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RGI Group Newsletter

Insurance IT Strategies – Building a Midoffice to Optimize Business Processes, Analytics and Customer Relations

Most insurers operate with IT environments that cannot support digital insurance. To stay competitive, they must begin shifting their focus to systems of differentiation and innovation, as well as building strong midoffices to support emerging business processes, channels and data needs.

Key Findings

  • New business requirements, especially adoption of digital insurance principles and customer experience management, will require new IT capabilities that most insurance companies do not have today.
  • Competitive advantage in the insurance industry is shifting from operational efficiencies to customer intimacy, data mastery, business model transformation and business process innovation. New IT capabilities are required to support these objectives.
  • The transformation needed in the IT department (including staffing transitions and new technology acquisition) will be expensive and challenging. It is, however, a core requirement to keep up with business demands during the next two to three years.

Recommendations

Insurance CIOs and IT leaders:

  • Apply Gartner's pace layers methodology to classify systems into systems of record, innovation and differentiation. Overlay staffing, IT investment and priorities to the classification outcome to determine where focus is unbalanced, and capabilities are lacking.
  • Assess staffing gaps and limitations. These include the quantity and type of staff needed to support innovation and differentiation initiatives.
  • Compare the existing IT strategy against the Gartner model to determine areas of underinvestment and opportunities for improvement. Ensure that cost and complexities of the back office are being reduced over time through aggressively tackling legacy modernization through systems replacement, systems consolidation and portfolio rationalization.
  • Identify missing IT capabilities needed in the midoffice IT layer. These include CRM, BPM, MCI and BI/analytics.

Strategic Planning Assumption

By 2017, only 30% of insurers will have established a robust midoffice IT capability with business process optimization, enterprise information intelligence and centralized customer data, to enable them to better compete in the digital insurance marketplace.

Analysis

P&C and life insurance CIOs are in a difficult situation today, managing innovation while dealing with legacy technology. There is an overabundance of new strategies across the industry, including the adoption of digital business concepts to enable a digital insurer to focus on customer experience management, and enhanced needs for organizational intelligence through big data and advanced analytics. To help drive these initiatives, new leadership models are being introduced with new roles being created (such as chief digital officers, chief data officers, chief innovation officers and customer relations leaders). This surge in strategic thinking, and the focus on innovation, is resulting in several problems for the CIO and the IT department.

New requirements are being added to a company's IT priority list, which is stressing IT staffing. Already, most CIOs report that they are understaffed in many areas, and their departments are lacking the IT skills, budget, and head count to keep up with business demand. With new demands being added without growth in IT staffing, this will further stress the IT department and result in lessened abilities to deliver the needed results to the business. Those companies burdened by large, back-office legacy systems and redundant IT environments will find it most difficult to keep up with the pace of innovation. Insurance CIOs must take a more aggressive approach to legacy modernization to keep pace with business demand.

In response to these demands, many insurance CIOs want to prioritize their focus. This includes shifting focus in many cases from operations to technology innovation. IT leaders must embrace new tactics in how they run their departments, including their balance of skills to support emerging business requirements targeted at business process optimization (BPO), CRM and data mastery. This requires a new approach to insurance IT through prioritization, focus and filling out technical gaps that exist today.

A New Approach to Insurance IT: Applying the Pace Layer Methodology to Help Prioritize Investment

Most companies lack a methodology to prioritize their IT focus other than toward the business department that has the largest funding or is most vocal about their needs. A better model is needed, one that is aligned with business outcomes and strategic business demands.

The pace-layering methodology can help insurance CIOs and IT leaders assess the business value delivered via various applications against competitive differentiation. This can be used to guide discussions with business leaders around budget and investments. Through workshops and customer engagements, Gartner already has begun to help insurers tag traditional core systems and emerging applications against the three pace-layering categories:

  • Systems of records. These support common industry processes. Process excellence would not provide a competitive advantage.
  • Systems of innovation. Having better business processes here would provide moderate competitive advantage over your peers.
  • Systems of differentiation. These are new processes or functionality not typically delivered in the industry or by your peers. Having this capability would enable competitive differentiation and significant advantage in terms of revenue, speed to market, risk avoidance or customer retention.

Insurance CIOs and IT leaders increasingly are realizing two things:

  • Core systems, such as policy management/administration, are becoming systems of record (see Figure 1). While it is essential to have operational efficient systems, they are not contributors to competitive advantage.
  • Innovation and differentiation often reside in the application of new technologies (those that are customer-facing or digital).

Figure 1. Applying the Pace-Layering Methodology to the Insurance IT Landscape

Figure 1. Applying the Pace-Layering Methodology to the Insurance IT Landscape
Source: Gartner (July 2015)

This model is, in many cases, in contrast to current prioritization and staffing levels within insurance IT departments. In many companies, the IT department is primarily aligned with back-office systems (core systems, such as policy administration), with much fewer skills in advanced analytics solutions, business process management (BPM) methodologies, mobile or portal technology. CIOs are finding that many current skill sets are not transferrable to emerging technology areas, and new strategies, such as bimodal IT (the support of traditional waterfall development plus agile to support more real-time delivery), mobile development or vendor management. All of this makes transformation of the IT department critical, difficult and expensive. Without this transformation, however, IT staffing limitations will be a major inhibitor in transitioning to a digital business and deriving the operational efficiencies needed to compete in the insurance marketplace of 2018. Hiring, building skill sets, and adapting sourcing strategies to support systems of differentiation and systems of innovation are key to supporting optimal digital insurance operations.

Fulfilling Innovation and Differentiation: Building the Midoffice Technical Layer

In addition to the application of pace layering to help support portfolio rationalization and review, CIOs should begin to evaluate the process efficiency and business value of their applications against emerging industry conditions, such as customer experience management. Today, most insurers are heavily focused on modernizing and maintaining their back office-systems (much of which would be classified as systems of record, such as policy administration; see Figure 2). For many insurance CIOs, the majority of their IT investment goes toward these systems, which account for the greatest drain on the IT department. As a result, focus on the front-office systems (e.g., channel-related systems such as those to manage agents, portals or mobility) is moderate. The midoffice (or the architectural layer that contains process orchestration capabilities, single view of customer records, business intelligence [BI] and BPM solutions) is siloed, with limited enterprise capabilities in place. These companies remain product- or channel-centric, unable to become customer-centric enterprises.

Figure 2. Typical Insurance IT Environment, 2015

Figure 2. Typical Insurance IT Environment, 2015
Source: Gartner (July 2015)

Key characteristics of the 2015 IT environment:

  • Large back-office focus and investment. This is due to aged systems, redundancy, vendor relationship management requirements, a strong reliance on outsourcing, past merger/acquisition activities, and/or high maintenance requirements attributable to in-house and priority systems.
  • A midoffice IT landscape that contains line of business, product or siloed systems, little enterprise governance, system gaps (e.g., most insurers lacking a single view of customer), and/or redundancy in BI due to departmental buying decisions.
  • A thin and siloed channel IT landscape, with each channel having its own IT platform, limited multichannel platforms being used to support cross-channel interactions, reliance on a few select channels, and each channel presenting its own business process.

This IT model is problematic for many reasons. A continued focus on back-office systems and processes does not produce competitive advantage. Competitive advantage in the digital insurance marketplace is from being customer-centric, having business agility, leveraging digital technologies (such as the Internet of Things [IoT]), and building a data mastery to support enterprise business processes.

The current model has limited support of emerging and digital technologies (especially those that are customer-facing):

  • It does not have a means to support cross-channel or cross-core system processes.
  • It cannot support the transformation of back-office processes (typically these are product-focused or system-defined) into those that match customer/channel demands.
  • It cannot support enterprise information intelligence needs.
  • It cannot enable real-time transactional needs when back-office systems operate in batch, nor supply channels with holistic views into customer or transactions in a real-time manner.

In other words, this IT model will not enable digital insurance, therefore making it a risk to the organization.

To support digital insurance, new functionalities are needed (see Figure 3). In this new approach:

  • Focus on the back office is reduced. This can occur through application rationalization, consolidation, shifting from proprietary legacy systems to packaged solutions that are easier to maintain, shifting to hosted/off-premises systems (such as business process as a service [BPaaS] or SaaS) that reduce the on-premises footprint, redeployment of resources to move value-added areas, and/or shifting legacy systems to IT outsourcing partners that can maintain them while you shift those resources to more-strategic areas. This is also accomplished through simplifying the back-office systems through the shift of business logic from those systems to the midoffice (for example, moving analytics out of the core system to an enterprise layer, or shifting business rules execution to a business rule engine that would standardize rules across systems). In this case, this would move business logic and processes that normally would sit in the back-office layer to the midoffice.
  • The midoffice would substantially expand and grow as new solutions were deployed, new functionality is added, business logic centralized, a software-defined architecture (SDA) established, and a data foundation established to support enterprise information intelligence. The midoffice becomes where business process rules are maintained and managed, customer intelligence housed, and corporate information situated. As a result, this becomes the processing brain of the company, to support multichannel and customer experience requirements and all information and data integration demands — enterprisewide and line of business.
  • An expanding front office as new channels are added (to include new devices as a customer-touchpoint and data collection tool such as the IoT), but thinner due to less channel-specific business logic being maintained in the channel silos. As business leaders seek to add new channels, they need to be able to do this in a quick manner and leverage the channel architecture used by other channels. The way to accomplish this is to become more channel neutral so that new channels (e.g., mobile and affiliate partners) can be plugged into the delivery platform, instead of building new platforms for each channel. This shifts cross-channel and common-across-channels business logic to the midoffice, where the multichannel platform, business rule repositories and workflow systems will reside.

Figure 3. The IT Model for Insurance Digital Business

Figure 3. The IT Model for Insurance Digital Business
Source: Gartner (July 2015)

New technical capabilities will be needed to support digital business models aimed at transforming insurance IT organizations to support emerging business demands, capitalize on digital technologies, support digital consumer needs, and optimize business processes to match the new market conditions (including support of the IoT, new consumer behavioral models and emerging competition). Success in the insurance marketplace of 2018 will require a new IT approach that optimizes business processes, supports enterprise data mastery and improves customer experiences.

Recommendations

Insurance CIOs and IT leaders:

  • Apply Gartner's Pace-Layered Application Strategy to classify systems into systems of record, innovation and differentiation. Overlay staffing, IT investment, and priorities to the classification outcome to determine where focus is unbalanced and capabilities lacking.
  • Assess staffing gaps and limitations. These include quantity and type of staff needed to support innovation and differentiation initiatives. Work with HR to identify staffing plans to fill skills that are lacking today (such as agile development, mobile development, analytics support, and so on). Build a staffing model that includes identification of skills to be sought when hiring, education/retraining opportunities for existing staff, skills to be retired/sunset, and the role of IT service partners to fill gaps short- and long-term.
  • Compare the existing IT strategy against the Gartner model (shown in Figure 2 and Figure 3) to determine areas of underinvestment and opportunities for improvement. Ensure that the costs and complexities of the back office are being reduced over time through aggressively tackling legacy modernization through system replacement, system consolidation and portfolio rationalization.
  • Identify missing IT capabilities needed in the midoffice layer, includinxsg CRM, BPM, MCI and BI/analytics. Ensure proper business cases and investments are being made, and that enterprise standards are being created to create economies of scale across all lines of business and functional departments (such as marketing, claims, sales, and so on). This will be a multiyear and large investments, so a roadmap should be made that allows for a step-by-step approach to meeting this goal.
Source: Gartner Research, G00275481, Kimberly Harris-Ferrante, 29 July 2015