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."


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."


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.

The use of analytics also is having a greater impact in claims in areas such as adjuster assignment, evaluation, frequency and severity prediction. Katie Doyle, product marketing manager at Guidewire, says the use of active intelligence is important because it enables early intervention on case management. "Carriers are moving away from a world where performance was gauged by doing closed claims file reviews" she says. "They now want to look at open claims so that they address problems as they occur and affect the outcome."

Perhaps the biggest advance on the claims technology front has come in the back end with the advent of configurable systems. Configurability enables staged implementations, which means that a carrier can start with a simple installation and add complexity to the system over time as they tailor it to their specific needs. Tom King, senior director for insurance for Redwood Shores, Calif.-based Oracle Corp., notes that the high degree of customization of legacy systems afforded great functionality but also destroyed the upgrade path in the process. "Configuration has now made it tenable to go from build to buy mentality," he says.

While many of these functionalities were once limited to best-of-breed solutions, a new crop of suite solutions is affording carriers even more choices.

"The good news is that with many of the current suite solutions, you don't have to sacrifice functionality," Carnahan says. "The beauty of an integrated suite is that you can implement a single module at a time; also it's pre-integrated and there's single vendor to work with. Conversely, others rather spread risk among several vendors and are unwilling to sub-optimize any module, so they go for best-of-breed."

Guidewire's Doyle notes that it's been 10 years of modern claims systems, so carriers now perceive that it's less risky to proceed into the marketplace. What's more, carriers may also view a claims system transplant as a more manageable first step than other core system replacement such as policy administration or billing. Although it interfaces with a wide range of internal and external systems, core claim systems tend to be monolithic applications, where most of the work is done in one core solution. "Policy admin is so mission-critical, many companies will do claims first," she says. "Because of the functionality issues surrounding policy admin, the volume issues and the way it needs to scale, I think it's a much riskier proposition for a carrier to start there."


Despite these new features, and the fact that their current systems may have reached the end of their useful life, many proponents of modernizing claims within an insurance organization still seem to struggle to make the business case to upper management. Doyle says one problem is that too often the tactical benefits of claims modernization, such as reducing leakage, are stressed over larger strategic benefits, such as enabling new business.

One factor that may help sway a skeptical CFO in favor of funding claims replacement is the fact that a greater amount of transparency around claims is now needed for the regulatory environment. "With older solutions, it's harder to add data elements, and it's harder to pull that data out, so as people are looking for new claims solutions they need to be cognizant about the need to have flexibility to meet regulatory demands," Carnahan says.

Another even more inexorable factor that may prompt claims replacement is the graying of the adjuster workforce. A 2006 survey of insurers by New York-based Deloitte noted that 70% of claims adjusters are over the age of 40. While modern systems can assuage this problem to an extent with better calibrated work assignments, carriers need to acknowledge that they have finite amount of time left with many of their most seasoned adjusters. While one solution would be to prioritize the remaining time of these aging adjusters on training their replacements, Mike Mahoney, senior director product marketing for San Diego-based Mitchell International, says the end result may just be that insurers are inadvertently training individuals that eventually end up working for competitors. "You can't pull them all off the line to train the next generation," he says. "Instead, you can use them to train your system."

Oracle's King says decreased training time is another factor in favor of modern systems. For example, a carrier deluged by claims during a natural disaster could take underwriters or sales people and put them on first-notice-of-loss desk and make them effective. "If you have a legacy system where it takes six weeks of training for somebody to learn FNOL, you're hosed," says King.

Mahoney argues that there are many ancillary parts of the claims process that can be replaced on an as-needed basis, and that carriers can continue to use legacy claims systems, while handing off much of the "blocking and tackling" of the claims process to a third party. "Is the play fixing the core system or the stuff that goes into it?," he asks. "Insurers need to look at the items that surround the claims handling process, and the inputs and outputs necessary to do a good job in claims."



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