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Agile Insurance

Agile Insurance

When the regulators came knocing, Pinnacol Assurance had to move quickly to save millions in revenue.

Agile infrastructure | Like setting off a bomb in the middle of the policy and claim management and accounting systems: That's how CIO Robert Norris remembers what happened when the Colorado Division of Insurance regulators came knocking earlier this year. "You can't do this," they told him and his company, Pinnacol Assurance. "It just isn't fair to everyone."

The problem was SelectRisk, a new product worth nearly $US9 million dollars in business that Pinnacol was already selling to more than 100 customers. It was a complex insurance program that would give back some of the premiums paid by a group of customers if their losses were low.

Pinnacol, however, had designed SelectRisk specifically for a particular set of customers whose losses were usually small and who took safety seriously. And that was the issue: The regulators felt that the exclusivity violated the state's insurance regulations. Unfortunately for Pinnacol, the IT applications supporting SelectRisk were also complex. Changing them would require heavy modifications from Norris's team.

Rather than fight the regulators, Pinnacol set out to create a new product that would satisfy the state's requirement to make the product available to every customer - while not losing any existing customers in the process.

Old Roots

Pinnacol Assurance is not your typical insurance company. Founded in 1915 as the State Compensation Insurance Fund, its mission was to ensure that workers' compensation insurance was available to all employers in Colorado. Over time, unfortunately, the stigma of being "the insurer of last resort" befell the organization. It was an organization, the perception went, that could never fail or go out of business; legally, employers would always have to compensate their workers injured on the job. Seventy-two years and a $US500 million deficit later, with customer service levels plunging, the company needed a serious restoration.

With a name change to the State Compensation Insurance Authority in 1987, the organization transitioned from state agency to a quasi-public authority, meaning it was no longer under the direct control of the Colorado General Assembly. Gary Pon, Pinnacol's CEO, took the reins in 1986. He inherited "a company challenged by inadequate premium rates, out-of-control expenses, underwriting deficiencies and redundancies in their systems and procedures", says Bill Shenton, a managing director with Conning & Company, an asset management company with a focus on insurance company investments, who has been following Pinnacol for more than a decade.

In 1999, the company's name changed again, this time to Pinnacol Assurance. The corporate culture shifted too. Thanks to a management restructuring and the removal of departmental silos in favour of multidisciplinary teams, Pinnacol was primed to operate more like a lean business and less like a bloated government agency. The first job on the to-do list for Pon, Norris and the other senior executives was to erase the remaining deficit and create a surplus.

IT would play a starring role in this transformation. Pinnacol's long struggle to integrate a new enterprise client and server system - its experience with expensive IT consultants functioning in various departments with minimal oversight and poor IT alignment with the business - had created a mess. "I was brought in to clean up that mess," says Norris, who came aboard in 1997.

The featured player in the IT department was - and continues to be - an insurance software package called WCIS. It was purchased in 1996 from Price Waterhouse (now PricewaterhouseCoopers), though today it bears little resemblance to its original form. Norris and his developers have essentially rewritten WCIS so that it meets Pinnacol's claims management, policy pricing and policy administration needs. They've also added more than 20 new modules for medical billing adjudication, investigative and safety consultation management and more.

Making those kinds of customizations to prebuilt software may not sound like agility in action. But Norris is proud that the system's simplicity and flexibility lets his staff of 50 stay nimble. All core business systems run on the integrated application architecture and share a single corporate database. As a result, "Pinnacol has virtually no application integration issues that would create drag in our response to business demand," Norris says.

Thus, Norris was able to stay calm when the state insurance regulators came calling about Pinnacol's SelectRisk product. "The mood was not one of panic so much as significant concern about potentially losing this business, coupled with a heightened sense of urgency given that we needed to act quickly to satisfy regulatory concerns," Norris remembers. Pinnacol decided to cut SelectRisk. But it needed to create a replacement quickly.

A task force was formed with members from IT, underwriting, accounting and internal audit. Within weeks, a new product, called Group Large Deductibles, was crafted to address both the needs of the original SelectRisk customers and regulatory concerns. First, Pinnacol moved away from returning premiums to customers based on loss performance and instead adopted a method wherein customers pay a certain premium up front while maintaining trust accounts for premiums that they might have to pay later, depending on their losses. Next came the supporting IT applications. Group Large Deductibles, it turned out, required extensive tweaks. The changes to WCIS involved enhancing the billing system and Pinnacol Online, altering how Pinnacol accounts for deductibles, developing new automated forms, changing the quoting system, providing trust accounting capabilities and tweaking WCIS's interface to the general ledger.

"With this new program, we preserved the original group of customers, plus we gave ourselves another tool to attract new business," Norris says. The changes were designed and implemented in a few weeks. Phase one, Norris says, was figuring out what they were going to do. Hastily called meetings took place to unearth a new approach. Phase two was determining - from both a business and an IT standpoint - how to go about doing it. "Internally," Norris says, "we knew we could perform the operation." And lastly, the company realized that it needed the solution yesterday. Without such rapid response, he says, the large book of business (and millions of dollars) would have been lost. "If we had given control of our applications to someone else, we would not have been able to respond."

The results have been tangible, Norris says. In the past five years, premium revenue has risen 176 percent, while internal operating expenses increased only 38 percent (from $US48.5 million to $US67 million). And that financial success was matched by dramatically increased flexibility. If IT had been faced with the SelectRisk problem seven years ago, things would have gone in a very different direction, Norris says. It would have been met with excuses, not agility. Now, IT is responsive to today's competitive realities. "We have, over the course of six or seven years, developed such high expectations in our customers, and those expectations have become baseline," says Norris. "That is the Achilles heel of being a truly agile IS department: No good deed goes unpunished," he jokes.

Working Close to Home

To keep things speedy, Norris employs a stable of 15 software developers. They're not outside contractors on his speed-dial; Norris keeps them even closer at hand. He claims that Pinnacol has no dependency on software vendors or consultants; everything is handled inside by his team. Those developers are grouped into small teams that collaborate on projects in specific business areas, such as online systems or claims and policy management. Eventually, Norris says, they become business experts in those areas. "I don't understand how other companies compete while abdicating their control over their systems to someone else," Norris says. "The more that companies start to run like one another [governed by the same systems capabilities], the less the opportunity for them to differentiate themselves competitively."

Norris, however, isn't blind to the drawbacks of keeping all of his development within Pinnacol's walls. "Software development isn't an easy process, and it presents management challenges," he says. Challenges come in the form of increased expenses in areas that he could possibly outsource for lower costs. In the end, however, Norris feels that if the system is "touched" by the majority of Pinnacol's employees, then "there are opportunities to add value to make the software customized to the way they work".

Pinnacol also stays agile with a nonbureaucratic, flat-as-a-board hierarchy. In IT, for example, there's Norris and the four teams that work on programming, decision support, infrastructure and desktop support. One manager oversees each group. Each group gets a tremendous amount of leeway, trust and responsibility. And there's not a lot of fat among the ranks - even though these 50 IT staffers support 530 Pinnacol employees who, in turn, support 57,000 customers who, in turn, do nearly $US500 million in annual business with Pinnacol. "Everyone [in IT] is either one or two steps away from me and the CEO," Norris says. "It's not an organizational model that works with people who need a lot of supervision."

Likewise, his project management and software development methodologies seek simplicity and speed. Project management is partly based on Project Management Institute standards. The other part is built on business alignment, high-level executive sponsorship and project chunking - breaking projects into manageable pieces as opposed to dealing with monolithic ventures. One peculiar thing Pinnacol's project management does account for is scope creep. "It assumes that scope could change because business requirements usually change; so it prescribes how to handle scope creep rather than try to prevent it," Norris says. Software development follows a rapid application development skeleton, mixed with some elements of extreme programming. (For more on extreme programming, see "Jack Be Nimble, Jack Be Quick at www.cio.com.au/index.php?id=309500928.) Small squads of software developers work together on the projects. They start with small releases, then add functionality. IT enforces coding standards, programmers have d irect access to users, and the developers go home on time. "It's not a particularly remarkable strategy," Norris says.

Though he may downplay the strategy, Norris knows that his IT department's agile execution is tied directly to Pinnacol's newfound approach to its business and customer service. "We don't want to be just good, because success is often one's own worst enemy," he says. "If there's a better way of doing something, the IT department will know how to make it better." And now they'll do it much faster.

Keeping Things Fresh

Pinnacol Assurance CIO Robert Norris likes standardization. His consistency is born out of a desire to keep his users happy. Every one of Pinnacol's 530 employees, for instance, receives a fully loaded Gateway PC running Windows 2000. All of those PCs were purchased at the same time, during a six-week span, two years ago. "We replaced every PC in the building," he says. "Everyone has the same platform. That way people on the help desk don't need to ask: 'What operating system are you on?'"

Norris takes the same approach for his data centre, with just a few exceptions. For mission-critical applications and databases, he has standardized on Oracle database engines, Sun Solaris operating systems and Sun Sparc servers. For basic network applications, Pinnacol uses Novell NetWare, typically on Dell servers. However, Norris says he has a handful of Linux and Windows boxes in the data centres that handle certain functions where he couldn't find a solution that would fit his standards. For example, on Windows 2000 or XP, Pinnacol runs a fax server, a document management system and a remote access server.

As far as standardization goes, Norris says, "I don't know why other companies don't do this. If you look at older environments, the maintenance costs of an ageing fleet of equipment are prohibitively higher."

Norris concedes that precise metrics for his hardware-updating strategies sometimes aren't easy to come by, but he seems more focused on the greater good of the user community and how it relates to overall company profitability and efficiency. "I'm always amazed by employees from other companies who are trashing their IT departments," Norris says. "One of my primary objectives is to have the employees of this company rave about the IS department."

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