Insurance Innovation with. Enterprise Product Management. White Paper - January 2003

Transcription

1 Insurance Innovation with Enterprise Product Management White Paper - January 2003

2 Table of Contents Executive Summary...3 Enterprise Product Management (EPM) for Competitive Advantage...4 Technology Challenges of Enterprise Product Management...9 Business Benefits of EPM...10 Introducing Insurance Innovator...14 Conclusion Page 2

3 Executive Summary Rapid market swings, changing customer and channel requirements, pressures from shareholders and regulators, and continued hyper-competition are forcing insurers to re-examine not only what products they sell, but also their processes and tools for developing, deploying, monitoring, and managing products and product portfolios. This examination confirms that existing manual and automated systems are inadequate to provide the support required by the demands of the age. Leading insurers are finding many reasons to agree with the noted MIT researcher, Charles Fine, who wrote that the capability of ongoing concurrent design of products, processes, and the intra- and inter-organizational network of competencies required to deliver value to the marketplace is perhaps THE meta-core (or innercore) competency above all others. 1 A new approach - Enterprise Product Management (EPM) - provides the required framework for today s environment. EPM is a disciplined approach for effectively and efficiently managing all aspects of development, deployment, and maintenance for individual products and for portfolios of products. EPM targets the alignment of product strategy with corporate goals and objectives, and provides management tools to effect accountability for results. Given the complexity of today s insurance distribution and underwriting environments, insurers existing technologies do not have requisite flexibility and robustness to fully enable EPM. However, EPM focused technologies are available which leverage existing enterprise and departmental systems, minimizing the cost and disruption of system replacement. This white paper describes the rationale for EPM, defines its components, outlines the business benefits for EPM and describes the current state of the art technologies supporting implementation of EPM. It ends with a recommendation for an enterprise-wide, singular and consolidated enterprise view that will enable insurance firms to effectively manage their products. In today s customer-driven environment, dominated by rapidly evolving actuarial and underwriting necessities, new channel requirements, conflicting pulls between product commodization and customization, and increasing scrutiny of profitability by shareholders and regulators alike, successful insurers will be those that adopt new approaches and systems to support an enterprise view of product management. 1 Charles H. Fine INDUSTRY CLOCKSPEED AND COMPETENCY CHAIN DESIGN: AN INTRODUCTORY ESSAY, Sloan School of Management, Massachusetts Institute of Technology Page 3

4 Enterprise Product Management (EPM) for Competitive Advantage Why Enterprise Product Management Increasingly informed and sophisticated customers are driving new and unprecedented demands on insurance carriers. Information sources, such as commercial advertising and the Internet are presenting customers with an ever-widening array of choices. 2 While the vast majority of customers view insurance as a commodity, marketing approaches are focusing on unique customers attributes to drive purchasing decisions, creating requirements for mass customization 3. There is a decline in the loyalty that customers feel towards traditional insurance distribution channels, and insurers are responding with multi-channel distribution strategies, requiring products to be customized to the specific channel. Leading Life and P&C insurers realize that customer-focused product differentiation, developed with well-documented actuarial assumptions and supported by skilled marketing, tight underwriting, and highly targeted distribution strategies, are required for sustained, competitive advantage and retention of quality business. Many executives are seeking a product strategy, which includes customer-driven customization and market-focused packaging. Unfortunately, most insurers do not have the required robust, yet flexible environment to meet today s needs for a product-focused strategy. Required systems changes are labor intensive and increase time-to-market. Product rules are frequently hard-coded into legacy applications, which were not designed for ease of modification. As a result, insurers cannot respond to urgent market demands in a timely fashion. Mixed distribution channels are imposing new requirements on products. Today s insurance customers are selecting from a variety of sales and service channels to meet their needs. As a result, many insurers are offering the same base product through different channels, frequently with different feature and service components. Carrying channel requirements through product design and deployment is a critical success factor. 2 While the Internet has not proven to be a viable vehicle to generate and culminate new sales of insurance, approximately one third of internet users employ web tools to obtain comparative information or get quotes prior to completing the sale in a more traditional manner. 3 Insurers that are prepared to meet specific needs of employers, groups, and associations, are seeing program business as a large opportunity. Conning & Company estimates that a group distribution of personal lines insurance is expected to rise by 7 percent to 40 percent in the next year. Page 4

5 Business product rules are not consistent. Attempts to reduce time to market, and meet channel needs, with existing methods and systems, invariably result in errors or omissions causing discrepancies between, for example, printed manuals, and on-line versions. These result in costly duplication of work, greater underwriting time and effort, and the potential for unintended interpretation of rules. Insurers are incapable of viewing product strategy from an enterprise perspective. Shareholders, rating agencies, and, in some cases, governmental bodies are requiring insurers to plan, manage, control, and report the impact of products on cost, market share, and profitability. These requirements are being imposed at multiple levels of granularity and roll-up, from individual products, up through lines of business, and across the entire enterprise. In order for insurers to meet objectives for a flexible product strategy to support long-term profitability, executives must adopt an enterprise wide product strategy, which is supported by appropriate methods and technology. Enterprise Product Management provides the foundation for such a strategy. Figure 1 - EPM Drivers and Impacts Page 5

6 What is EPM Enterprise Product Management (EPM) is the ability to effectively support and efficiently manage insurance product development, deployment, and maintenance throughout the enterprise and across multiple distribution channels. EPM allows product management to be successfully aligned with corporate goals and objectives. EPM has two separate, but closely interrelated components, namely product development and product deployment supporting the business functions of the modern-day insurance enterprise. The combination of integrated product development and deployment provides the insurance enterprise with enhanced competitive advantages, when executed correctly. For example, using EPM enhances product development, allowing insurers the ability to: Quickly and intelligently innovate market driven products Significantly shorten product time to market, and Customize products to support market and channel strategies. With EPM, enterprise product deployment strategies are also supported, allowing insurers to: Increase discipline through consistent application of rules, and Understand product contribution to profitability at any level of granularity. By integrating development and deployment at an enterprise level, insurers are given the ability to: Align product strategies fully with corporate strategies such as mixed distribution and customer relationship management campaigns Improve risk management with consistently applied business rules, and Satisfy stakeholders responsible for corporate control over product development and deployment areas and activities. Product development and deployment were once seen as isolated functions within the insurance enterprise. Today s environment requires an integrated, enterprise view. EPM provides the required underpinning for extending the capacity of organizations to exercise greater strategic direction and control, as well as allowing more effective and efficient tactical management. Page 6

7 Figure 2 - Enterprise View of Product Management Existing manual methods and legacy systems are inadequate by themselves to address the proliferation of product options, regulatory requirements, new distribution channels, and customer self-service demands. Instead, with EPM insurers use automated processes, disciplined methods, and integrated systems to effectively manage the product life cycle. But to be successful, EPM must take advantage of proven, standards-based technologies to leverage the capabilities of existing systems. EPM must work without disrupting operations, and also must be introduced in a logical framework to allow benefits to be realized in a staged, meaningful fashion. Value of EPM By taking an enterprise approach to product management, insurers see value in four specific areas: 1. Improved revenue generation. By reducing time-to-market, insurers can capitalize on new opportunities quickly and effectively. In fact, time-to-market is a critical element, not only to maintain current revenue, but also to realize projected increases in premium through innovating with new products or new product bundling. For example, New York Life credits improved time-to-market capabilities with its products for a large portion of its 41% increase in life and annuity sales in 2001, during a period that challenged its competitors. 4 4 New York Life, News Release, April 4, Page 7

8 2. Sustainable competitive advantage. Increased customer pull is driving the need for EPM in insurance. Many insurance carriers, regardless of lines of business and distribution channels, are focusing on the end customer to drive product development. The rising importance of affinity group marketing, Internet portals (for comparison shopping), and alternative risk financing vehicles for the commercial insured is forcing insurers to be able to rapidly customize products for customers and channels, while maintaining consistency in the application of product rules and underwriting guidelines. Gartner notes that: Competition is driving insurers to quickly create and launch new insurance products, often without the necessary supporting infrastructure Reduced costs. In the new, market driven environment insurers must find tools that will costeffectively serve the need for rapid and flexible response to demand for new or modified products. Present methods of discrete, sequential steps, using a disconnected set of enterprise and desktop automation applications, result in redundancy, errors, delays and costs. By utilizing EPM tools, the marketing, product management, and field operations groups can take advantage of a common platform, which has the capability of integrating with other enterprise systems. 4. Improved risk management. Stakeholders and rating agencies are insisting that insurers view product development from an enterprise perspective in order to quantify the contributions to profitability of specific products, product lines, and deployment channels. Standard & Poor s considers even the potential entry of competitors posing a threat of competitive products or services as a key criterion in its ratings methodology. To fully satisfy investors and rating agencies therefore, an insurer must not only demonstrate the financial viability of a single product or line of business, but how the insurer s portfolio of products will perform. 6 5 Gartner Research Note M , November Recently, for example, Standard & Poors downgraded a life insurer to negative from stable because of the combined organization's challenges in establishing a profitable and predictable product line outside of the health insurance operations. Standard & Poor's Information release, Sept. 19, Page 8

9 Technology Challenges of Enterprise Product Management To meet the multi-dimensional demands of customers, distributors, regulators, and investors, product management must be approached with discipline, and must utilize technology to ensure consistency. Existing technology applications do not adequately meet these needs. As a transaction-intensive industry, insurance was an early adopter of technology to automate accounting, policy administration and claims. This early adoption has proven to be a mixed blessing as innovation is dependent on the ability to modify legacy systems. Facing the year 2000 issues, many insurers choose to remediate, rather than replace back office systems. This has further entrenched the rigidity of insurers base processing environments. In the new, market driven environment, insurers must find tools that will serve the need for rapid, flexible response to demand for new or modified products. And it is clear that most insurers are not currently armed with these tools. According to Gartner, product development and deployment will continue to be problematic for 90 percent of large insurers by year-end 2002 because of inadequate infrastructure (0.7 probability). 7 The good news is that many IT executives in the insurance industry recognize this challenge. For example, Barbara Koster, Senior Vice President and Chief Information Officer of Individual Life Insurance and Retail Distribution at Prudential Financial, says, "Today, customers drive the need, rather than insurers just providing products. A successful IT department has to have an environment that will be able to buy, build and integrate technology quickly in order to provide rapid introduction of products to the marketplace." 8 Furthermore, to accommodate recent initiatives for web access and customer relationship management (CRM) tools, a number of insurers have improvised a front-end strategy for legacy systems. This can be leveraged to serve as the basis to meet the current needs of insurers, their agents/broker, and customers for flexible, responsive product management. 7 Gartner Research Note M , November Building IT for the Customer Economy, InsuranceTech.com, October 16, Page 9

10 Many large organizations, especially insurance companies, have been burned by multi-year, big budget IT projects. Business demands and technologies change rapidly, and long-term project objectives are either eclipsed by changes in the marketplace, or rendered obsolete with the introduction of new technologies. As a result, there is a trend towards smaller, discrete projects, offering faster return on investment, which accumulate to support broader business strategies. Business Benefits of EPM Responding to the aforementioned market drivers, financial service executives now see that product development is the highest priority for the next evolution of the infrastructure. A recent commissioned study indicated that more executives surveyed ranked product development as a key business priority than any other item, including expense reduction, new customer acquisition, or distribution channel improvement. Confirmation of this is provided by Gartner, which said that approximately 40 percent of Type A insurers in the United States will purchase or build new product configuration capability by yearend 2004 (0.7 probability). 9 Early adopters are realizing the benefits of EPM today. According to Fairfax Financial, "Enterprise Product Management is a strategic component to our systems renovation project. EPM gives us the ability to rapidly introduce products to the market and maintain consistent business rules and processes across the enterprise 10 " Functional Benefits With EPM, insurers realize: A singular, consolidated enterprise view of market needs, product development, channel deployment, and market response; Strategic coupling of product development and deployment with all of the other enterprise level resources and requirements; Enhanced abilities to test new or modified products and potential impacts; Improved predictability of product development/deployment requirements; Greater control over product deployment and customer facing interactions; Consistent documentation of product related activities (modifications, enhancements, manuscript wordings) to satisfy legal and regulatory requirements. 9 Gartner Review, November Clive Timothy, CTO, Fairfax Insurance Page 10

11 Financial Benefits As a result of implementing EPM, insurers can see improved financial controls and results, including: Improved top-line results through more rapid response to market/channel/customer requirements; Reduced costs for product development, testing, and deployment; Consistent application of underwriting rules and requirements across multiple distribution channels; Decreased reliance on scarce I/T resources for support to product development and testing; Elimination of redundant entry of information and data among multiple systems during development and deployment; Efficiencies from automation of customer sales and service processes; Efficiencies from electronic integration of processes and data with partners and service providers. Leveraging Existing Technology Investments To accommodate demands for new forms of access to existing data and have the ability to complete transactions over the Internet, a number of insurance organizations have purchased or developed data warehouses (i.e., consolidations of existing data stored in a flexible database format) and introduced a standardized middleware architecture known as an Enterprise Application Interface (EAI) layer, which manages the integration needs for new Customer Relationship Management (CRM), web services, and financial applications. An EPM tool suite, based on open standards, leverages this investment in an EAI architecture by introducing a Product Application to complement the existing interface and application functionality. Page 11

12 Figure 3 - EPM in an Enterprise Architecture By utilizing industry standards for connectivity and its won extensive data management and integration capabilities, this architecture introduces product management functionality at reduced cost by leveraging existing technology investments, and exploits existing interface application functionality in new ways. For instance, a number of insurers that were early adopters of CRM were encouraged by the initial results, but frequently wanted these extended beyond the boundaries of customer management. CRM did offer new, consolidated views of customers, and provided for new market segmentation. However, because CRM did not have the capability to segment products in the same way as it segments customers, insurers had to resort to traditional, often manual methods to correlate product line performance within specific market segments. By linking EPM functionality with CRM, users can query data relating to products in the same way as customer information, to logically bind the two sets, and offer new views of product and product feature performance within target markets. Page 12

13 As noted above, insurers are justifiably skeptical of being able to realize benefits from large, multi-year projects. In this environment an approach is needed that allows for realization of tactical benefits, while providing a foundation for Enterprise Product Management. With a modular EPM solution, insurers may begin by selecting elements of an EPM tool suite to implement, which achieve the immediate objectives of reduced costs and faster time to market. Building on that success, organizations are positioned to extend the functionality to a larger set of existing and new products, and obtain more seamless integration with other enterprise systems. This extends the cost savings to a broader base and allows product and portfolio managers to utilize the broader capabilities of EPM in examining product performance. With this foundation, extension from tactical value to strategic value becomes evolutionary, rather than revolutionary and disruptive. This facilitates buy-in from stakeholders as the benefits provided by Enterprise Product Management are realized by a growing set of operational and support personnel. Page 13

14 Introducing Insurance Innovator In light of the industry s problems and taking in to account the pre-requisites for a superior EPM offering, is introducing its EPM suite Insurance Innovator to provide a singular, consolidated view of products across the enterprise, enabling insurance companies to effectively manage their products and their relationships to customers, channels and back-end systems. Insurance Innovator goes further to provide a unique layer of enterprise components for deploying business processes, business rules and 'product services' in support of new and existing products. Solution Components Insurance Innovator incorporates four functions required for Enterprise Product Management functionality: Insurance Innovator Product Configurator Insurance Innovator Product Services Insurance Innovator Product Process Manager Figure 4 - EPM - Insurance Innovator Functional Design Page 14

15 Insurance Innovator Product Configurator The Product Configurator is the component that allows the product developer to create new products, modify existing products, and simulate/test products through the use of templates linked to the product repository. Coupled with Camilion s Product Process Manager, this component forms the product developers workbench. Insurance Innovator Product Services Insurance Innovator s Product Services component is the web service for product and process design and deployment. It contains all of the universally accessible enterprise product elements, definitions and enterprise product rules captured in structured format. Insurance Integrator also incorporates all of the available industry data standards (including ACORD), and messaging standards (such as XML and web services) to enable highly reliable, scalable information exchange. Insurance Innovator Product Process Manager In order to ensure accurate, rapid deployment of products, the Process and Application Designer component provides a development environment to build business processes and business rules. It also provides a high performance, web-based execution environment for deployment of these processes. Insurance Innovator and Legacy Systems Most insurers have functioning back office systems for policy administration, claims, accounting, commissions, etc. These have been modified and enhanced over the years, and many were given an entirely new lease on life with Year 2000 remediation work. Insurance Innovator leverages the investment in the existing EAI architecture by introducing a product management application, to complement the existing interface and application functionality. Page 15

16 Conclusion The end product of insurance is a collection of intellectual property components - including marketing, underwriting, financial, and service - into a contracted assurance to clients that risks will be managed, mitigated, controlled and financed. As such, the insurance enterprise needs tools to support the development and structured collection of this intellectual property to enhance existing methods and systems for administration, claims, accounting, customer relationship management, and customer/channel communications. Enterprise Product Management provides the framework for the definition of the tools and the requirements for associated processes and interfaces. As insurers become increasingly rigorous in the collection of data, and more sophisticated in the understanding of the contributions that market segments, distribution channels, and product elements make to profitability, we will see that the winners are those who apply Enterprise Product Management with the greatest discipline, supported by the best tools. Legacy back office processing systems, which continue to provide basic claims, policy management, and accounting functions, lack the flexibility to respond to required product changes in a timely fashion, and do not incorporate the tools necessary to manage the complexity of products customized to meet new customer and channel demands. These systems frequently represent line of business silos rather than reflecting the way customers want to buy, and do not allow for enterprise-wide, or portfolio analysis of contributions to profitability.. EPM allows the enterprise to mix and match different products from different lines of business to offer customers a complete solution to their insurance needs, and provides for analysis of costs, revenues, and profitability at multiple levels of granularity or roll up. New tools, such as CRM and web portals, have introduced a necessary layer to surround legacy systems with enterprise application interfaces (EAI), but do not address product management issues specifically. EPM tool sets, which are built to leverage the EAI architecture, fill the required void. is committed to providing the best tools available to insurers that share our vision of Enterprise Product Management. Page 16

17 8500 Leslie Street Suite 100 Thornhill, ON L3T 7M8 T: TF: 866.CAMILION ( ) Fax: Page 17