Banding together: Regional insurers are forming alliances to upgrade technology and grow their businesses. (Technology).

Sitting in the shadow of State Farm in Bloomington, Ill., Country Insurance & Financial Services knows that to compete against the nation's largest insurers it has to beef up its technology and market share. So, following a business plan that's gaining popularity among regional insurers, Country pooled its resources with smaller insurers to create a sophisticated technology infrastructure that will rival the systems of the industry's heavy hitters.

The deals are born from regional insurers' need to compete with the major players, said Chuck Johnston, vice president and director of insurance information strategies for the Meta Group, which helps insurers form these alliances. "The regional insurers don't have the best economies of scale or the most innovative products, and they don't always have the management mindset to step out on a limb and try new things. They are kind of fat and happy They realize, however, they are in trouble," Johnston said.

Although in the early stages, the alliances are taking place among insurers that Johnston has labeled small-tier, midtier and tier-two groups. The small-tier insurers produce less than $250 million in annual premium, have limited access to capital and rudimentary, outdated technology systems. "They will be swept over in a storm and left alone, because they are in such a tight niche, or they will be acquired," Johnston said. Midtier insurers, with $250 million to $1 billion in premium, tend to have a single distribution channel--selling primarily through independent agents because they can't afford a captive agent force. The top players haven't encroached on their territory yet, because they are focused on higher population centers and different market segments. "The midtier's catch phrase is, 'We're the best insurer in southern Indiana,'" Johnston said.

The tier-two companies, or insurers doing between $1 billion in premium and Fortune 200 level, are feeling the most pressure from top players, such as New York Life and State Farm. "They are generally a regional model that has multiple distribution channels and dabbles in creating banks or other alternative financial-services offerings," Johnston said.

To achieve the lean, sophisticated technology systems of their competitors, small-tier, midtier and tier-two insurers that have similar businesses are taking part in alliances and mergers of scale, where they are also looking for market share. Because new administration systems can cost between $5 million and $10 million, insurers are finding that they need to combine forces to become big enough to afford the top systems. "The goal is to double the size of the company with lower marginal expenses. They combine data centers and networks, leverage software licenses and standardize under one system. It doesn't transform the business but has the advantage of one large business," Johnston said.

Pooling Interests

Country formed the alliances with three insurers to increase the company's geographic reach and its ability to share products. In the business arrangement with MSI Preferred Insurance Co., Holyoke Mutual Insurance Co. and Middlesex Mutual Assurance Co., the insurers pool their premiums and expenses, and participants take a share according to their size. Country is the largest participant in the alliance, with about $1 billion in annual premium, whereas the other three insurers each reported about $100 million in premium annually.

"All four of us had a desire to move to newer technology, particularly policy-processing technology," said Barbara Baurer, executive vice president and chief operating officer for Country. Right now Country and its three insurer partners are in the middle of the massive technology switchover that's being phased in over multiple years. "It's like planning a major invasion; there are so many things to think about to get all these companies on a common platform," Baurer said.

Country saw savings in the payroll of its information services staff. Through the alliance, it could hire programmers from Minneapolis, the headquarters of MSI. Since Country shares its headquarters city with State Farm, Country had to pay its on-site technology staffers enough to compete with the salaries offered by the insurance giant.

Another step was to get all four companies on a common application system for accounting. Country purchased accounting software and is implementing the programs using in-house staff.

Preliminary Analysis

Perhaps the biggest challenge to combining technologies was switching over all four companies to a new policy administration system. Because all four companies' systems are about 25 years old, they need to be replaced with a more flexible system that would bring products to market more quickly and allow more efficient interface with agency forces.

The first consideration, Baurer said, was finding a system that fit with each company. They decided to use one policy administration system for the multiline, captive-agency companies MSI and Country, and another for Holyoke and Middlesex, which have independent agents, Baurer said.

A steering committee representing Country, Middlesex, Holyoke and MSI is currently completing analysis of all technology projects, including existing policy-application systems, sifting through the differences of each system and deciding which ones to eliminate to create a consolidated product. "For instance, in a homeowners insurance product, we offer different discounts and endorsements...All of us are interested in eliminating differences, because it will cost less to maintain the system long term;' Baurer said.

A New System

After the analysis is completed, Country and MSI tech staff will write new interface systems that will feed the data from both companies into the new software by Castek. Country will initially convert 750,000 auto policies to the new system, Baurer said.

In the case of Middlesex and Holyoke, the alliance decided to take an interim step before joining the Castek system. Middlesex already was using a viable policy administration system called Freedom, and it uses independent agents like Holyoke. So both companies will use Freedom, beginning this year. Freedom, produced by Fiserv, offers a broad range of applications, including accounts payable and receivable and bank reconciliation, and it generates the annual filings for the National Association of Insurance Commissioners. Baurer said both companies will save money, because Freedom is a policy-administration, commission-tracking total system that will put both companies on one program for all needs. After Country's and MSI's move to Castek is complete, Holyoke and Middlesex will convert to that system, Baurer said.

Tying all the companies together has its challenges, too. Country came into the alliance with a multiline, exclusive agency point of reference that caused some problems when dealing with Holyoke's and Middlesex's independent agent sales channels, Baurer said. "We didn't understand how they worked at first, and we made some assumptions that weren't really valid. But it was a benefit, too, because in some states we compete against that channel, so I understand it better now," she said.

The benefits from the alliance weren't all based on cost savings, Baurer said. Just consolidating business activities, such as accounting, makes all the companies more efficient. In addition, Holyoke, Middlesex and MSI now have access to Country's 24/7 call centers, something they didn't have in the past. "We also expect the new system will speed our time to market for new products. That will also impact on the premium-generating side," Baurer said.

RELATED ARTICLE: Drivers of the New Strategy for Regional Insurers

Many changes in the industry account for regional insurers' need to combine forces. Regional insurers can expect competition for their choice accounts from the Prudentials and Hartfords as the top players switch selling strategies from a demographic focus to a geographic one. Many of the largest insurers are focusing on high-net-worth consumers, and they are finding they can go after that market segment anywhere in the United States because there are wealthy people in every state, said Chuck Johnston, vice president and director of insurance information strategies for the Meta Group.

Direct selling in the commodity markets--automobile, homeowners and term life insurance--also is squeezing regional insurers. "The direct players are getting more aggressive and putting pressure on regional players because they don't have the cost of geographic penetration that an agency-driven field force has. They can penetrate these areas without making huge human-capital investments," Johnston said.

Setting an Example

Savings Bank Life Insurance Company of Massachusetts is firmly entrenched in the New England market. SBLI has $27.9 billion of ordinary life in force, making it the leader in that category in the state in 2000, according to A.M. Best Co. State/Line data. Tier-two level SBLI sells insurance through direct sales, agents, brokers and banks. To compete with the top players, SBLI is doing two things: selling more term life and annuities through the Internet and expanding outside its Northeast presence by creating alliances with banks and affinity marketing groups.

"To penetrate other areas, we have to align with a co-branding opportunity, so we went into affinity marketing groups like AAA of Southern New England and the Massachusetts Society of Certified Public Accountants and the New Jersey League of Community & Savings Bankers," said Irving Burday, SBLI's chief information officer.

But the company's biggest initiative is launching co-branded Web sites with banks throughout the Northeast. "We get a wonderful ability to tap into large amounts of depositors and bank customers and to tap into markets that we normally don't get into," Burday said. Instead of the banks developing their own life products and annuities, SBLI brings the products to them. The co-branded Web site is a major marketing opportunity and requires minimal technological investment.

Burday said SBLI can create a simple link from its Web site to a bank's Web site or nest its content within the bank's Web site. The nesting option is the most popular, because then the consumer never leaves the bank's Web site. Nesting isn't difficult to do from a technology standpoint, Burday said. SBLI has the necessary information packaged and can get it off the ground in less than a week. The insurer provides a set of specs for the bank along with codes, scripting and generic pages that allow the bank to slot the pages inside its Web site. "It's a straightforward process. We're providing the means to make a sale. We don't have to integrate into their back-office systems; all we have to do is provide management reports to the banks," Burday said.

In October, SBLI rolled out a co-branded Web site with Salem Five Cents Savings Bank and has plans for 10 to 20 similar initiatives with other banks this year. Once the bank program gets off the ground, SBLI will probably expand into more geographic regions, Burday said.