Insurance against service costs

The pure service components of an insurance software implementation could cost an insurer Rs 10 to 20 crore over a period of time. Over and above this, the insurer has to spend on hardware and software licences.

INSURANCE companies face many challenges when they attempt to break into the Indian market. In the joint venture context, the Indian partner is starting a completely new line of business. For the foreign partner the Indian market is new and could remain unpredictable for some time.

Operationally, the new insurer has to simultaneously address various issues pertaining to product mix, competitive positioning, distribution strategy, infrastructure build-up, regulatory compliance and relationship with partners, channels and intermediaries.

Further adding to the challenge is the fact that the regulatory authority is bound to frequently put in place fresh guidelines. Insurers from abroad have a reasonable track record in entering a new country through mergers and acquisitions. However, the Indian scenario, as seen above, is far more complex. This creates a unique set of issues for the insurer from a system perspective.

System Challenges

The new insurer will be faced with a variety of system-related issues. The challenges could be:

• Fluidity of the product mix
• Changing regulatory context
• Evolving process of distribution and channels management
• Business analysis requirement
• Frequent need to re-engineer internal processes
• Creating and nurturing an in-house IT department.

All of this means that the insurer's IT systems will have to undergo considerable change. This could have serious implications on IT service costs -- both one-time and recurring.

Let us also look at the nature of an insurance software system and the implications on service costs. Insurance systems are complex for a number of reasons. Insurance products are complex. There are a number of rules pertaining to underwriting, premium computation, reinsurance, agent commission and accounting that apply to each new policy that is issued. By comparison, a typical banking transaction is far simpler.

Insurance organizations are far-flung geographically. The customers are in one location, the agents and brokers in another and critical personnel such as underwriters at the head office. Individual policy transactions need to flow through various geographical locations for due completion.

An insurance software package too reflects this complexity. Typically, a package may have millions of lines of code, about a thousand screens, hundreds of processes and a maze of reports and queries.

The inherent complexity necessitates the package-vendor to have technical specialists at the module level. This means that the vendor will deploy a variety of technical personnel. For any meaningful discussion on the system, the vendor will send in a team of personnel from abroad. These specialists are expensive as they have both software and business skills. Of course, the insurance organization has to pay for their time.

Software implementation is a time and manpower-consuming task. Software implementation for an insurance organization is a time-consuming and laborious process and has to go through the following processes.

• Business process rationalization and documentation.
  
• Functionality mapping to the insurance software package
  
• Modified software acceptance process
  
• Implementation

Business process rationalization and documentation

Typically an insurance organization has a number of functional departments. They are actuarial, new business, client servicing, marketing and agency management accounts/investment and reinsurance. There are complex business rules, process flow specifications, data characteristics, information integration issues, MIS and reporting needs as applicable to each of the departments.

The rationalization process involves interviewing users and management, documenting the findings and finalizing the target system specifications.

Functionality mapping

A joint team comprising personnel from the vendor and insurer has to carefully map the requirements to the functionality of the software package. As a first step, the vendor prepares the software package for the mapping exercise by creating test data and action sequences that are close to the insurer's requirements. A joint team then subjects the package to a step-by-step process of comparison with the documented requirement.

This phase has to be done carefully. Users from the insurer's organization carry the responsibility to unearth functional deficiencies in the package. There is considerable effort involved on the part of the vendors as well. Users need to grasp the detailed functionality of the vendor's package. Even small system elements may not be ignored. This process creates change specifications for the vendor's software package.

Modified software acceptance process

The vendor then carries out the modifications. This could take months of work depending on the situation. After completion the users have to go through the process of acceptance. Again, this activity is time-consuming for the vendor and the personnel from the insurance organization.

Implementation

Implementation is the final activity. Users and vendors jointly create an elaborate implementation plan. Participating personnel from either side need to get ready. A big effort goes into populating the system with data. Most new Insurers will be disadvantaged by the lack of test data. Subject to all things going well, the planned cut over date may be achieved.

Software service costs

A typical software vendor from abroad will have to fly in personnel from a foreign location during various stages of the IT project. The service charges of the overseas software vendor could be prohibitive. Typically, the expenses may be in the range of $500-$1000 per man-day. The pure service component of an insurance software implementation could, therefore, cost the insurer Rs 10 to 20 crore over a period of time. Over and above this, the insurer has to spend on hardware and software licenses.

The solution

In the above situation, a discerning new insurer may do well to look at the following options:

Keep the scope of the initial IT system simple. In any case it has to undergo considerable changes in the next few years. Outsource the entire software implementation and services to an India-based software house that has insurance expertise. Focus solely on the business challenges.
Procure the software from one source and services from another.
Insurers still have the time to decide and execute an optimal IT strategy.

(The author is Managing Director, KALS Information systems.)