Nobody ever set outs to purchase a legacy system. Carriers looking to address a business need purchase a technology that, only after years of service, begins to show its age only in relation to other, newer solutions.
Considering the competitive landscape property/casualty insurers find themselves in, this question of relativity is an important one. The continuing soft market and limited investment returns are putting pressures on combined ratios and leaving carriers with two options: They can either focus on increasing top line growth or look to decrease costs through greater operational efficiency. Since that growth is a zero-sum game in a soft market, opting to decrease costs seems the more expeditious route.
With the vast bulk of carrier expenditures in the claims area, it seems a likely to place to start. While any dollar a carrier saves on claims travels directly to the bottom line, a broader advantage of claims systems replacement may be the promise of addressing strategic imperatives, such as business transformation. For example, with market conditions putting an increasing premium on retention, one could argue that a well-functioning claims process is a prerequisite to handle the growth expected once the market rebounds.
Karlyn Carnahan, a principal in the insurance practice at New York-based Novarica, notes that recent research by her firm indicates that 47% of large property/casualty carriers and 40% mid-sized property/casualty carriers have claims as a top-three IT investment priority for 2010. "There are many people who are in the process of implementing a claims solution or doing the research to get ready to implement," she says.
But where, exactly, does one start? A carrier can opt to rip and replace a legacy claims system with a modern offering. Another option is to wrap a services layer around a highly functional legacy system or augment it with analytics or business process management technology. [See sidebar to see how Farmers leveraged BPM to improve claims handling.] Both strategies have pros and cons. To many, the rip-and-replace approach is inherently risky, akin to changing engines on a plane in mid-flight. Others will push back that wrapping and extending a legacy system is ultimately a losing proposition because it only delays a reckoning while locking in legacy business practices and "paving the cowpath."
Another consideration insurers must account for when replacing claims systems is the inherently diffuse nature of the process. Insurers have to rely on third parties, such as auto repair shops, to deliver services and maintain the standards they have established for themselves.
Whatever choice is made is an important one since a claims transaction is likely to be the most protracted interaction a customer has with a carrier, and the quality of that experience is likely to leave an indelible mark on the customers' view of said carrier.
"Providing a truly differentiated claims experience is a competitive advantage," Carnahan says. "Typically when people think about replacing a claims system, you don't think about premium generation from claims. Yet, if you can handle claims more efficiently with the same staff, you are better able to take advantage of the growth being generated from the underwriting side."
OUT WITH THE OLD
The need to better serve the business was the primary consideration as Lincoln R.I.-based Amica Mutual Insurance Co. looked to replace its claims system, says Claims Applications Section Manager Bill Vandervelde.
Despite the fact it was a green screen, code-driven, Cobol and assembler system, it was highly functional, Vandervelde says. "It was a 30-year-old system, but it accomplished most of what the business wanted to do during its day," he says.
After a review process, the company opted for the ClaimCenter offering from San Mateo, Calif.-based Guidewire Software. "We knew we had to go to a modern claims system if we wanted to keep providing the worldwide claims service Amica was known for," Vandervelde recalls.
Like all major core system undertakings, there were surprises in the implementation phase but, overall, the shift to the new system was a smooth one. "The most daunting task we had was getting somebody to go into to COBOL and assembler and pull out those business rules," he says. "There were some rules we didn't even know were in there until we attempted to venture in."
Vandervelde notes that Amica chose not to retire its legacy system, using it instead to interface with their accounting system of record and create financial reports. "From a maintenance standpoint, we're supporting a stripped down version of legacy, and had to learn new technologies in order to support ClaimCenter, but we're getting more proficient as we go along."
More importantly, the modern system gives IT more power to deliver what business users would like, Vandervelde says. Specifically, he cites the functionalities engendered by operating in a browser-based environment, noting the company recently linked the system to their website, enabling Amica customers to report a claim online.
"From a technology standpoint, the difference in terms of what we can now do for the business and the customer is night and day," he says. "We now enable customers to submit a first notice of loss to a claims handler and track the status of a claim online. Prior to having the modern claims systems that we now have, that would have been very difficult to do."
ASSESSING OPTIONS
An insurer looking to redo the technology undergirding its claims process certainly does not lack for choices. In the past decade, a plethora of claims options has appeared in the market. This wasn't always the case.
Now, many are designed specifically to work with service-oriented architectures, are typically configurable, browser-based and also have built-in business intelligence tools. The rules-based scripting common to modern systems helps route claims to the adjuster best suited to handle it during first notice of loss. Features such as integrated workflow management capability, automated task management, document creation and business rules configuration are table stakes for vendors seeking to make a sale. Since claims, from a systems perspective, largely derives from financial systems, many offerings feature automated reserving. Likewise, adjuster portals and dashboards and better user interfaces for easy navigation also are standard requirements. New systems also grant greater visibility into the workings of third parties and processes such as salvage, subrogation and litigation. This broader functionality dovetails with another nascent trend in claims: the insertion of the customer in the claims process. Some modern systems enable a customer to upload photos of accident or track the repair process of vehicle in a body shop.
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