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Insurance & Technology: The Blog« November 2007 | Main | January 2008 » December 18, 2007Analytics on SteroidsIn light of the publication of Senate Majority Leader George Mitchell’s report on illegal performance-enhancing substances in Major League Baseball, it’s a little embarrassing that Billy Beane’s success with the Oakland A’s figures so prominently in the early pages “Competing on Analytics: The New Science of Winning,” by Tom Davenport and Jeanne Harris.* I say “a little” because the fact that the A’s were apparently competing not only on analytics but, at least to some extent, on steroids, does not negate the book’s argument. It does, however, invite meditation on the limits of the analytic approach to competition and may also clarify questions of “art versus science” in the use of analytics for automated decision-making. Beane’s success, popularized in Michael Lewis’ “Moneyball,” clearly owes a great deal to his analytical approach, despite the use of steroids by some of his players. In any case, his success is only one of many examples of analytical competition adduced by Davenport and Harris. Ultimately, the application of analytics to measure various kinds of performance is little more than an extension of accounting. One wouldn’t rely on intuition to track business transactions, and all the advocates of analytical competition are arguing is that one take a similarly empirical and mathematical approach to measuring what works or doesn’t. The emergence of this approach is thus not the result of brilliant insight so much as it is simply a natural consequence of the recent availability of large amounts of data for analysis. Given insurers’ increasing ability to access enormous stores of potentially valuable data hitherto locked away in their systems, the concept of analytical competition—often through the vehicle of Davenport and Harris’ book—is justifiably popular among insurance technology executives. However, the Moneyball example shows that it’s possible that variables other than the ones identified can distort the outcomes of analysis. And as with the use of any metrics, one has to choose the right ones: irrelevant hypotheses generate worthless conclusions. In that respect, intuition may supply what a purely analytical approach cannot. Also, one must never lose sight of the effects of chance. “In an area where you haven’t found an independent variable closely linked to a dependent variable, there’s room for chance and other factors,” is how David West, research director, TowerGroup, puts it. While individual anomalies are very unlikely to trump statistical tendencies in the long run, West’s point underscores the need to understand precisely what one is and is not measuring, and what the full range of possibility—not just probability—is when applying analysis. The general principle is that “‘on any given Sunday’ any team can beat any other team,” West says. In application of that principle, he adds that, “this Sunday, Miami is will ultimately remain the only undefeated team in history when they spoil the Patriots’ season.” *Patriots coach Bill Belichick is also mentioned in the book (p78), but his cheating involved the effective use of analytics rather than their distortion. Posted by Anthony O'Donnell at 01:43 PM | Comments December 07, 2007Where Are The Experts?Someone sent me a column by computer-industry consultant Kathleen Dollard about the pace of change. It started me thinking that there are two great forces that are going to impact our industry. The first is the rate of change in technology. The second is more subtle but just as important — the rate of retirements in our industry. Over the next ten years, our industry will look very different. Futurist Ray Kurzweil postulates that the rate of change over the next 100 years will be more like 20,000 years of change. We can look at the rapid-version histories of Java and the .NET Framework as examples of the rate of change. New technologies are going to burst on the scene, and we'll need to embrace them. Sometimes external events like September 11 force us to embrace change. In the old days, we all knew the guy who knew every line of code in a particular system written in COBOL or RPGIII. That guy is gone, replaced by teams using several different languages. If we look at the population changes of the professionals, we can expect that over the next 20 years, a generation will be retiring. Those of us who have been around awhile all know someone who has retired or will retire soon. Companies are starting to appreciate the issue. They are changing policies to encourage people to work longer. To some extent, the fact that we serve a conservative client base will mediate the need to adopt new technologies. We as professionals should recognize that we'll need to learn new and varied technologies. Our clients will be looking for companies that have experts and can retain them. Posted by Howard Kennedy at 02:18 PM | Comments December 05, 2007Insurance IT Strategies Can't Avoid Addressing Green ComputingSt. Paul-based Travelers' announcement this week that it is pledging to reduce total U.S. greenhouse gas emissions by seven percent by 2011 is another example of how high-profile topics such as green computing, sustainability and energy efficiency have become in financial services. Travelers' initiative stems from the company’s participation in Climate Leaders, the U.S. Environmental Protection Agency’s (EPA) industry-government partnership that works with companies to develop comprehensive climate change strategies. Not to detract in any way from Travelers' goals or climate change-addressing activities to date -– but it's gotten so that I'm seeing announcements of this nature from insurance companies and banks almost every day. Yes, there's a lot hype and "happy talk," but as I have noted before, the issues of climate change and environmental risk are real and so are the potential business benefits for insurers that start to address these issues in a meaningful way. I will go so far as to predict that 2008 will be "The Year of Green" in insurance and financial services IT. Reducing carbon footprints and addressing sustainability won't necessarily replace any of the other urgent topics of discussion and analysis, such legacy systems, customer experience, recruiting and retaining IT talent, and risk management/regulatory compliance. But these new concerns will move towards the top of senior executives' agendas. In fact, I think discussions of and actions on all these long-standing high-priority challenges actually will incorporate sustainability-related concerns –- the green computing angle might actually be a way to make a stronger business case and seal the deal. For example, CIOs still trying to persuade doubters about legacy transformation strategies can make the argument that moving to a more efficient platform also will position their companies as leaders in addressing sustainability. Carriers that are struggling to renew their IT workforces with new, younger blood have a better chance of attracting Millennials by being on the right side of dealing with climate change. Sooner or later (after the 2008 presidential elections?) there will be tougher regulatory requirements related to businesses' and consumers' carbon outputs -– why not get a head start on compliance? Posted by Kathy Burger at 04:15 PM | Comments December 04, 2007The Continuing Importance of Business and IT Alignment: Where Do Insurers Stand?The importance of business and IT alignment within an insurance organization was a common theme discussed by both our Tech Savvy CEOs (June 2007) and Elite 8 honorees (November 2007). And apparently, the call of those leading CEOs and CIOs has been heard throughout the insurance vertical. But while most business and IT executives agree upon the value of IT as it relates to the strategic success of a business, a relative few are able to convert those mutual feelings into positive results. According to the Diamond Digital IQ Study, a recently report by Diamond Management & Technology Consultants, 85 percent of business and technology leaders within the insurance industry agreed upon the value of IT in strategic success. However, nearly 36 percent of those business leaders were dissatisfied with the IT strategic planning process, while only 15 percent of IT leaders shared that sentiment. "There are some disconnects between statement and action," says Paul Blase, co-managing partner of Diamond's insurance practice. Blase points out that a low percentage of insurance business leaders are satisfied with IT department results, in terms on-time, on-budget project delivery. On the flip side, 70 percent of business leaders believed that post-merger and acquisition (M&A) business integration processes were effective, as opposed to almost 35 percent of IT leaders. Further, despite most acknowledging the strategic importance of IT, few business leaders have offered IT a seat at the table. Case in point: only 36 percent of the Diamond survey respondents "totally agreed" that the CIO was involved in the business strategy development process. Those disconnects between theory and practice, Blase says, affect how insurers view IT-related ROI and performance. As a result, IT budgets can be thrown out of whack. "If IT and the business aren't working together on the areas where IT can drive down maintenance costs, the budget becomes bloated in the wrong area and there is less money to free up for IT strategic investment," Blase says. While the above illustrates that the insurance vertical has a long way to go, the industry is not alone. In many ways, the discrepancy between plan and practice within insurance is in line with the overall findings of the Diamond study, which included results from 456 C-level business and technology executives across a wide array of industries. In fact, insurers stack up quite well against the whole. From both an operational and strategic standpoint, the study has found that insurers have demonstrated a strong commitment to IT, outpacing the consumer packaged goods and retail; manufacturing and distribution; and utility industries in these regards. Further, Blase suggests that insurers are leading the way when it comes to analytics, a concept where the industry's IT and business sides have found common ground both operationally and strategically. "One area where insurance is ahead of the game is using the vast amounts of data in the market to provide very granular risk-based pricing for their products," Blase says. "They're also experimenting with data in the market to monitor risks and help prevent or respond to risks as they happen." Posted by Nathan Conz at 04:51 PM | Comments What Makes a Topic "Hot"?Yesterday a friend in the industry asked me about how much of a hot topic billing was, and I had to concede that I wasn’t sure. Certainly, I hazarded, there is still an appetite for best-of-breed solutions, even if more often owing to CIOs following a more cautious route. More often than in the past, according to Celent analyst Chad Hersh, insurance CIOs are taking an incremental, component-based, services-oriented architecture approach, and will seek to assemble as many modules as they can from a selected vendor. However, since open architecture permits more choice, they can opt for alternatives if a particular component is found wanting. I would add that given more demanding customer expectations, billing ought to be more than an afterthought. Whether I was on the right track or not, the question got me thinking about what makes a topic “hot.” Without question, necessity is the mother of a good deal of invention and implementation in the insurance technology space. However, that doesn’t mean that all systems priorities are correctly ordered: some needs assert themselves with greater force than others. A CIO may have a small number of clear systems priorities and a dozen others that are further down the priority list. It may take more thorough analysis to prioritize these items, and in its absence less rational drivers may come into play. What I am suggesting is that some items, at some point, are likely to get less attention because they are less interesting or more forbidding. If one had to make a list of more “boring” functionality, billing might be on it. Lack of flash may not be the only irrational factor in disordering priorities. Fear may drive slow adoption of technological innovation in some areas — actuarial for example. I have made the case before that actuarial technology was an area in urgent need of technology and process reform, and I’ve had reason to think so since. For example, yesterday I received a press release from Ernst & Young announcing results of a survey that found a “crisis of confidence towards actuarial and IT” on the part of senior management. While the release was self-serving, it made legitimate points:
It’s true that, like underwriters, actuaries are reluctant to relinquish any control over their activities, resisting automation. That assertion is amply demonstrated by their dependence on free-floating spreadsheets that can make financial reconciliation a nightmare. But it is probably also true that CIOs are quite happy to leave actuaries to their arcane concerns unless they are commanded by senior management to get involved. Posted by Anthony O'Donnell at 02:36 PM | Comments
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