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Money down the drain

Run-off companies are wasting millions of pounds running inappropriate IT systems dating back to when they were still underwriting, says Jeff Ward of TriSystems.

Few subjects are more likely to induce the blossoming of cavernous yawns than "IT for run-off". Believe me, I know. My company took a booth at the ARC Conference last month - it was alive with lawyers, if that's the right way to put it, but we were the only IT company exhibiting.

With run-off, you see, it's all about the cut and thrust of commutations and crystallisation, lawyers and litigation. IT, it would seem, couldn't be less important. This is odd.

There seems little point in battening down the hatches in the claims department and fiercely negotiating favourable commutations, only to burn vast sums of cash on inappropriate IT. By that I mean wrong software, wrong hardware, wrong licence terms, wrong communications, wrong service providers, and so on.

What was just about cost-justifiable when premium was incoming cannot possibly remain so when the portfolio goes into in run-off. That's precisely the time, however, when the last thing most people think of is looking hard at the IT infrastructure. The IT director and half the developers may get the bullet, but what about the systems, the database, the IT service providers? What should you do with that huge mainframe or that exorbitant Facilties Management contract, sapping valuable cash month after month? Spending tens or hundreds of thousands of pounds a year in software maintenance, leasing or operational costs may have been OK with a demanding underwriting team in the driving seat and that all-important S&P rating to protect, but it can't be effective expenditure now.

So why do so many run-off management companies, and a fair few self-managed entities, carry on running hugely inappropriate and expensive systems?

The main culprit is, of course, database conversion, which people avoid like the plague, reciting the standard slogans of "cost" and "risk" to ripples of applause and muted "hear-hears" from the finance director. But is that always right? Well, sometimes it is and sometimes it isn't, but you can only tell which after careful consideration of the facts and all of the alternatives. There is no room for knee-jerk reactions here.

If you're running a mainframe, you'll certainly recognise "cost" without a formal introduction. One insurer I know of in run-off currently spends in excess of £300,000 per year on systems leasing and FM operations - that's the same system it used as an active underwriter, half of which they now don't use. Their IT service provider remains unsurprisingly delighted. And no, it's not my company.

Just do some simple arithmetic: it may take a good 10 years to run that portfolio off. That's at least £3 million spent on IT alone - no small sum. If, on the other hand, they were to spend £300,000 on file-converting onto a more cost-effective platform, costing about the same again for a perpetual software licence, then they would be quids-in after 3 years and around £2 million up by the end, even allowing for software maintenance and hardware replacement. So why don't they?

Well, there are two possible explanations. If they are self-managed, it would probably be easier to grow wings and fly than to get board approval for £600,000 of capital expenditure on an IT conversion project. "Where's the commercial imperative?" they will ask. Well, they could try doing a cost-benefit analysis for starters, but people seem to have forgotten how to do those these days.

However, if they are managed by a run-off service provider, then there is an additional problem. In our highly fluid age, when nobody looks further ahead than next Thursday week, run-off outsourcing contracts can get moved around from provider to provider with alarming speed. So it's simply not worth the expense of converting platforms if the provider is going to lose the contract in 3 years time.

And moving contracts between providers can be a very costly business unless the system goes with the data, which is not always an option. I know of one "provider" who left thousands of claims files in black dustbin-liners (un-indexed of course) for the new incumbent when they lost the account. Nice. Some others just hand over a tape with no instructions and no data dictionary - a couple of gigabytes of data and a compliments slip. That is going to cost someone a lot of money. All very nice for us IT people, but what a complete waste of cash.

This is all daft in the extreme. Companies in run-off must not allow data to languish in hideously expensive and quite inappropriate systems - failure to invest in appropriate IT is a mistake whether you are active or in run-off. Run-off cost control must encompass IT and, as with any other business, investment is very often necessary in order to make longer-term savings.

Jeff Ward is director at TriSystems, a supplier of software products and services to insurers and reinsurers, including several run-off operations.

-   Insurance Day