Technology is crucial to the success of insurance and pensions companies, and specific needs vary from company-to-company. The Life & Pensions software directory looks at some of the options that are available. Clive Davidson reports

Many factors drive the need for software in insurance and pensions organisations. They include the complexity of today's products, the competitiveness of the markets and the need for efficient operations to contain costs. Add to this the sheer scale and diversity of some organisations, and their enormous ambition and it becomes clear how crucial technology must be to their success. Life & Pensions second annual software survey sets out the broad range of systems, and the recent innovations that their third-party developers have made, to help insurance and pensions organisations run their businesses successfully and achieve their goals.

But while there are a few features that almost all organisations want from their software, such as reliability and ease of use, specific requirements vary enormously from company-to-company and pension fund-to-pension fund. This affects how they go about selecting their vendors and managing the implementation process. A detailed look at how four very different organisations acquired and installed systems - a European leading insurance and banking group wanting to integrate group-wide asset and liability management (ALM), a UK government pension department upgrading its core administration system, a major European insurer expanding into Central and Eastern Europe, and a private pension provider creating products for the reformed UK pensions market - reveal some of the scope and scale of the challenges of implementing new systems, and some of the rewards for the effort.

Belgium's KBC Group decided it wanted to integrate the ALM of its banking and insurance operations. "Banking and insurance ALM are exposed to similar ALM risks but their exposure to and the distribution over those risks is generally quite different," says Marko Bolt, head of ALM modelling and architecture in the value and risk management department at KBC Group. "Integrating them makes it possible to take decisions based on the net ALM position. Banks normally have large credit and large long interest exposures, while insurers tend to have large equity and real estate exposures and small or even short interest exposures. Integrating these positions makes it possible to look at the positions per risk type, and to calculate the effects of diversification on the group wide risk profile (and) to take the group wide diversification effects into account in the calculation of economic capital within KBC."

KBC saw the main challenges in achieving such integration as the large knowledge transfer involved between banking and insurance, where products, concepts and cultures were different, and the creation of an IT architecture and infrastructure to support the integration. In a step towards the latter, KBC created a risk data layer within its technology architecture to which the various entities feed their data, simplifying systems communications.

KBC reviewed a number of systems and had proof of concept projects with two potential vendors, one of which was Zurich-based Iris Integrated Risk Management, and eventually selected Iris's riskpro system. "It was clear that riskpro had the best ALM features, such as value and accounting income calculations and simulations, and was already used by KBC for the ALM of most of its Belgian banking entities," says Bolt. The proof of concept exercise proved that it was relatively easy to extend the use of riskpro to the other ALM risk types within the KBC Group, such as multi-currency interest rate risk, equity, forex and inflation, and to load replicating portfolios for insurance products. In addition, Iris made several enhancements to the system with respect to volatility, inflation and libor market modelling and the creation of new contract types.

KBC signed the contract for the group-wide ALM system in July 2007, and has already implemented the handling of market data, stress scenarios, VaR shifts and reports. As well as KBC's banking entities, KBC Insurance and its Fidea insurance subsidiary are feeding information into the system.

"Integrating ALM makes it possible, for example, to look at the group-wide exposure to inflation," says Bolt. "The mainly liability-driven exposure, concentrated in the non-life insurers and defined benefit pension funds, can be compared with the group-wide direct or indirect inflation linked assets, (such as) inflation linked bonds and real estate." The integration of banking and insurance ALM also ensures the integration of models and concepts, such as replication. "This enables a better comparison between the ALM risks and returns of different investment products offered by the banking, asset managements and insurance entities," says Bolt.

KBC uses replicating models to measure the ALM risk in terms of VaR for banking, life and non-life products. "For non-life, the interest and inflation risks are replicated by bonds and inflation-linked bonds," says Bolt. "For life, the main issue is the modelling of profit sharing. KBC uses profit sharing formulas with interest and equity components for valuation and risk measurement. The translation of the formula into a replicating portfolio consisting of more basic financial instruments is complex and KBC is still refining this aspect."

The integration of insurance and banking that the new system provides is enabling KBC to start achieving its ambition of managing strategic and tactical ALM positions group-wide, says Bolt.

Public pension bodies can be difficult customers in terms of implementing new software systems. The organisations tend to have large numbers of members, they can have some complex pension arrangements, their deadlines are absolute - pensions must be paid on time - and they tend to be set in their ways. The Northern Ireland Department of Health, Social Services and Public Safety (NI DHSSPS) had to deal with all of these factors when it set about acquiring and implementing a new administration system.

The department took its time about selecting a vendor - two-and-a-half years to be exact. It announced that it was looking for a system and asked vendors to make initial expressions of interest in June 2004, but it was not until January 2007 that it finally signed a contract with heywood, based in Cheshire, England and part of the aquilaheywood group. Although the process was protracted - the phase from identifying the preferred supplier to closing the contract alone took four months - the time was well spent, says Mairead O'Neil, deputy project manager at NI DHSSPS.

"The time spent on the procurement process brought dividends in that there was clear agreement on the implementation and no surprises," says O'Neil. That is not to say that the process was not challenging. NI DHSSPS has close to 100,000 members, and pays 26,000 pensions, some of which are highly complex to calculate. These include GP pensions which offer a number of flexibilities, and where complicated 'dynamising' or uprating factors have to be applied to average income calculations.

"Although (GP pensions) represent less than 1% of pensions paid, they are highly complex to administer," says Moira McCarthy, head of the superannuation branch at NI DHSSPS. This was a learning curve for heywood as the company had not dealt with the level of complexity before and had to spend considerable development time programming them into its system. The automation of their calculation will be a major benefit for the department. NI DHSSPS's old system was not user friendly and left a number of tasks to be manually performed. However, the staff knew it well, and were familiar with their routines. Retraining staff on the new system has proved to be one of the biggest challenges.

"The heywood system is dramatically different from what we were used to and it has been challenging to make the transition to the new system," says McCarthy. The department has undertaken a major retraining effort with heywood, and has further change management training planned as the next phases of the implementation continue this year. However, new staff tend to pick up the new system quickly and easily.

But despite the radical change the new system has entailed, all pensions were paid on time from the first month of going live in October last year. "When you are in the business of paying pensions they must be paid on time, and our staff are very dedicated and committed to achieving this at all times," says McCarthy.

Benefits of the new system include an integrated payroll module, efficient workflow that improves security and audit control, electronic document scanning and management that will make dealing with member queries much easier, an improved interface to employer systems, and easier access to actuarial information to answer government queries. The final phase of the implementation will include implementing member self-service functions that will allow members to access the system via the web to check their records, remain up to date, and model their pension alternatives, for example calculating their payments for different retirement ages.

With the major markets of Europe crowded with aggressive competitors, some insurance companies are looking to the East for more promising territory. Major global life and pensions company Aegon, based in The Hague, decided to mastermind its expansion into Central and Eastern Europe via its Hungarian subsidiary, which it established in 1992. A key plank in any such expansion programme is the technology platform on which a company plans to deliver its products.

In Budapest, Aegon had a 10-year old in-house system for its life and non-life businesses. However, the system was too complex and too tailored to the Hungarian market to be suitable for the new subsidiaries Aegon was planning to set up or acquire in Slovakia, the Czech Republic, Poland and elsewhere. Furthermore, Aegon wanted to separate its systems for life and non-life products - subsidiaries in the new territories would focus on life business only, and an essential characteristic of any system had to be the ability to scale up to meet market demands, says Gabor Gacsai, IT manager for Aegon Central and Eastern Europe.

Other key requirements of the system were the ability to implement quickly and cost-effectively on greenfield sites, good vendor support (Aegon decided against in-house development), and, most importantly, support for the rapid and relatively easy development of new products that would be essential for competitive success in the new territories, says Gacsai. Technically the system had to be able to operate with Aegon's Unix- and Oracle-based Hungarian infrastructure, and had to support multiple languages and currencies.

The system selection process quickly narrowed in on the GraphTalk A.I.A. insurance system from California-based software giant, Computer Sciences Corporation, an installation of which was already running successfully in Aegon's US operations. (In the US, the system manages three million policies.) Aggressive time scales for launching the new businesses in Slovakia and the Czech Republic meant the original plan to implement first in Hungary and use the experience in the new territories had to be abandoned, and Aegon implemented simultaneously in all three offices.

"It was a risky approach," says Gacsai. "The solution had to manage new life policies in Hungary without disruption (of existing business), while we were implementing a new system on greenfield sites with no in-house experience of the system." The lack of locals with technical experience of the system was the biggest challenge, says Gacsai.

The risk paid off. The systems were in place on time (in five months) and within budget - CSC was on a fixed price delivery contract so had a vested interest in efficient implementation. The system is operating successfully, and already manages over 70,000 policies in Hungary, over 20,000 in Slovakia and over 10,000 in the Czech Republic.

"This region of the world is very important to Aegon's business plans," said Gabor Kepecs, chief executive officer of Aegon Central and Eastern Europe when the systems went live. "Time to market is of crucial importance, so we were looking not only for an application with a short implementation time and great flexibility in product development, but also for a long-term partner who can support us in achieving our goals."

With the personal pensions market in the UK in a process of evolution, and with little certainty which products would prove successful in the market, York-based Norwich Union Life hedged its bets by investing in a number of specialist providers. In 2003, it took a small stake in Lifetime Group, also based in York. Then as A-day (6 April 2006 when the UK introduced pension reforms) approached, Norwich Union, like many other pension providers, decided that self-investment pension plans (SIPPs) would form a significant part of the market, and realised it would need a new system to handle their special requirements. "We selected Lifetime as the best option to build and develop a cost-effective SIPP platform," says Angela MacDonald, director of marketing for wraps (tax-wrapper products) at Norwich Union Life, so the company acquired the remaining interest in Lifetime.

Lifetime already had several pieces of the jigsaw that needs to be put together to support SIPPs, including a funds platform and investment capabilities. And it already had a third-party systems vendor that could design and build a system, London-based DST International. Norwich Union was happy with this arrangement, sharing its parent company Aviva's strong preference for third-party and offshore resourcing, says MacDonald. Furthermore, DST was familiar as a vendor, having already supplied some financial systems to Norwich Union as well as an investment system to the company's fund managers, London-based Morley Fund Management.

MacDonald says that the key features required for the SIPPs system were compliance with regulations, asset allocation capabilities, and the ability to offer online access to modern-day customers. "Complying with regulations may seem an easy thing to say but there are a lot of regulations about government actuarial limits, draw down, the provision of information, which means you must have a robust environment that can handle the complexity automatically," says MacDonald.

Sophisticated asset allocation is at the heart of SIPPs. "People come into SIPPs because they want a more broad and varied asset strategy, so you need an open architecture environment where you can offer assets in equities and in property as well as funds, where you can value all of them, move money between them, keep track of them, and give the client accurate records of where they are," says MacDonald.

And then there are the expectations of today's customers to satisfy. If someone is choosing a SIPP, they are unlikely to be happy with the traditional yearly statement and queries by telephone. "Nowadays customers and their financial advisers want 24/7 access and a good online experience that allows them to trade, to switch funds, to get valuations, and so on," says MacDonald.

Working with Lifetime and DST, Norwich Union oversaw the development and implementation of what is now known as DST Wrap - an administration system for SIPPs and other wrap products. The implementation has been successful, particularly adviser and customer access. "Our experience is that the more online access you give for advisers and customers to manage their assets, the more activity there is, which is as it should be," says MacDonald.

Looking at the experience of these organisations, certain themes emerge, such as the importance of vendor reference sites (KBC, Aegon and Norwich Union could all see their potential vendor's software working elsewhere in their organisations), the critical need for systems skills and user training, and the requirement to work with the vendor to extend functionality to meet specific requirements. Meanwhile, all the implementations have brought major business benefits.

Further details of each of the systems in these case studies can be found in our survey, along with many other broad-based systems and highly focused applications that can meet the range of business requirements of insurers and pension funds.

View the results of the Software Survey in the PDF document below

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Please email Nick Dunbar, Editor, to comment on this article.

Angela MacDonald, Norwich Union Life

Gabor Gacsai, Aegon Central and Eastern Europe