6 strategies for the future: a study reveals new priorities of property/casualty insurers, including organic growth and paperless processing.

The complex and challenging factors of the past few years increasingly have contributed to the heightened level of uncertainty faced by property/casualty insurers. What can these events tell us about what to expect in the future? Will it be more of the same--volatile equity markets, acts of terrorism, slow economic growth, rapidly intensifying competition, continued rate hardening and increased corporate fraud? Or, are changes in the air?

In this environment, P/C executives have found it difficult, if not impossible, to determine consistent priorities. And, unfortunately, indecision has often been perceived as the best decision.

To find out if there is an answer to the dilemmas facing P/C insurers, Robert E. Nolan Co. surveyed more than 120 executives in the P/C industry. Respondents included insurers that offer personal lines, commercial lines and workers' compensation products across a broad array of distribution channels.

The survey's findings are encouraging, and suggest that the environment might be settling down with priorities becoming clearer. Six suggested courses of action for P/C insurers emerged from the survey. They are listed in the "Six Business Strategies" box on page 81 and explained in detail below.

1 Avoiding Distractions to Focus on Core Processes

New technology, industry consolidation, outsourcing and offshore processing are some of the most popular distractions that frequently capture headlines and fuel water cooler conversations. Unfortunately, hype often is created around concepts that haven't reached fruition and might never reach it. Each concept, when afforded a disproportionate amount of attention, can confuse an insurance organization's true priorities and take time from core functions such as underwriting. Study participants also clearly stated their priorities for P/C underwriting: Stick to the basics and avoid distractions.

2 Emphasizing Organic Growth and Expense Management

Study responses suggest a consistent need to roll out new tools while continuing to squeeze more from existing system investments. In addition, two revealing contrasts appear from the study results: Organic growth is favored significantly over acquisitions, and expense management is a considerably higher priority than outsourcing.

The relatively low priority placed by study participants on acquisitions and outsourcing suggests possibilities that may be contrary to perceived industry trends. For example, although expense management continues as a top priority, study participants do not see outsourcing as a high priority to achieve expense savings--perhaps influenced by high-profile disappointments that have occurred in outsourcing situations involving service-related operations. In addition, the relatively low priority placed on acquisitions may indicate that industry consolidation is less likely in the future. The emphasis on organic growth does not mean the consolidation trend will stop. But it could suggest, at least for those surveyed, that the trend could be slower than expected.

3 Claims: Back-to-Basics Approach

Underwriting, claims and contact centers have monopolized the focus of insurers for a long time. Companies try to improve profitability, decrease costs and provide better service in these areas. The priorities identified by study participants reveal that, at least in the claims arena, a back-to-basics approach may be in the offing.

Study participants continue to place a high priority on the traditional claims business drivers, such as managing cost, while also emphasizing enhancements to ensure the desired customer experience. While this has been the case with personal lines for a long time, commercial lines customers should begin evolving in a similar direction. Across all lines, the key drivers of customer satisfaction are still "fast, fair and hassle-free" claims service.

When participants were asked how best to improve claims, their responses were slightly different from those given to a similar question regarding underwriting. Survey participants suggested a full complement of people, process and technology improvements is critical to improving claims results. Other findings of interest include the relatively high priority placed on traditional file reviews, as well as the need to use existing technology better. As with underwriting, outsourcing falls to the bottom of the list, suggesting that participants are not currently looking to that path as a primary means to claims improvement. It is evident that offshoring and outsourcing are seen as the lowest priority for both underwriting and claims.

When study participants were asked if they plan to investigate the use of off shore processing to support underwriting or policy issuance processes, 92% disagreed or strongly disagreed.

Participants suggest that offshoring has a long way to go before it is viable for core underwriting, contact centers and claims processing. Still, offshoring and outsourcing continue to gain acceptance for long-standing commodity functions such as information technology data center management, application maintenance and selected development work. Though there is much publicity and discussion around outsourcing and offshoring, they mostly remain an option for noncustomer functions.

4 Paperless Processing

Expense management and service improvement continue as top priorities for P/C organizations, and insurers will be looking for specific ways to achieve these goals. Study participants are definitively looking into:

* Business process management;

* Getting greater value from existing systems and new technology investments; and

* Paperless processing as a viable approach to business improvement.

The convergence of these trends strongly suggests that insurers are capturing, or are intent on capturing, the synergy of people, process and technology. Insurers are placing more priority on making sound investment decisions, as well as exploring new process-management practices and technology. Yet, while the concepts of process design and stewardship are getting welcome attention lately, relatively few carriers have institutionalized the necessary priorities and competencies for effectively linking process and technology.

This is especially evident in document imaging, document management and work flow--technologies that enable paperless processing. The industry trend toward paperless processing appears to be reinforced by the study results, and participant responses suggest increasing agreement by P/C organizations that their organizations will be paperless in the next two years.

Despite optimism regarding paperless processing, industry case studies show that eliminating all paper is a vexing challenge with an elusive return on investment. Instead, focusing on the challenge of significantly reducing paper is much more realistic than becoming paperless in the near term. Cultural tendencies, lingering traditional business practices and old habits on the part of agents and consumers will keep paper in the mix for some time. Carriers will achieve the most for their money by maintaining the push to reduce paper, while continuing to invest in system integration, field technology, portals and end-to-end process automation.

4 Diverging Priorities: Mutual and Stock Companies

Part of this year's P/C study analyzes the response differences between company ownership structures--mutually owned companies vs. stock based (both privately held and publicly traded). In most cases, the priorities for both are nearly the same, particularly for underwriting and claims. Nevertheless, there are distinct differences, mainly around three topics:

* Mutuals believe more strongly than do their stock-based peers that their operations will be paperless within the next two years.

* Stock-based companies appear to be squeezing more out of their existing technology investments. When asked, stock-based companies tend to agree more that their operations will be most improved by using existing technology as opposed to new technologies.

* Mutuals appear to use more new technologies to improve their business. This difference points to either the varied degrees of systems capabilities between stock and mutuals, or possibly a difference in technology investment philosophies.

Small to Medium-Size Insurer Strategies

While the P/C industry underwent extensive consolidation during the 1990s, a number of small to medium-size insurers still remain and compete against much larger companies. This trend will inevitably continue, but with increased challenges, especially for the smaller organizations (those with annual written premiums of less than $1 billion). This year's study results reinforce these competitive challenges--in particular regarding dimension of scale and efficiency.

Across several study topics, larger organizations appear to be more focused on gaining scale and efficiency advantages than do smaller insurers. For example, larger insurers believe more strongly in the expanded use of call centers, and that call centers will be most improved through new technologies. In contrast, smaller insurers believe process changes will improve claims operations more than their larger peers do.

Study results also suggest smaller insurers should carefully develop strategies to compete against larger insurers. Larger organizations will continue to acquire new technologies, expand call centers and leverage knowledge to be more competitive at all levels. Competing against the larger insurer will put increasing underwriting profit pressure on smaller organizations. This will require smaller organizations to differentiate themselves on distribution, risk selection, product and customer contact.

Smaller companies often have an advantage in this mix, at least for now, given that larger companies have more difficulty implementing new technology effectively because of the scale and scope of such projects. Smaller companies, while they have more at stake if they miss the mark with technology, can more easily address the problem, and get technology specified, selected and operationalized faster and more effectively than their large-scale peers.

The Bottom Line

Can P/C insurance companies measurably improve business performance in the near term? Over-all, survey participants are cautiously optimistic about the future. P/C industry professionals plan to face the operational and marketplace challenges of today with tools, techniques and tenacity, and a healthy dose of research and planning.

With economic and industry climates shifting, survey respondents are armed with ideas about how to move forward--concentrating on core insurance processes; working toward organic growth; practicing expense management; focusing on back-to-basics strategies in the claims and underwriting areas; and exploiting paperless processing and other promising technologies. The survey results also indicate such efforts are not universally applicable, meaning insurers must invest time and resources to target and validate technology investments against their unique needs.

We Plan to Investigate the
Use of Offshore Processing
to Support Our Underwriting
or Policy Issuance

Disagree     92%
Neutral       5%
Agree         3%

Note: Table made from bar graph.

We Expect to Be Paperless
in the Underwriting
Workflow in Two Years

Disagree     24%
Neutral      21%
Agree        55%

Note: Table made from pie chart.

Mutual vs.                                         Stock      Mutual
Stock Companies                                    Company    Company

Expect to be paperless within the next two years    50%        100%
Operations will be most improved through           100%         50%
  existing technologies
Contact centers will be most improved               50%        100%
  through new technologies
We plan to investigate the use of                   25%          0%
  offshore processing to support our policy
  issuance process
Claims operations will be most improved            100%         50%
  through full utilization of existing technology

                                                   100%          0%
                                                   AGREE       DISAGREE

Key Points

* P/C insurers are focusing on a back-to-basics strategy in claims and underwriting.

* Offshoring and outsourcing are low priorities for both underwriting and claims.

* Expense management and service improvement continue to be top priorities for P/C organizations.

Top Underwriting Priorities

Identified in Survey

1. Organic growth

2. Underwriting and general expense management

3. Customer service

4. New tool introduction

5. Training

6. Growth through acquisition

7. Outsourcing

Top Claims Priorities Identified in Survey

1. Loss costs

2. Loss adjustment expense

3. Customer satisfaction

4. Severity

5. Reserving accuracy

6. Subrogation results

7. Claims frequency

8. Special investigation unit effectiveness

9. Catastrophe results

Six Business Strategies

1 Avoid distractions and focus on core insurance processes and performance drivers.

2 Continue to consider organic growth, expense management and customer service as priorities, while seriously questioning whether outsourcing is a way to improve these areas.

3 Objectively and thoroughly review whether offshore processing of underwriting, claims and contact centers will deliver the promised benefits.

4 Renew the commitment to paperless processing--the promise and reality appear to be converging.

5 Stock companies should question if they are being overly conservative in technology investments. Mutual companies should honestly assess whether they are ahead, catching up, or trailing too far behind with technology investments.

6 Small to medium-size insurers should carefully evaluate their options and strategies, particularly when competing against large organizations that continue to invest in scale and efficiency.

Contributor Steve Discher is practice director at the Robert E. Nolan Co.