Two Cultures in the Insurance Industry

By Eugene Reagan
Senior Consultant

In 1959, British scientist and author C.P. Snow decried the separation of academic life into two cultures, one devoted to literary and artistic subjects and the other to scientific studies. The thrust of his argument was that this separation made it difficult, if not impossible, to communicate within the intellectual community.  It also fractured the educational process into segments, making it harder to become well-rounded intellectually. Over the last 45 years academia has seen this trend accelerate. Specialization has become more acute. Each of the two cultures has split into a multitude of even narrower cultures.

The insurance industry has long faced its own version of this dichotomy. In this case, the gap is not between humanities and science, but between technology and operations. For many years, there has been a perception that the people who understood the insurance business didn’t understand the insurance technology, and vice-versa.

This was not always the case. Like the gentleman scholar idealized by C.P. Snow, early insurance technologists were grounded in the business. In the 1960s, there were few computer geeks or gurus. No one had a computer science degree. The people who worked in the computer room or with data processing were people who transferred from operational or financial areas, bringing industry knowledge with them. These individuals knew the business and had to learn about the technology. However, as systems became more varied and complex and new programming languages were developed, it became necessary to hire and develop technology experts who would learn the details of the operation.

It hasn’t always worked out as planned. It is difficult and time-consuming for technology personnel to manage existing systems, stay current with changing technologies, address the detailed operational processes being supported and develop a broad understanding of the big picture—the overall corporate strategy and its relation to the insurance industry. As a result, over many years, senior IT managers became better and better technologists while frequently losing sight of the overall business operation.

If the growing complexity of the technology made things difficult for IT personnel, it totally confounded the operational and financial managers who had the business needs. As a result, communication deteriorated from awkward to impossible in many cases. In order to further develop expertise, the technology function in most organizations came to be organized by hardware or system rather than line of business or customer.  This also added a layer of difficulty to communication. There was little motivation or opportunity for the technology expert to expand his or her horizons beyond a specific system which might only support one processing function. 

IT departments developed their own bureaucracies and issues. In many organizations, IT strategies were developed that were separate and distinct from any overall corporate business strategies. The resulting communication problems often degenerated into political battles and turf wars. A common example of this situation was the recurring tension over project priorities with the implicit clash between users’ needs and IT’s resource shortages and conflicts.

In many companies, these communication problems existed from the lowest ranks of the organization (supervisors and programmers) to the highest levels (CIO, CFO or other senior officers). However, a study conducted by Nolan in 2003 suggests that these communication issues are being improved as senior managers develop a greater understanding of insurance technology and its support of the overall business.

Improved Understanding

This study, “Technology Strategy and Implementation in the Insurance Industry,” surveyed insurance company CEOs, CFOs, COOs, CIOs and other senior officers on their views on the role of insurance technology. One key finding was that senior executives seem to have a solid understanding of the role and importance of technology. In particular, two-thirds of all respondents indicated that leaders from operations and financial areas have a “good-to-excellent” understanding of technology.  Similarly, two-thirds of the respondents feel that CIOs have an equal level of understanding of the business operations. 

Much of this improvement can be attributed to the Y2K crisis that forced executives to focus on the impact of information systems on business operations. Another contributing factor has been the attention given to a range of new technologies, such as CRM, including agent and customer support systems; contact center systems; rules/expert systems used in underwriting and claims auto-adjudication; new administration systems to support new products such as variable life and annuities; ERP; and robust E-business systems. Although the levels of knowledge have improved, the impact on the actual success of these technologies has been mixed.

The bottom-line impact of technology costs on overall results has also forced management at many levels to become more actively engaged in system development and purchase decisions.  Successful companies have learned to integrate individuals from all the key disciplines in the planning and budgeting process in order to realistically allocate resources and set priorities.

While the improvements in this area are important, it is still troubling that one-third of respondents indicate that knowledge levels are less than “good.” In particular, there are gaps at key leadership positions. When asked about their chief operating officer’s understanding of technology, just under half (47%) of the IT respondents replied “good, very good or excellent.” However, when business leaders were asked the same question, 70% rated the COO’s understanding as “good” or better. This represents a significant difference of opinion regarding a key decision maker’s understanding of technology. 

Surprisingly, only 36% of the IT respondents credited their chief financial officer with a “good” or better understanding of technology. This is somewhat unexpected due to the long history of IT-finance reporting relationships in many companies.  In comparison, respondents from financial and operations areas felt more strongly that CFOs do have an adequate understanding of technology issues, with a 63% positive response rate to the same question.

A similar gap was identified in relation to the chief marketing officer. Only 10% of the IT respondents felt the CMO has a “good” or better understanding of technology.  Almost 42% of the business respondents replied with “good” or “very good.” (No one indicated their CMO had an “excellent” understanding of technology.) This difference in perception indicates that marketing areas are probably not making the most effective use of technology.

Strategic Impact

In the past, IT strategies have often been developed at least somewhat independently of the overall business strategy. There was an unspoken assumption that better technology always supported and improved the business strategy, but many times this assumption proved to be incorrect. Operational users have often felt that the focus and direction of the IT staff was not necessarily the same as the rest of the organization. Fortunately for the industry, this trend seems to be changing. In this study, approximately 80% of both IT and business respondents agree that the business strategy drives technology. This improvement addresses a major senior-management issue. 

However, there remain instances of poor coordination. One executive remarked, “Our approach is too technology-driven, instead of [being] driven by business or process innovation.” Another said, “Our most common mistake is letting the ‘tail wag the dog.’ I am fearful that IT is driving the decision-making process instead of the functional departments driving IT.”

Almost 92% of those responding agreed with the statement, “Technology is essential to our ability to compete and differentiate in the marketplace.” In an age of key enabling technologies, this may be stating the obvious. However, it indicates that technology must be considered along with other traditional differentiators (e.g., products, price, etc.) in order to be competitive.

Having agreed about the overall importance of technology, study respondents then revealed mixed views about its actual performance. Only 49% of the IT leaders and 43% of the business leaders surveyed believe that their current technology gives them a competitive advantage. So, almost everyone understands the need for a technology advantage, but more than half of those responding believe that their current systems are not providing it. The high expectations of technology have not been met with correspondingly high results.

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