy-centric underwriters need to focus on assets/exposures specific to their lines of business; and

• Customer or customer individual underwriting should be performed once per customer as opposed to once per policy.

Billing, payment and collections
Of all functions within the carrier, the billing and accounts receivable groups are likely to be most enthusiastic about customer-centric design. The reason? More often than not they’re the ones criticized for sending multiple bills to the same customer where each bill corresponds to a different policy. This not only increases the number of transactions (and associated costs), but also makes other transactions, such as agent/carrier accounting, more difficult. Furthermore, accounting staff tend to think of this arrangement as counterintuitive, because they see the customer-centric model quite clearly – a unique customer corresponds to a unique billing account, and a unique policy corresponds to a unique receivable.
The trouble lies with policy-centric processes that don’t identify multiple policies as belonging to the same customer. Considering an extreme case, an individual-owned business may wish to consolidate the home, auto, and commercial insurance for a single entity under one bill. This is virtually impossible for a policy-centric carrier.
When using customer-centric processes, all of this becomes much easier, since an integral part of creating a quote or a policy is to identify the customer for whom the coverage is being added. In addition, assuming the carrier opts for a rich customer definition, there should be no issues when associating commercial entities.
Some additional advantages also accrue from becoming customer-centric:

• If payment plans are made consistent across products, billing and payment becomes easier for both the carrier and the customer. In addition, when the customer wishes to change a  payment plan, this can be done in one place.

• If the carrier already has EFT details on file for a customer, the same EFT profile can be used for other products that are purchased later. Equally importantly, if the customer changes his bank, changes only need to be made in one place. This is a specific benefit of keeping one or more payment profiles associated with the customer as opposed to the policy.

Emulate Amazon.com…
At checkout, shoppers at Amazon.com are able to add, delete or modify:

• Billing address – the address at which the bill is to be sent or alternatively the billing address of the credit card used;

• Delivery address – the address to where merchandise is to be delivered; and/or

• Payment method – the method of payment (e.g. EFT, credit card, etc.) as well as the associated payment details.

This “on-the-fly” modification of the customer record is only possible because Amazon.comdistinguishes between customers and transactions. More often than not, insurance carriers do not make this distinction.
Clearance
For most carriers, clearance is the process of ensuring that a risk is not being covered twice, and determining whether two brokers have submitted the same risk for the same customer. Based on carrier preference, this may be done up front, or at the end of the process, when the broker or customer requests the carrier to bind a policy.
The challenge with this process in policy-centric systems is that since all policies capture different customer and risk characteristics, clearance is performed in different ways for different policy types. A customer-centric process breaks the account clearance process into two pieces, namely, customer and coverage clearance. Note that this is analogous to the manner in which we suggest segmenting the underwriting process into customer underwriting and coverage underwriting.
Customer clearance is the process of comparing the customer details of two submissions to determine whether we’re dealing with the same customer. This process uses a variety of matching criteria, including social security number, EIN, date of birth and DUNS number in addition to name, address, zip and other contact information. Since this is a problem which is not specific to insurance, there are many third-party data management solutions available.
Coverage clearance is relevant only if two submissions belong to the same customer. This is where the policy/product specific process would determine whether, for example, the same vehicle was being covered by two different policies.
New business issue
The issuance process in a customer-centric world bears much similarity to the policy-centric model. The one major difference is the need to issue multiple policies simultaneously.
Returning to the TurboTax® example, when a user wishes to file a tax return, TurboTax® generates the relevant forms as a single package. In the same fashion, whether delivery of policy forms is electronic or paper-based, it’s important in our customer-centric world to generate all documents for all policies sold to a customer in one consolidated package.
Endorsements
It is typical of most policy-centric carriers to attach endorsements to each policy associated with a customer. This process is done in isolation, with little or no reference to other policies that may be in force for the same customer. This approach has numerous disadvantages. Consider the examples below:

• A carrier has homeowners, auto, and umbrella in force for a customer. The customer endorses the auto policy to add a Ferrari. This is of much consequence to the umbrella underwriter, however, in a policy-centric world the umbrella underwriter would not be aware of this until renewal.

• The customer in the above example moves to a new house. Three policies will need to be endorsed and the same address information will need to be entered three times. This example adds the related concern that the agent may neglect to endorse one of the policies.

Customer-centric processing eliminates both of these issues. An endorsement to the auto (or homeowners) policy could trigger a task for the umbrella underwriter. Note that this is possible only because all three policies are associated with the same customer. In the case of an address change, since all shared asset information is associated with the customer, it only needs to be modified once, and based on the implementation of the process, policy endorsements may be generated automatically. Note that, again, we have broken the endorsement into two parts, a customer endorsement, where some attribute of the customer is modified, such as the address of the covered home; and a coverage endorsement, where we may or may not decide to modify the coverages on this asset.
Clearly, the benefit is that the “customer” needs to be endorsed just once, and not for each policy.
Cancellations & non-renewals: non-pay
In our view, cancellations and non-renewal for non-payment can be classified into three fairly distinct classes:

• Defaulter – where the insured does not have a good payment history.

• Redeemable – where the insured does have a good payment history, but has had extenuating or mitigating circumstances.

• No-fault – where the customer is being penalized for an error or omission by the customer, agent, or carrier.

It should be clear that it is in the interest of the carrier to distinguish between these three cases. The strength of the customer-centric model is that we have the information we need to make good decisions. Let’s consider the three cases in order:
In the case of defaulters, non-payment should alert the carrier that other policies for the same customer may be at risk as well. While carrier actions in this regard are limited by regulation, the carrier can take certain steps such as holding or reviewing all changes to other policies issued to the customer.
Where a late paying customer has previously exhibited good payment behavior across all policies, the carrier should take steps to be more lenient than it might otherwise be. Clearly, leniency is not an issue from a regulatory viewpoint, and helps to secure the customer’s loyalty.
If improperly handled, an inadvertent or a no-fault cancellation could cost the carrier a customer. To avoid improperly terminating an insured, carriers are well advised to look at surplus cash/payments in other policies for the same customer, recent changes in address and other possible sources of error before canceling.
Cancellations & non-renewals – underwriting
Issues with cancellations and non-renewals for underwriting reasons follow the same broad pattern as the non-pay discussion above. Here, our three categories include:

• Bad risks – where the insured is a bad risk and likely should not have been taken on as a customer.

• Good risks gone bad – where the insured was a good risk, but has become a bad risk.

• Misunderstood good risks – where the risk is good, but has been misunderstood.

First, let’s consider the bad risks. These become evident when the carrier discovers that a particular policy needs to be cancelled for reasons associated with underwriting guidelines. In this case, we must clearly distinguish between a bad customer and a bad risk. In other words, there is a difference between an insured who misled the carrier as part of the application process, and another who mistakenly built a house on a hazardous waste site. In the former case, the carrier should do its utmost to rid itself of all other policies for the same customer. In the latter, merely the one with the hazardous waste exposure will do.
For an example of a risk that becomes less attractive over time, consider a manufacturing unit that expands quickly. In doing so, it begins to cut corners on employee training, safety, maintenance procedures, etc. This is clearly a situation where the carrier needs to work with the insured to consider the impact on other coverages provided to the same customer. As with the non-pay situation, working through issues with the carrier will likely promote customer loyalty.
Finally, the issue of alienating a good customer exists if there is a cancellation or non-renewal based on a misunderstanding. Consequently, this must be a well-considered decision based on the attractiveness of the customer as a whole.
We should point out here that many of the above concepts have been tried out successfully in the consumer loan and mortgage industry with very good results. Extending this idea further, we highly recommend that in the context of underwriting customers, carriers examine the practices of consumer loan and mortgage underwriting, since their business is built upon underwriting the ability of their customers to meet commitments. Much the same is true in the case of commercial loans and banking.
Renewals
In a customer-centric world, renewals are viewed in the same fashion as the bind requests discussed earlier. Once the carrier makes the decision to send out a renewal offer to an existing customer or reissue a quote to a prospect who did not accept it previously, the carrier can maximize:

• The chance of renewal or of new business succeeding (in the case of offers to prospects)

• Up- or cross-selling as a way of further expanding the coverage area of the customer, and precluding competitors from muscling in.

We would emphasize that this be done with careful examination of the target customer needs, since both the attractiveness of the renewal offer, and of any up- or cross-selling attempts depends on how targeted the message is.
Process & systems conversion
Once a carrier has determined a change to a customer-centric operational model is in their best interest, the processes and systems required to support the model must be designed and implemented. While technology is front-and-center, at a purely business level there are some cardinal rules to follow.
Shared customer repository
Assuming a well-formed customer definition, the carrier first needs to identify all customers by drawing from policy, billing, and claims systems, and organizing them into one coherent, clean repository. This is a major, necessary undertaking. Outsourcing should be considered here, as there are a number of companies that specialize in this type of work. The same vendor can also be used to maintain the data on an ongoing basis to avoid duplication, erroneous or outdated information or other data quality issues. All other systems, including policy, billing and claims should refer to this repository for all customer-related information.
Stripping away agency
One common misconception in the carrier and agency worlds is that agencies “own” customers. While agents and brokers produce quotes and policies for customers and can therefore be viewed as “owning” the policies, they do not, in fact, have the same ownership over – or responsibility to – the customer as the carrier.
To illustrate this, consider that a customer retains three brokers to acquire three policies from a single carrier. A policy-centric system would treat each policy as a separate “customer.” However, from the carrier’s (accurate) perspective, this arrangement is with a single customer; thinking otherwise negates the utility gained by proper customer definition described throughout this paper.
To be sure, this does create some complications, particularly related to information security since it becomes necessary to hide customer details from certain users (e.g., brokers) not entered by the originating broker. Adding this additional security layer, however, is well worth the extra effort.
Maintaining clean data
Once a carrier creates a clean central repository, both system shortcomings and data entry errors will negatively impact data quality, as duplicates and inconsistencies will begin to pollute otherwise good data. To address this, a staff member (or several staff members) should be made responsible for data integrity and cleanliness against a set of published data quality measures.
The business case
Thus far, we have described the customer-centric model for carriers, contrasted it with the traditional policy-centric model, and walked through the steps one would take to transition from the old to the new model. To conclude this paper, we’ll describe the business case for the customer-centric model.
CRM/customer profitability
As the attentive reader will have deduced by now, much of the content of this paper is the application of customer relationship management principles to insurance. If one strips away the hype around CRM, the simple kernel of wisdom that remains is to do whatever you can to acquire and retain profitable customers, while doing your utmost to rehabilitate or discard unprofitable customers. A precursor to this notion is to recognize and reduce the many ways in which customers cost carriers money.
While insurers routinely use loss ratio as a proxy for customer profitability, it should be noted that customer acquisition and servicing costs have risen to the point where they mustbe considered as well. Both direct and indirect costs are acknowledged in the customer-centric model, as are means of revenue maximization.
Underwriting/rating
The ability to consider all policies from the customer perspective is essential to underwriting. Underwriting considers the desirability of assets owned (or managed) by the insured.
While the focused underwriting of assets, such as buildings or automobiles, and the perils associated with them is important, it is perhaps more important to underwrite the individual or the entity that owns, lives in, operates and/or manages these assets. This point of view is supported by the fact that the majority of new variables added to rating algorithms in the last twenty years involve “human” factors such as credit, age, gender, etc. Additionally, the definition of “customer” as a household is supported by the importance that “additional drivers” now have in automobile rating. The same is true for commercial lines. The credit rating of a company, together with its processes (whether related to cash control, loss control or injury prevention) have become as important as square-footage and protection class in rating and underwriting.
Unfortunately, it is rare to find these additional customer characteristics in process definitions, and even less so in policy processing systems. Another, equally important point is that when these additional customer characteristics are captured and tracked, they are done so at the policy level, suggesting that underwriters reviewing other policies for the same customer often do not have access to this information.
The bottom line is that while individual underwriters may collect and review a wide variety of customer information, this is rarely institutionalized in underwriting processes when in fact it should be. Conversely, neither personal nor commercial lines underwriters adequately underwrite the customer, and instead restrict themselves to the narrow confines of a particular line of business. An extreme example of this is umbrella underwriting, where rarely do umbrella underwriters collect, let alone analyze, all of the details of the underlying policy changes associated with them.
Note that these shortcomings in process are not functions of ignorance or laxity. Instead, they stem from a long held policy-centric view from both a process and technology perspective. Furthermore, the cost and risk (not to mention the unavailability of management capacity) required to undertake this type of change locks the majority of carriers into a policy-centric world.
Given this, the financial impact of the customer-centric model includes:

• Lower underwriting costs. By splitting underwriting into customer and coverage underwriting, we remove redundancies in underwriting customers.

• Lower cross-subsidization. By adding more customer attributes as drivers of rating algorithms, we reduce the coverage cost subsidies that have existed with the traditional focus on assets, perils and exposures, rather than the owners, operators and managers of assets.

• Lower loss costs. Through improved underwriting information, more consistent underwriting guidelines  and the early warning provided by the first policy to have a loss on other policies for the same customer, loss costs may be reduced.

Billing/collections & customer support
Single bills per customer cost less to generate, cost less to apply and process, and if the invoice is designed well, provide the customer with answers to frequently asked questions to reduce customer service calls. This is not trivial, since some 70%  of carrier service center calls are related to billing inquiries.
Even when a customer does call, the ability for customer service representatives to access all of a customer’s policies and ascertain their billing status, as well as up- or cross-sell relevant or complementary products enhances the utility of call center representatives. More information at a rep’s fingertips means fewer transfers within the call center, faster problem resolution and generally more satisfied customers.
Commoditization
A number of insurance monolines, especially personal lines and the low end of some commercial lines, are becoming commoditized. Direct-to-consumer companies are leading the way, usurping precious market share from traditional carriers who lack direct sales capabilities.
The best counter to this trend is to begin to offer value-added products and services that are highly targeted to specific customer segments willing to pay higher premiums. To put it bluntly, the policy-centric model fails miserably in this sort of world.
Agent/broker/channel benefits
While the direct channel is expanding, agents and brokers are still a necessary component of the value chain, and are likely to remain so for some time to come. For the most part, the customer-centric model suits these players much more than the policy-centric model because:

• A majority, and certainly the more competent members of this community, are already customer-centric. From their perspective it’s far easier to shop for all of a customer’s needs in one place rather than dealing with multiple carriers. This reduces costs for the agent/broker and drives higher marginal revenue for the carrier.

• As the population of agents/brokers ages and individuals with lower skills and less experience are introduced, a carrier that can promote its own products rather than rely on agents to push them is likely to enjoy higher revenues.

• As has been described earlier, the lower cost of policy maintenance in a customer-centric model is also likely to appeal to agents and brokers, since many post-acquisition transactions do not pay commissions.

Conclusion
Many carriers continue to operate using a policy-centric model. We believe that, on balance, these carriers have higher operating costs, lower revenue per customer and are likely to have lower growth rates than their customer-centric compatriots. The customer-centric model is tried and tested in many industries, most notably, perhaps, in banking and consumer finance.
There are tangible benefits associated with a customer-centric model, particularly for multi-line carriers. To realize these benefits, however, carriers need to take a hard look at existing, organizational structures, processes, and systems and the cultures in which they dwell.
This is no easy task, nor is it certain that when they are done, they will be substantially better off than before. However, the cost of not attempting this transformation may be result in an increasing lack of ability to compete or maintain the loyalty of hard-won customers.
Implemented well, on the other hand, the customer-centric model results in substantially lower costs, the ability to significantly grow revenue and profit and a loyal, committed and ultimately satisfied customer base.

Vivek is co-founder and Chief Technology Officer at OneShield, Inc., a process automation software company with an insurance industry focus. Prior to OneShield, Vivek worked in a variety of technology, marketing and consulting positions in the financial services industry. His industry experience spans some twenty years. Vivek was educated at Swarthmore College and INSEAD.

Overview
Today’s business world is characterized by organizations benefiting from efficiency breakthroughs enabled by the exciting technological advances of the past ten years or so. Associated with this change is the way in which businesses can now focus on core competencies, as inexpensive means of outsourcing what were traditionally internal functions, even to distant locales half a world away, have become prevalent.
Outsourcing and offshoring
Outsourcing refers to a transfer of certain internal processes that comprise business operations to a third party. Offshoring, on the other hand, is simply outsourcing business processes to a third party in a foreign country. India, China, Russia, Indonesia and Brazil have emerged as leading offshore outsourcing centers.
Outsourcing is suitable for virtually any business process, however, the most frequently outsourced processes are those that are considered “non-critical,” inasmuch as they do not represent a core competency. Increasingly, however, we’re seeing important, core processes, including product development and market research, being outsourced to third parties. Some commonly outsourced functions include:

• IT services, including data centers and programming;
• Transaction processing, such as credit cards; and
• Other business process outsourcing, including customer support functions, database maintenance and bookkeeping services.

Developments in technology and telecommunications have served to strengthen arguments in favor of outsourcing, hence an increasing number of organizations are making the decision to outsource. Businesses that outsource – especially offshore – enjoy the benefits of lower labor costs and favorable exchange rates. However, ill-informed companies often suffer from a poorly considered outsourcing strategy.
Like any other business decision, a decision to outsource should be based on numerous factors.  A thorough inventory of existing, internal processes and an understanding of the benefits and pitfalls of outsourcing need to be taken into account.
Outsourcing insurance operations
Insurance operations and the processes that comprise them provide a major area of opportunity for insurers to enhance their competitive positions. As a driver of operational excellence, a well-defined and carefully executed outsourcing strategy can yield:

• Lower operating costs;
• Greater flexibility;
• Better responsiveness to customers; and
• Increased quality.

A word of caution is appropriate here. Few of these benefits may be realized without a thoroughly researched effort. A decision to transfer business processes is a major undertaking that should be analyzed and examined critically to derive an optimal result. A good place to start is by asking, What processes are good candidates for outsourcing? Insurance company operational processes that are most routinely outsourced include:

• Quote issuance;
• Policy issuance;
• Endorsement processing;
• Financial administration;
• Claims processing;
• Customer service; and
• Billing.

The motivation for outsourcing is more often than not a reduction in cost and acquisition of important skills, creating an apparent competitive boon to company operations.
However, is gaining competitive advantage this simple?
Before embarking on such an ambitious endeavor, it’s extremely important to understand the specific nature of one’s business and the impact of outsourcing on existing operations. Insurance operations are highly specialized, and their adequate conduct requires considerable experience and knowledge.
Further, cultural considerations must not be overlooked. Certain core activities are best performed with a tinge of local flavor and hence should not be outsourced. As such, differentiating core from non-core activities is critically important since such a distinction is often erroneously made on the basis of what might be considered “important” and “not-so-important.” To be sure, no activity is unimportant, and any decision to outsource should be based on an assessment of those activities that are readily transferable, versus those which are performed with a level of uniqueness that distinguishes them from competitors.
Outsourcing management
Outsourcing involves three major phases: pre-migration, migration andpost-migration.
Pre-migration includes the outsourcing decision, vendor selection and definition of the service levels that form the basis of an agreement. Once an agreement is executed, the engagement is officially kicked off and the transition to the migration phase begins.
Migration includes a thorough documentation of the activities that are to be undertaken by the outsourcing vendor, governance and compliance policy development, project planning and resource allocation, training, knowledge transfer, system integration (when applicable), data migration, security and user acceptance testing. A completed migration phase sets the stage for fully “operationalizing” the outsourcing relationship, which takes place during the post-migration phase.
Post-migration is the phase during which control of operational processes being outsourced are handed over to the vendor. Viable providers will offer transparency into daily operations and workflow, including activity reports, service level compliance, change control and audits.
Pre-Migration
The Decision to Outsource
The decision to outsource should center on seeking a professional relationship with a dedicated vendor who can provide fresh ideas on how to run and improve operations. Outsourcing is a strategic initiative, and as such has a goal of establishing a long-lasting and fruitful alliance formed for the mutual benefit of both parties.
One of the most common mistakes in the outsourcing decision is to focus solely on smaller or less critical processes as candidates with an eye toward cost cutting. While a reasonable decision criterion, cost savings should not be the sole motivator for outsourcing; there should be an acute awareness of the compromises to quality that might result from such decisions.
Selection of the best candidate processes for outsourcing begins with a review of all organizational processes. Those that represent core competency and demonstrate little room for improvement are best left alone; those to which a qualified outsourcing vendor can add value – by providing management frameworks, process visibility and guaranteeing service levels at reduced prices – are excellent candidates. Such an internal process review involves:

• Identification and documentation of organizational processes;
• Analysis of process challenges (multiple handoffs, bottlenecks, non-value adding activities);
• Feasibility studies and impact analysis; and
• Determination of decision criteria.

A typical insurance operation includes multiple opportunities for outsourcing, including underwriting, policy administration, customer support, claims management, renewals, and billing and collections.
A common misconception is that outsourcing should allow an organization to focus only on important operations that require direct control of quality. However, since no function is unimportant, this idea is a detriment to good outsourcing practices. In fact, outsourcing itself should be thought of as a process that requires careful attention to management, in order to derive the maximum value from the relationship.
Which processes?
To support decisions to outsource specific business processes, operational processes should be evaluated with respect to the complexity and level of risk associated with the process, and the value that outsourcing that process can add to the business.
The matrix on the following page illustrates a good way to organize decision criteria to determine which processes represent the best candidates for outsourcing. Notably, in this example the business value derived from outsourcing is weighed against the complexity of business processes, the riskier ones less likely to be outsourced.

Outsourcing selection criteria

In examining their own processes, the organization depicted in our example has determined that:

• Policy issuance is a well-documented, mature process, and outsourcing could provide significant benefit – in particular for a company that issues fairly standard policies that require simple underwriting reviews.

• The claims settlement process is potentially complex and as such involves a fair amount of risk. In this case, extra attention should be paid to prospective vendors’ experience and expertise in dealing with the claims process. More tightly controlled service level monitoring is called for as well.

• Market surveys and basic customer service are processes that our subject company feels are best done internally. Though risks and complexities are low, maintaining a first line with customers is determined to be important enough  to maintain in-house. Outsourcing these simple but important processes might also be compromised by the cultural differences of offshore providers, introducing unnecessary risk.

• Endorsement processing, adjuster assignment and reserving are processes that are viewed as highly complex, and our subject company is not comfortable outsourcing these processes to third parties.

Naturally, the position of the various processes that comprise an insurance operation in the matrix will vary from company to company.
Vendor selection
When choosing a vendor, selection criteria and the weight each is given will vary by company and are heavily influenced by market cycles and organizational objectives. Expertise, experience, reputation, efficiency and good customer service are among the factors to consider when choosing a vendor.
In addition, to better evaluate the fit of a prospective outsourcing partner, vendors should provide information regarding:

• Their vision, mission and values;
• Financial statements (two to three years preferred);
• Client lists and referrals;
• Capabilities and areas of specialization;
• Capacity;
• Office locations;
• Infrastructure; and
• Reporting and management capabilities (i.e. dashboards and portals).

These factors help narrow the field of prospective vendors considerably.  [N.B.: While  there’s some debate regarding exactly what value is derived by examining a vendor’s vision, mission and values, their overall cultural fit – something that should be a major consideration – becomes pronounced only by gaining an understanding of these “soft” factors. These are not mere niceties, rather important indicators of a vendor’s priorities.]
Having arrived at a shortlist of prospective vendors, final selection includes additional diligence, which should include:

• Capabilities demonstration. A live demonstration of the vendor’s capabilities is the best way to understand how the day-to-day relationship will be managed. During any such demo, representatives of all stakeholders should be present. It is advisable to score the vendor on a list of factors that the stakeholders feel are important, bringing objectivity to the process.

• Scrutiny, analysis and review. Scrutinize the presentations provided and compare notes with other users that attend the demonstration. This provides multiple perspectives from which the ultimate decision maker can determine the final selection. Site visits also provide valuable insights into the strength of a vendor’s claims regarding their servicing abilities.

• Negotiation and commitment. The closing step in the final selection process is negotiation. Vendor pricing, service levels and payment terms should be evaluated and compared.

Other important considerations include:

• Communications. Good communications are a hallmark of any well-managed enterprise. Frequent, comprehensive and candid communications help keep expectations aligned.

• Dedication. Naturally, most outsourcing vendors will vouch for their staff’s dedication to the job. Staff dedication is a result of training, incentives and job growth opportunities, which translate into employees’ willingness to study, engage thoroughly and adapt to the insurance company’s outsourced processes.

• Efficiency. It is always of interest to know whether workflows are optimized – where insurance company expectations are met or exceeded (as defined in service level agreements) at least cost. It’s important to understand how variations in volume impact turnaround times and how the company is equipped to handle the expansions and contractions that characterize any dynamic industry.

• Quality is a major consideration when choosing an outsourcing vendor. Compromising quality results in customer attrition and a consequent reduction in business volume. Obvious adoption of widely accepted best practices should provide comfort that the chosen outsourcing firm has in place a viable quality management system. Certifications such as ISO or CMMI provide reasonably reliable third-party quality endorsements.

• Customer service. Inasmuch as policy holders are extremely sensitive to their sense of relationship with their insurer, their needs must never be compromised.  When outsourcing, it’s important to ensure that a chosen vendor will exercise the same level of care as the insurance company would if they employed their own internal staff. This requires frequent monitoring of customer satisfaction via surveys, complaint logs, and call monitoring.

• Reputation. Outsourcing companies that have an established name are the best bets to start with. While experience does not always relate directly to expertise, a company that has developed a solid reputation in a particular industry has a lot at stake, and will typically go to great lengths to ensure the success of the relationship.

• Size. Size is another important consideration in the vendor selection process.  In any industry,  there are players that target different segments based on their financial capacity, capabilities and value proposition. While the effect of size mismatch may not be felt initially, there are long term considerations that essentially indicate the importance of including size among the evaluation criteria.

• Pricing model. With the rapid growth and acceptance of outsourcing services, it’s natural to witness intense price competition. Since many companies outsource to obtain cost savings and operating efficiencies, a flexible pricing model that respects multiple service levels should be a feature of any outsourcing arrangement. In addition, pricing models should reflect the core business of the insurer. For example, an insurer that specializes in private passenger auto insurance exhibits certain operational characteristics that influence pricing, including:

• High volume (large number of policies);
• Low value (low premium values);
• High operational costs (resulting from large policy issuances);
• Requirement for faster turn around time; and
• Standardized processes.

As such, auto and similarly situated insurers should take note: these characteristics represent a collection of important evaluation criteria when selecting a vendor for outsourcing. However, an additional characteristic, flexibility, is driven by the notion that lower margin operations inhibit the ability to commit to fixed payment schedules, and as such the vendor should allow some form of unit pricing, where fluctuations in transaction volumes are mirrored with variable pricing agreements.
Agreement and kickoff
The final step in the pre-migration phase is marked by execution of an agreement with the outsourcing vendor and an all-hands kickoff meeting. Contract negotiation and finalization is a key step, the importance of which cannot be overemphasized. Offshoring in particular introduces risks that are only mitigated with the careful attention to contract terms that adequately define expectations. Risk factors inherent in an outsourcing arrangement that are amplified when dealing with offshore vendors include:

• Communication issues;
• Cultural differences;
• Political and economic climate;
• Legal environment; and
• Attitudinal differences.

A closer look at each of these factors highlights the importance of tight controls memorialized in clear contract language.  Unfortunately, many outsourcing relationships begin with much fanfare and enthusiasm, only to irreparably degrade due to misunderstandings that might have been avoided entirely given a more diligent contracting process.
Having executed an agreement, the parties next assemble at a formal kickoff meeting that involves representatives of all stakeholders in the relationship to create the cohesiveness required for a well-integrated vendor-client partnership. Participants typically include the project sponsor, project manager(s), subject matter experts and core team members from the insurance company client, and a lead project manager, team leader(s) and key staff members from the outsourcing vendor. It’s important to understand the structure of the vendor’s project team organization prior to commencing the project, with the lead project manager’s reporting relationships and escalation protocols clearly defined.
The kickoff meeting provides an excellent venue to discuss these and other issues that influence the good communications that characterize any successful working relationship. In addition, the kickoff meeting is the principal forum used to align expectations between client and vendor. Some areas in need of reconciliation include:

• Performance and quality. Successful business operations are often defined by the quantity and timeliness of process outputs (i.e., performance) and the consistent ability to meet or exceed client specifications (i.e., quality). Quantitative measures that validate pre-defined performance expectations (in some cases, service levels) and quality should be routinely communicated.

• Roles and responsibilities. Team skills assessments should precede the assignment of specific roles, and the client should be made aware of the backgrounds of vendor staff members designated to perform work on their behalf. The roles and responsibilities of people working within each organization should be well-defined and communicated to all team members to avoid confusion, duplication of effort and to instill accountability.

• Control. In any outsourcing relationship, control of operations is a major cause of anxiety.  Operations once exclusively the domain of internal resources may now be distributed worldwide. As such, technology and telecommunications occupy a pivotal role to the success of the relationship. The benefits of outsourcing tend to evaporate if the client company exercises too much control. As such, good visibility and frequent, if not real-time reporting help allay the fears that often accompany a loss of control.

• Security. Data security is of paramount importance for insurance companies. In an industry built on trust, security, confidentiality and the protection of sensitive customer information is critical; breaches of trust can spell disaster for the outsourcing vendor and the insurance company client. A review of documented security measures and a thorough examination of data facilities should precede any outsourcing relationship.

Migration
The migration phase involves the actual implementation of the outsourcing process. It starts with documentation of all outsourced processes and ends with user acceptance testing.
Activities involved in each step of the migration phase are detailed below:

• Documentation. A review of process and other manuals that assist the vendor in providing their services is the first step of the migration phase. It’s good form for an insurance company to develop and maintain manuals that highlight procedures and indicate roles, responsibilities and process owners for each operational function. These documents provide valuable input to an outsourcing vendor, and help preserve business continuity in the event of staff changes. Process manuals are dynamic, with process efficiencies built upon past experiences and evolving market conditions that are recorded as lessons learned within its pages. Accordingly, the vendor should demonstrate the ability to adapt to these changes.

• Compliance checks. Both parties need to ensure that there are no legal or compliance issues encumbering the outsourcing or offshoring arrangement. For example, many jurisdictions regulate the sharing of personal information and leverage severe penalties for infringement. Reviewing such limitations is an important part of the migration process.

• Governance and infrastructure. Process governance, including vendor policies and procedures, and the infrastructure upon which outsourced staff rely to perform their jobs should be examined thoroughly and well understood by the insurance company client.  System availability should meet or exceed “five nines” of uptime (99.999% availability).

• Disaster recovery. The outsourcing vendor’s disaster recovery plans should be reviewed and understood, and the procedures for dealing with failures due to unforeseen natural and unnatural catastrophes widely communicated and even rehearsed from time to time.

A related issue during this phase includes the installation of software applications required in the conduct of the insurance company client’s business at the vendor’s locale. Software End User License Agreements (EULAs) should be reviewed, and additional licenses purchased if necessary to ensure compliance.  In addition, insurance companies should collaborate with their chosen vendor on the following:

• Project/resource planning. Detailed project plans, including resource allocations and task scheduling are drawn up during the migration phase. Project timelines should be determined based on actual level of effort required while considering business objectives, rather than arbitrary due dates and guesstimates. Business process outsourcing represents a major change in the means by which business is conducted. As such, the impact on the client’s existing business should be acknowledged while project planning, and the appropriate buffers and lags associated with any such impact accounted for.

• Training. Training and knowledge transfer is another critical part of the migration phase. Resources employed on the various process teams should be well-versed with the rules and regulations, statutory issues, data structures and data protection laws, internal policies and procedures impacting any outsourced process with which they’re involved. Training should include a level of interactivity that tests the knowledge and the grasp of specific processes, enabling the vendor to assign responsibilities to the appropriate staff members.

• Data transfer. The actual transfer of data is a preparatory step in advance of user acceptance testing, and provides the vendor with the requisite raw material to make the outsourced process operational.

• Process integration/migration. As seamless a transition as possible from outsourcing location to insurance company client operation is the objective of this stage of migration. Procedural challenges may best be served with the adoption  of certain technologies, such as extract, transform and load (ETL) tools for efficient data migration and Business Process Management Suites (BPMS) to link disparate systems and promote efficient workflow.

• Compliance again. At this stage of migration, it’s wise to ensure that all necessary contracts and agreements are in place, with an explicit understanding of the timing and frequency of audits to ensure compliance with service levels, policies, and regulations.

• User acceptance testing (UAT). The UAT process allows the insurance company client to validate the chosen set of procedures for effecting the outsourced process within the service levels defined in the outsourcing agreement. Sample transactions and associated reporting provide the best means for such validation.

A properly managed migration phase will provide for the insurance company client an excellent understanding of the vendor’s ability to meet expected performance levels. UAT results and any corrective action should be taken by the vendor as a pre-condition to going live.
A common mistake made in outsourcing relationships is moving on to the post-migration phase immediately after completing the UAT.  However, it is highly advisable that a thorough comparison of client objectives against test results is undertaken in a manner that validates the outsourcing decision for the client’s management.
Validating the decision
According to the 8th Annual Outsourcing Index released by The Outsourcing Institute, the single most common reason companies outsource is to reduce and control operating costs. As such, ensuring this objective is actually realized should be given much weight when evaluating the viability of continuing to outsource any process.  There are many ways to go about this:

• Compare service level agreements. SLAs provide quantitative benchmarks for evaluating the speed, cost and quality of various processes.  For every transaction processed during UAT, the insurance company client should evaluate compliance with stated service levels. There’s no reason to expect failed service levels to improve in a production environment, so remedial attention is imperative prior to going live.
• Current vs. future. A comparison of current process performance to UAT results provides a good indication of the cost, speed and quality benefits of outsourcing.

The most important takeaway from the migration phase is a validated understanding of the benefits of outsourcing that aligns vendor and client expectations.
Post-Migration
During the post-migration phase, emphasis shifts to relationship management and the ability to rapidly address issues that arise in the live production environment.
To preserve business continuity and enhance the quality of outsourced processes, the following steps should be followed:

• Handover and control. Naturally, some insurance company personnel are reluctant to give up control over certain organizational processes. The lines of responsibility, however, must be clearly drawn for the relationship to work. Control anxiety is best alleviated by providing frequent, if not real time, visibility into process performance.

• Transparent operations. As earlier intimated, for the outsourcing relationship to be viable, the vendor’s operations must be transparent to the client. This means the personnel engaged on behalf of the client are known and accessible to the client, and the results of operations are reported as frequently as mandated by the SLAs that govern the relationship. Absent adequate transparency, the client and vendor expectations will, over time, become misaligned.

• Reporting. Consistent with the need to provide transparency into the daily workings of the outsourcing vendor is a clear definition of the type and frequency of reporting that will take place. Reports that indicate weakening service levels should be thoroughly discussed and the lessons learned institutionalized to avoid further slippage.

• Process updates and change control.  Changes to business processes and the associated service levels must be documented and incorporated into existing agreements as mutually understood modifications to the current arrangement. Failure to support change in writing often results in misunderstandings, especially with offshore partners whose language interpretations may be somewhat nuanced. Changes should be authorized by a client representative who fully understands the impact of any such change. The adoption of the change is facilitated with documentation and training in any revised procedures mandated by the change.

• Audits. Occasionally, it may become necessary for the client to undertake a detailed review of the vendor’s operations in order to verify that reported information is, in fact, consistent with reality. Further, periodic reviews are not only prudent, but represent a good business practice to which no outsourcing vendor should object.

Conclusion
In the strictest sense, outsourcing should be viewed as a strategic initiative designed to help an insurer in the advancement of its organizational objectives. As with any major operational undertaking, outsourced processes require diligent monitoring, careful analysis and well-documented contingency plans to maximize the benefits of the engagement.
Offshoring operations introduces additional risks, though it’s an increasingly accessible strategy for even small and mid-sized insurers to realize significant cost advantages. Cost considerations, however, must be weighed against the quality, cultural differences, time zone changes and language barriers that might inhibit a relationship with an offshore provider.
Insurers have many choices when selecting a third party with whom to engage for outsourcing business processes. Aligning a prospective vendor’s operational strategy with the insurer’s is a fundamental endeavor in advance of entering such a relationship. Insurers should be aware of prospective vendors’ own market positioning, to see whether they are focused on:

• Lower costs services for transactional processes;
• A wider breadth of services offered;
• Deeper vertical (i.e., insurance) knowledge; or
• Better methods of execution.

Matching business objectives helps considerably in aligning the client-vendor relationship from the start.
According to Gartner, the offshoring component of outsourcing alone is expected to exceed $235 billion by 2008. This represents a compound annual growth rate of 7.8% since 2002, and speaks loudly about the success of offshoring as an important operational strategy that affords those who carefully consider it, and apply best practices to the engagement of a qualified provider, a distinct competitive advantage.

Vivek Sethia is Vice President, Insurance Practice – North America at 3i-Infotech Inc. In this capacity, he manages and charters the growth path for the Insurance IT Solutions practice and oversees the IT Solutions and Consulting businesses for both the property & casualty and health insurance sectors, managing a team of over 200 people. Having spent more than 12 years in providing IT solutions and consulting services, he has experience with requirements analysis, design, development and implementation. Vivek is a management graduate from India with experience spanning some twenty-five countries across four continents.

How many of us suffer through weekly status meetings, update meetings, meetings about what meetings we should be having? A perfect example of confusing activity with accomplishment is the meeting for meeting’s sake. What I mean by that (if it’s not already clear) is when a scheduled meeting is held simply because it’s a regularly scheduled meeting. These can be colossal wastes of time and talent. A related result of these meetings for participants is a feeling of being busy, of working when, in fact, no real work is getting done. Activity without accomplishment.

Status meetings in particular are dinosaurs, since today’s management information and business intelligence platforms provide great visibility and negate the need for many of these inane get-togethers. BPM systems provide incredibly granular information about specific activities, individual performance, process outputs, etc. The foundations of BPM (the discipline, not the technology) call for clearly established objectives, uniform workflow, extensive documentation – all components of any well-managed organization. The vision is established, the methodology is instilled, the marching orders are given and the troops go to work. The application of management best practices is anathema to meeting after meeting after meeting to establish policies or get status reports.

To be sure, sometimes we need to have meetings, and sometimes we need to have many. I’ve shepherded wayward projects by calling for sunrise (first thing in the morning) and sunset (last thing at night) meetings to establish with a given team what will be accomplished today, and what was accomplished today. These meetings, however, are designed to be temporary interventions to get derailed projects back on track.

Look at your calendar and see how many pre-scheduled meetings there are. Think about what really gets accomplished at each of them. Think about how attending these meetings takes you out of flow, as your day-to-day activities are interrupted and getting back into the groove wastes another hour of your day.

To be a real competitor, the principles of good management must rule. Meetings for the sake of meeting suck the life right out of your workforce and your business. Meet when you must, set an agenda, distribute to all participants at least an hour before the meeting, provide some sort of value or learning and always, always, have take aways for everyone at the table.

There’s naturally a ton of hype surrounding BPM, and I’m proud to be among its staunchest promoters both within my organization and among our clientele. There’s seems to be a disconnect, however, regarding what the implications are for the adoption of BPM, and I think it’s important to draw a distinction here. The greatest pushback against BPM initiatives is the idea that its adoption requires wholesale changes in every aspect of the organization. But change, to be effective, should take place incrementally, with a process-focus being embraced over time as a series of small successes add up to validate the BPM approach. This evolution requires staff to become process thinkers, seeing processes in their organizational context and paying attention to the influences that make or break excellent processes. (Excellent processes being those that are efficient, effective and agile.) (See, for example, my entry, The Big Picture from November 7, 2006.) This is purely an educational endeavor, and the establishment of well-defined and widely communicated organizational goals, uniform process frameworks and aligned compensation creates the foundation for an organization of process thinkers.
A process-centered organization, however, is an entirely different thing. A process-centered organization has organized around processes; that is, processes have primacy in the design of the organization. This means that process owners have much authority, responsibility and accountability for the conduct and output of the processes they supervise. Truly an organizational form, a process-centered organization may not, in fact, be the best choice for organizational design. Other design choices, including organizing around customers (e.g., large corporate customers, individual consumers), geography (e.g., Northeast, Southwest, etc.), functions (e.g., sales, production, research, finance, etc.), products and services (e.g., consumer products, commercial products, etc.), or projects (i.e., a matrix structure) are just as valid as organizing around processes. The choice of organizational design, however, depends heavily on a number of factors, including the industry in which the organization operates, the type (professional, skilled, semi-skilled) and number (small, large, huge) of employees, the age of the organization, the markets it serves, and other factors. To be sure, a process-centered organization will encourage process thinking, however, any one of the other generic organizational designs stands to benefit greatly from a coterie of employees who are process thinkers as well.