Core capabilities limit innovation: Often, underwriting, policy-administration and claims-management infrastructure is so restrictive that it cannot support business strategies, regardless of cost. (Technology).

The insurance industry faces a number of significant strategic and tactical challenges, including asbestos, loss-cost inflation, natural and man-made catastrophes and the macroeconomic downturn. Insurers also have several opportunities to transform the business, enhance revenue and optimize expenses by leveraging new and emerging capabilities, such as e-business, customer relationship management, wealth management and strategic partnering.

Senior business and information technology managers clearly have a number of opportunities to focus on. And there is no shortage of vendors rushing to capture share in these emerging areas. But there is a mundane, complex problem that has plagued the industry for decades and is a critical barrier for insurers--core insurance capabilities. These capabilities, which include underwriting, policy administration and claims management, often are a key limiting factor in executing a variety of strategies and tactics.

A significant majority of insurers have core insurance capability portfolios running on last-generation assets, with a total cost of ownership that can exceed 50% of information technology spending. Consequently, the underlying business processes and organizational skill sets are structured to support these legacy core capabilities. In addition, the capability infrastructure is so restrictive that it cannot support business strategies and tactics, regardless of cost.

There is tremendous value in resolving core insurance concerns, and insurers have a relatively high willingness to address this issue. But due to the complexity of various business models and value propositions of insurers, the third-party marketplace has had a difficult time producing viable solutions. Many times, third-party solutions require extensive customization.

Custom-development efforts present significant cost challenges for all but the largest insurers that have the resources to address these issues. The problems are clear:

* Existing capabilities are inflexible and don't readily support most insurers' business imperatives.

* Core insurance maintenance consumes a significant portion of information technology spending.

* Third parties provide a limited number of viable solutions that often require extensive tailoring efforts.

* Custom-development efforts have relatively high cost and risk and require much time to build.

* Third-party and custom core insurance efforts, on a risk-adjusted basis, consume a significant portion of the benefits of addressing this issue.

There are no readily apparent solutions to this critical problem. However, a common element across all potential solutions includes increased cooperation in the form of a shared architectural vision with high-level baseline hardware, systems software and data standards. Historically, key stakeholders have not been able to develop this vision, and consequently, the industry has suffered.

Each stakeholder in the insurance industry has a distinct set of responsibilities and rationale for cooperating around the core insurance space:

* Insurers: Carriers will need to recognize that the core architecture is not a key source of competitive advantage and embrace the concept of an industry wide architectural vision. Doing so will create the environment where cost-effective, lower-risk, third-party and custom solutions can flourish.

* Third-party application providers: This includes organizations that build core solution components. Clearly, third parties should maintain and develop unique solutions. Application providers need to determine what the fundamental basis of competition is, other than the base hardware, systems software or data standards.

* System infrastructure providers: Major vendors that provide key infrastructure components across core insurance areas need to facilitate increased levels of cooperation. These vendors are in a unique position to embrace open technologies and standards and to add value across the industry.

* Services organizations: Firms performing custom development and third-party software-installation efforts need to develop explicit strategies that support development and implementation of the shared vision. This would reduce their costs and risks they can pass on to the insurers.

* Standard-setting boards: Industry consortia need to leverage their unique position in developing and supporting elements of the collaborative vision. This is the essence and intent that has promulgated their establishment and membership participation.

Stakeholders in the insurance industry may at last have the impetus to develop and execute a shared vision. As often stated, "there is nothing so powerful as an idea whose time has come." Maybe it's time for cooperation to become a reality.

William Pieroni is a general manager of IBM Global Insurance, White Plains, N.Y. He can be reached at [e-mail].