Deal trends and predictions in North American Life Insurance Policy Administration System market: Q&A Session

In a webinar on March 13th, Craig Weber and I presented our predictions for the North American Policy Administration system market. We also identified some the trends we've seen in the market as it relates to deals. A quick recap shows that we believe the NA PAS market will have a slight dip in 2012 relative to 2011 sales, which is driven by the fact that many of the larger insurers already have PAS systems in place and few large insurers have plans to buy a full new system. Instead we believe the market will be buoyed by the larger insurers upgrading and enhancing their current systems because many are using older versions of vendors' systems. We also believe that the market will see middle tier insurers picking up the pace on buying vendor systems as competitive pressures and efficiency mandates are now being applied to them. Several of the vendors in our recent report, North American Policy Administration Systems 2011: Life, Health, and Annuities ABCD Vendor View, are beginning to target this cadre of insurers.

Our webinar produced a great number of questions from the audience. I'll recap a few here.

Question: Your data suggests that large carriers will actually be building new policy admin systems using vendor software. But traditionally, that has not been true. Is something happening to drive this change?

Answer: We do see that insurers have been moving towards vendor systems. (Our data points to the fact that over nearly 50 percent of larger insurers have at least one vendor system in production.)

Question: What are the top 3 decision drivers for insurers and are there any key decision driver differences in each of the three tiers?

Answer: The big one is Agility . . . followed by the need to provide end customers, agents and policyholders the ability to work more easily with the insurer. The fact that many of the vendor systems are now offering greater flexibility and more user friendly GUIs points to the need for the insurer to provide the policyholder with a timely, error free and positive experience with the insurer. Some carriers have also expressed concerns about ongoing resource availability to keep their legacy systems running, though this seems to be a secondary issue to the others.

In terms of differences by tier of carrier, the first two drivers are universal. Large carriers are typically in more lines, and have a more differentiated distribution footprint. But small carriers also need agility to move with their markets, and in fact have the advantage of being organizationally limber.

Question: Is the data presented include conversion costs or pure implementation costs (new business) ?

Answer: Our data presents only the first year license and implementation costs of vendor PAS system. It is based on the average license fees and first year costs given to us in our vendor RFIs for our report. We use three different number for first year expenses based on the size of the insurer: Large (>US$ 1 billion), Medium and Small (< US$ 500 million) insurers.

Question: Do you find that the predominant strategy is replace or modernize?

Answer: We have seen that the trend is to modernize even if it means taking the long upgrade path towards modernizing. We incorporated that trend into our estimates for our analysis. We have found that through discussions with vendor clients, particularly ones on older systems, and our associated research in the PAS market that clients often opt to stay with their existing vendors and modernize in lieu of starting over with a new system and vendor.

In a counter to our finding, we received the following comment from an attendee that we thought we’d share: “Modernization may not always be possible with the current vendor particularly if there is a growing need for agility as Craig mentioned. Carriers may be looking for ways to inject agility into a legacy solution by employing, for example, a new calculation engine that interfaces with the PAS and other core systems or a product configurator that can facilitate rapid change by producing artifacts a legacy system can consume. This way they are protecting their existing investment, are by no means doing a rip and replace, and provide themselves with a roadmap to future replacement.”

Questions: Any specific trends in the closed book of business when it comes to package / software implementation? Especially, do you see any insurers implementing a packaged solution for small closed block of business?

Answer: We did not ask specifically about whether the systems were being used for closed books of business in our vendor RFIs. Nor did we ask the clients using the systems if the books were open or closed. However, Jamie MacGregor in Celent's London office and I (Karen) are currently researching a series of reports specifically about closed books of life insurance. Our reports will discuss closed books in both US and the UK. It will address the reasons why insurers opt to close books and the challenges facing them once they decide to close the blocks of business. We will lay out the options available to insurers such as outsourcing, selling off businesses to other insurers or aggregators (UK), keeping the business inhouse and the additional options available for that strategy, etc. When legacy platforms are involved, this leads us right back to the question of what to do with an older system, especially if the system administers closed blocks, doesn't it? Look for that series of reports beginning in late April 2012.