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Technology in the Insurance Business Environment

Technology in the Insurance Business Environment
by Ed Slaby

In the world of computers, new technology is always only days away. Here's a look at what's on the horizon for actuaries.

This report focuses on Information Technology (IT) in the insurance business environment. In particular, it reviews emerging trends in IT management, and the likely impact they will have on the work of the life actuary.

Environmental Resources and Sources Scanned
The Society of Actuaries has a Technology Section that is an important resource to keep up with new developments in all aspects of information technology. In addition, the Long–Term Care Section has an operations sub–track that is focused on administrative and information technology issues in the long–term care insurance industry. Another useful resource is the "Report of the Society of Actuaries Technology Survey Subcommittee," that was presented in October 2002.

Environmental scanning should be seen as an adjunct to the information provided by these groups of volunteers and the research staff of the Society.

The scanning for this report used many sources such as insurance industry periodicals, IT periodicals, software vendors, Web sites and discussions with IT personnel and vendors.

Technology Background
In order to understand the present situation, it is useful to briefly review a history of the IT function in the life insurance business.

Well before the sale of computers for commercial applications, some life insurance actuaries had interacted with major vendors in the newly forming IT industry. They had an important role in educating their industry about possible uses of computers as well as communicating the needs of life insurers to computer vendors. The earliest use of IT was for data maintenance and accounting in financial operations activity. This was followed by the development of integrated systems for policyholder records and service. Actuaries in that era generally used such mainframe systems primarily for valuation and statistical reporting; however, they also began to have personal computing access through time–sharing arrangements.

The invention of the personal computer (PC) allowed life insurers to give their agents direct EDP links to the company's systems. In time, this functionality was enhanced using mobile (laptop) computers. This use of the PC fundamentally changed the way that insurance products are sold, and became an important source of competitive advantage for many companies.

Likewise, the PC also fundamentally changed actuarial work. The availability of spreadsheet software provided powerful and easy–to–use tools for actuarial analysis. Programming steps for actuarial work were easy to set up using spreadsheets and related tools such as data base management software. However, IT management tended to be ambivalent about the spread of desktop applications, which presented new support requirements and IT often did not control PC hardware and software purchase decisions made by individual operating units. IT saw PC systems as representing a host of rogue applications, which generated information outside of the company's operational control of data. In fact, the informal use of desktop applications was often symptomatic of IT's inability to provide timely and effective business solutions.

The changing regulatory environment in financial services and the resulting competition with mutual funds and banks caused the life insurance industry to respond by developing more and more complex products. These products could not be viable without increasingly more complex systems to support them. Actuaries in turn found they needed to respond with the use of more sophisticated modeling software, usually outside of the company's IT environment.

Companies adopted new technology, such as image processing and automated call processing, as a means to improved service efficiency. They found that, using these technologies, it was important to re–engineer their business processes to reduce costs and improve service.

In recent years, the industry has seen a flurry of company consolidations and sales of blocks of business for strategic reasons. These mergers and acquisitions, together with in force business representing many generations of products, finds most companies using a variety of legacy systems to administer their heritage of policies from prior eras.

The introduction of e–business has resulted in new challenges to life insurance business models. Interactive systems give agents and customers access to company data, and many transactions are now possible online.

Results of Scanning Activity
IT management in the life insurance business is currently facing a number of critical issues. IT is under renewed pressure to deliver timely and effective enterprise solutions. In order to better align IT projects with the business goals of the company, companies are adopting service–oriented architectures (SOA). Many firms in many industries have adopted SOA technology, and it is a good fit for the insurance business with its large investment in legacy systems and its need to be nimble in the marketplace.

SOA is a software development discipline that guides software developers to create reusable applications and hide the technical complexity behind business processes in a way that is independent of the choice of technology platform. As an example, a common function found in insurance systems is the ability to create, read, change or delete a record. Using SOA, a software developer builds a single interface, or "service," to interact with that type of record, wherever it is found in the company's legacy applications. Any new development can access that "service," rather than the legacy system. A key feature of SOA is that any new "service" must follow well–established standards, so that no analysis of the functions that are behind the service is required when the service is reused in a different application. In recent years, major software vendors (Microsoft, Java, etc.) have adopted new open technical standards, which mean that services written on different platforms can be used interchangeably.

In September 2005, the IBM Corporation made a significant contribution to growth and innovation in the insurance business. IBM gave access, through ACORD, which is the leading insurance industry standards body, to insurance industry content from its large–scale framework for the insurance industry called IAA (for Insurance Applications Architecture). The donated content covers business and technical descriptions of over 100 business processes used by the insurance industry, such as claims handling. For insurers, this move can result in significant cost savings by providing access through ACORD to definitions of common industry process services, eliminating the need to build their own. IBM sees adoption of standard ways of doing business as eliminating the need for and expense of developing a patchwork of proprietary methods. This is seen as a first step in developing a standard service oriented architecture for the insurance industry.

SOA technology has great potential for reducing the cost of maintaining old systems and implementing new systems.

The Need for Increased Central Control of IT Functions
In the past, individual operating units have pushed for control of decentralized IT functions. The need for enterprise and industry standards in business process management, the trend to outsourcing, and the increasing emphasis on internal controls and enterprise data models all argue for increased centralized control of IT functions. Enterprise data models require consistent data definitions and collection, even if individual operating units are the users of the data.

The trend toward central control of company information is also driven by management's reliance on risk–adjusted metrics used in managing capital and the risk profile of the company. Speed of preparation, and reliability, of the information needed for timely enterprise risk management will likewise provide an impetus for centralized control and common data definitions and handling.

There is a continuing demand for increased computing power, especially for actuarial and investment analytics and stochastic modeling. These issues, faced by IT management, will obviously have an impact on the work of the life actuary. A framework of industry–wide services and standards is under development. It is designed to facilitate integration of both legacy and newly developed applications into consistent system architecture. Actuaries will be challenged to respond to the increased rationalization of firm–wide systems and platforms by integrating their valuation and pricing applications into a standard IT architecture having consistent data definitions, data quality control and validation procedures. They will face a special challenge in the many manual processes still involved in the production of actuarial deliverables.

Life actuaries face new IT challenges because of the increasing use of stochastic modeling in asset and liability valuation and in product pricing. This is evidenced by the adoption of principles–based valuation techniques and by the increased use of stochastic pricing procedures.

Challenges Going Forward
In the period after World War II, as computers evolved from tools for scientific calculations and university research into tools for use by commercial firms, pioneering actuaries were instrumental in the development of specifications for the introduction of computing machinery into the life industry. Now IT management is developing new tools and techniques to respond to many new demands by management and regulators for company wide information. Life actuaries should be involved and contribute their expertise to the development of this new framework for corporate information, just as the actuaries of a previous generation made important contributions to IT in its early development by the life industry.

The Need to Continue Scanning
As a developing topic, these changes in IT management merit continued monitoring through the coming year.

Ed Slaby is senior VP, investments and actuarial for Unity Mutual Life Insurance Co. He can be contacted at