The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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Insurance businesses facing Solvency II may need additional and improved data to feed their internal models. But how can they control its quality and completeness and at the same time gain more than just compliance with SII? The answer lies in improved and rigorous business process management (BPM), because it provides governance of an organisation's process environment, to improve agility and operational performance.

BPM is a holistic approach. It employs methods, policies, metrics and software tools to continuously optimise and improve an organisation's activities and processes. It is an optimisation process in itself. BPM enables an enterprise to be more efficient, more effective and more capable of change than functionally focused organisations with a traditional hierarchical management.

Collaboration
A business process is made up of a series or network of value-added activities - each performed by their relevant roles or collaborators - that work together to achieve a common business goal. These processes are critical to an organisation. They may generate revenue and often represent a significant proportion of costs.

As a managerial approach, BPM considers processes to be strategic assets of an organisation that must be understood, managed and improved to deliver value-added products and services to clients. This foundation is very similar to other total quality management or continuous improvement process approaches. But BPM goes a step further because it can be supported or enabled through technology to aid management in times of stress and change.

In fact, BPM is an approach to integrate a change capability into an organisation - both human and technological. Consequently many BPM articles and pundits often discuss BPM from two perspectives: that of the people and the technology involved in it.

Man and machine
Although the initial focus of BPM was on the automation of business processes using information technology, it has since been extended to integrate human-driven processes. Human interaction takes place in series or in parallel with the use of technology.

Click to enlarge So, for example, in workflow systems, when individual steps in the business process require human intuition or judgement to be performed, these steps are assigned to appropriate staff within the organisation.

Another example is manual data entry, which has been the traditional process within the insurance industry to input data into back office systems. This is, however, labour-intensive and error-prone, so does not adequately address the tasks required of it. The solution lies in an automated process of data integration, transformation and exception handling. This is a very important area where the concept of BPM converges with SII.

Most organisations will be working with legacy applications and therefore looking for a wrapper that can deliver automated processes. One way of managing the two business processes of data integration and exception handling is using a data integration application that is coupled with or contains a workflow application.

The data integration application should be capable of processing any of the various technical formats of incoming data, for example: .xls, .txt, .csv, Access or xml. It should allow transformation at a structural and attribute level. This means converting from, say, a spreadsheet to xml (maybe an ACORD message) and also converting individual attribute values. For example: the sender labels a line of business as "casualty", but "liability" is the category title used by the receiver. It should also be able to validate the incoming data for accuracy and control its completeness.

Assuming that there are failures in such controls, this is where the workflow aspect comes in. Workflow should alert the user of an exception or failure and manage the process of rectification from alert to fix. Possible outcomes can be referred back to the sender or perhaps fixed internally. With these validation and workflow measures in place it will be easier to demonstrate adherence to the "accurate and complete" principles required by SII.

Automation in the driving seat
The goal should be to introduce as much automation as possible. This means that the data integration process should be triggered automatically. This can be based on events such as receipt of an email containing a spreadsheet, or receipt of a file to a file transfer protocol site. Failures of validation or transformation should be sent to "to do" lists within the workflow application. Then, the data integration process cannot be completed until all exceptions are dealt with, otherwise the data will not be accepted as complete by the regulator.

A data integration engine should then be able to orchestrate web services - if they are available - to deliver complete information to the destination application. This description seems similar to an enterprise service bus process, and in many ways it is.

This view of data integration as a facet of BPM is not necessarily the most obvious aspect that would spring to mind, but it is nevertheless an important one. As insurance organisations strive to cut overheads, data integration is a vital target for attention and the potential cost savings can be significant.

Broader benefits
There can be other benefits associated with this infrastructure. An example of this can be coverholder management. Any coverholder underwrites according to strict guidelines in terms of the limits and the types of business they can write. Validation rules can be added to the integration software to check that policies on incoming bordereau information conform to the guidelines for the cover or binding authority and reject those that do not. In this way, the solution that started out as a cost-effective way of integrating data now delivers additional benefits in the form of greater underwriting controls.

Automating business processes also offers much more scalability. This can be a valuable tool for insurers that have traditionally focused on larger, more complex risks - enabling them to adjust their strategies to focus more on the mid-market or maybe on retail.

Click to enlarge This will require the ability to process higher volumes of lower value risks. Increasing covers and binding authorities may be options for insurers that do not have the distribution channels needed for the mid-market and retail sectors, but then the ability to manage and control the increasing number of coverholders will be a more daunting task unless this can be automated.

So, what started as a solution to address issues arising from SII now demonstrates the potential to provide other business benefits. Many in the insurance industry believe that SII is too draconian and that the industry does not need regulation on such a scale, as it did not encounter the same problems as banks during the financial crisis.

While that may be the case, SII is mandatory and as such insurers have to meet its capital requirements, governance and supervision guidance and disclosure rules. So, the introduction of solutions that solve SII problems and also offer other significant gains to the organisation have to be worth considering and this is exactly what BPM can deliver.

Colin Whickman is director of IT and data management for consultancy firm Scyllogis Consulting