US life insurers face increasing competition from other insurers as well as from commercial banks and career agents. Increasingly, these agents are leaving their companies in favor of independent brokerages, often with their clients in tow. To counter the resulting decline in profitability, many insurers are looking to improve their IT systems as a way to boost operational efficiency and to lower costs.

In cooperation with LIMRA International,¹ McKinsey conducted a survey of 40 leading US life insurers of all sizes about technology priorities (Exhibit 1) and the effectiveness with which they have been implemented. Although administrative systems and sales force systems are listed more often as prioritites, the results show that two technologies have had the most impact in helping life insurers manage their costs and increase the efficiency of their front- and back-office operations. The first, distribution- and compensation-management automation, provides insurers with a better understanding of all facets of the distribution cycle: product planning, channel selection, sales, and agent compensation. It also gives these companies tools for monitoring agents, retaining their top performers, and improving client service. The second, straight-through processing, links tasks that were previously unconnected, such as new applications, renewals, service requests, and claims. This approach often greatly improves productivity by streamlining data entry, applications review, and underwriting and processing.

The main factor driving the use of these technologies is that agents are leaving their longtime employers at a record rate. Typically, agents know how much of a client's total business a carrier has captured as well as its possible cross-selling opportunities. As the sole keepers of this knowledge, they wield tremendous power over insurers and, as a result, can extract higher commission rates from them. Now, however, distribution- and compensation-management technology is enabling insurers to capture and retain critical information about their clients and agents (Exhibit 2). This technology can assist companies in matching products with customers and generating sales leads even after agents have departed.

In addition, the technology casts a light on critical sales data—the size of accounts, the number of proposals presented, and the number of appointments made and kept with customers. By knowing exactly who is selling what, carriers can compensate their agents and motivate sales staff more effectively while weeding out poor performers. Some insurers have already successfully introduced this technology: of the 40 companies surveyed, 28 ranked it among their top five IT priorities and 71 percent of the respondents found it effective.

The straight-through approach allows carriers to take process-improvement techniques used by manufacturers and apply them to insurance. By dividing new-customer applications into either simple or complex cases, for example, the carrier can direct the former to lower-cost, lower-skilled employees. This segmentation frees up scarce underwriting specialists, who can then spend more time gathering information, improving the selection of risk in the more complex, and possibly more lucrative, cases. An added benefit is a reduction—on average, by 25 to 50 percent—in the time elapsing from the processing of an application to the start date of the policy. One large North American insurer cut its turnaround time for approving new applications to 12 days, from 25. Many insurers are adopting this technology, and more than half of the executives we polled described their companies' straight-through processing initiatives as extremely effective (Exhibit 3).

These technologies are not easy to implement, nor are they trouble free. Our survey showed that in 2002, failed IT projects and cost overruns accounted for up to 20 percent of the total expenditure on IT projects. Insurance executives acknowledge that they must improve their ability to implement IT. To achieve their aims, they cited the need to focus on fewer critical initiatives and to introduce processes that align business and IT priorities. The executives also want to make employees accountable for a project's implementation as the first step toward recapturing some of the life insurers' lost profitability.