Insuring IT innovation

Phil Felice faced an immense task when he joined Guardian Life Insurance Company of America as its first CTO in January 2001. He had 90 days to come up with a flexible enterprise architecture that would tie together the New York-based company’s disparate systems so his company could take a holistic approach to serving customers and supporting agents and quickly capitalize on e-business innovations.

Felice found himself racing against time in an industry known more for being cautious than rushing to innovate. Under competitive pressure stirred by deregulation and the rise of e-business, insurance companies are finding they need to create easy-to-use systems driven by the needs of customers and business partners rather than internal product groups.

Many insurance carriers such as Guardian are tapping CTOs to work across corporate organizational lines to build the technology infrastructure necessary for the new, externally focused business environment. These chief technologists are scrambling to lay the foundations for extranets, portals, and direct links to agents’ computer systems.

“When I came to Guardian it was pretty much what you’d expect to see and do see in a lot of insurance firms: We had a lot of legacy, stovepipe systems.” Felice says. “We needed to build modern systems, whether they be Web-enabled or on a wireless device [but] we couldn’t just replace millions and millions of [bits] of legacy code.”

To integrate all the disparate systems into a single, logical system, the CTO and company vice-president rolled out a blueprint for the N-Tier Guardian Enterprise Architecture. The idea was to establish a loosely coupled, reusable, component-based architecture that put business logic in the middle tier, creating layers of abstraction between modern front ends and legacy systems.

Harder still has been making the organizational changes needed for the unified approach. “The journey isn’t just about technology; it’s a cultural shift,” he notes. CTO Felice is rallying his staff around the vision by detailing how the IT professionals will benefit. “You can be an executive on one hand but you’ve got to talk technology, talk turkey, when you are talking to technologists.”

Isolated Silos

The insurance industry is entering its “third battle” since the early 1990s, says John Kellington, CTO of Ohio Casualty Insurance in Fairfield, Ohio. The first battle was a coverage war. “What we all did was expand our coverage. The next war was a price war and we all reduced our price,” he says. “I really think…the third war is an ease-of-doing-business war.”

Accordingly, insurance companies “have to switch from a product strategy to a customer-centred strategy,” says David Holtzman, a New York-based partner in the insurance practice of accounting and consulting company Andersen. “Customers want the kind of service they already expect from their banks and brokerages,” which can mean completing a transaction in five or fewer clicks of the mouse.

Most insurance companies have created isolated technology silos organized by product, making it difficult to create these customer-facing capabilities, Holtzman says.

A company may have separate, mainframe-based policy administration systems for life insurance, disability income insurance, and annuities. These systems are so disconnected that a representative helping a customer with one type of policy “might not have an idea that a customer may have more than one policy,” he notes.

Those conditions are unacceptable, Holtzman says, as insurance companies try to recast themselves as financial services firms and diversify their portfolios to compete against banks, brokerages, and other businesses.

“While insurance has not historically been at the forefront of IT innovation, that behaviour is changing, especially over the past year,” says Jeetu Patel, executive vice-president of research at Doculabs, a Chicago-based consultancy. “Consumers are demanding more services, and customer retention is an increasingly larger part of ongoing revenue growth and profitability. Technology is seen as a great catalyst that enables organizations to achieve both objectives.”

As a result, industry CTOs such as Felice are faced with enabling their organizations for the economic shift taking place, although the technology in practice varies by insurance lines – property casualty insurance sales require quite a different tact than life insurance and variable annuities. As if supporting multiple lines were not complex enough, these CTOs must also find solutions for differing sales channels, be they independent agents, brokers, and dealers or through direct sales.

Enlisting CTOs for New Perspective

Many big insurance companies are trying to leverage their investment in big iron with middleware and component-based application development, says Kimberly Harris, research director at Stamford, Conn.-based Gartner. “The general tendency is not to replace the legacy system, rather it’s to build around them,” she says.

Having a flexible architecture is crucial for a company to “be able to quickly respond to market opportunities as they appear,” whether that opportunity is a new way to service customers or forge business partnerships, notes David Annis, CIO of The Hartford Financial Services Group. “That’s why I thought we needed a CTO, someone I thought could be proactive in helping us to build a foundation.”

Annis selected the company’s first CTO last year. Ken Barge was responsible for infrastructure technology at Hartford Life, which contributes roughly half of the company’s revenues with sales of annuities and mutual funds as well as life insurance.

Barger is now charged with providing the enabling architecture to Hartford’s technology initiatives such as its Electronic Business Center, an extranet that allows agents to make real-time billing inquiries and report claims. The CTO taps the company’s IT professionals to enhance Internet capacities, looking to bolster security authentication and directory services and add such capabilities as single sign-on so that consumers, agents, and other partners will have easy access to data.

As the services are externalized, new requirements emerge, notes Barger, pointing to single sign-on capability. “It gives you a speed-to-market capability. It gives you a common way to make multiple systems accessible. But it also brings on some requirements that we have to introduce like high availability and scalability.”

Policies Create Heavy Budget Burdens

The industry presents challenges for IT because insurance is a complex product, impacted by frequently changing regulations in each of the different states policies are sold. And unlike financial service firms, many insurers rely on an outside distribution channel – independent agents – who deal directly with customers and thus maintain control over the key customer data.

“IT managers are being asked to deliver a lot more without significantly growing the total budget,” says Michael F. LaPorta, a global industry director of insurance at Deloitte Consulting based in Stamford, Conn. The insurance industry spends about 4 per cent of revenues each year on IT expenses and salaries or about US$25 billion. Another 2 per cent to 4 per cent of revenues are spent on capitalized costs, roughly another US$15 billion to US$25 billion, says LaPorta. Spending on IT will be flat to slightly up this year, he predicts.

And those figures pale next to the 8 per cent to 10 per cent of revenues banks and brokerage firms spend on IT, Andersen’s Holtzman notes. “With those tight budgets, tech-savvy insurance firms know they must make good use of the CTO-level executives,” Holtzman adds. At Guardian, newly appointed CIO Dennis Callahan brought Felice on board, assigned 100 IT professionals to report to him directly, and established technology leadership for the rest of the roughly 550 IT professionals.

Although IT spending is under increased scrutiny, the right solution can translate into a big payoff. Felice points to Client Manager, a Web-based, thin client, information-retrieval application that uses an element of the architecture called Unified Client View, a kind of client information file. Based on J2EE (Java 2 Enterprise Edition), the Client Manager uses IBM MQSeries to access the companies’ multiple policy and administration legacy systems and generate intelligent inquires.

Through the Client Manager, customer representatives can view all of a customer’s policy information through a Web browser, rather than punching codes in a green-screen terminal.

Even with these changes, Felice is looking to disruptive technologies to further support the company’s changing technology. In the second quarter, Guardian will roll out a wireless version of Client Manager.

“Technology is a powerful tool, but it has to be aligned with the business,” says Felice. “It might be great technology that has developed, but if it doesn’t fit into what a company wants to do or what a consumer would like to buy or how they would like to purchase, it doesn’t matter.”

Balancing Budgets and Mission

Integrating various product lines and working to support disparate distribution channels presents a challenge for insurance industry CTOs who are also charged with keeping IT costs in line. From 2000 to 2001, IT spending in the insurance industry declined, says Jeetu Patel, executive vice-president of research at Chicago-based Doculabs.

The tragic events of Sept. 11 made budgetary considerations even greater. A number of insurance companies suffered losses because of claims filed. In addition the generally cautious business climate is making insurance companies carefully prioritize IT spending, says Kimberly Harris, research director at Stamford, Conn.-based Gartner.

“Spending has shifted from the acquisition of technology to more optimization of existing investments,” says Patel. The vice-president expects that spending will remain flat for at least the first half of 2002.

Making the case for reconstructing the technological infrastructure is not always easy. “One of the biggest challenges for the CIO or CTO is ‘How do you get a long-term infrastructure investment that does not have an immediate short-term benefit built in to an organization’s cost structure?’ ” notes Yom Senegor, who became CIO of Seattle-based Safeco in October, overseeing 1,500 people.

Susan E. Fisher is a technology journalist in the Chicago area. Contact her