Insured Stability

When IAG merged with another insurance company, CIO David Issa used the new operation's increased scale to reduce costs, creating a virtuous loop that passes the benefits on to customers.

When the Insurance Australia Group (IAG) took ownership of CGU in January, CIO David Issa knew that the only effective way to bring the two organisations together would be to adopt an entirely new business model.

Clearly, it would be important to merge systems wherever a synergy could be found, as with any merger between two business entities, but equally clearly, IAG would need to move with great caution because CGU was by nature a very different beast from IAG. With fundamental differences in their modes of operation, Issa was convinced failing to define a new business model before beginning any kind of technology merger would be a recipe for disaster.

"We had some areas where there was very little overlap [in systems] because CGU is predominantly what we call an intermediary business, meaning they sell their insurance through insurance brokers and financial institutions," Issa explains. "A lot of their technology sits with, for example, insurance brokers who actually then write the insurance business for the customer. In the rest of IAG we are what we call a direct business, so we deal directly with the end customer, predominantly through call centres but also through branches and through the Internet. So in those front-end systems, there is very little overlap."

With such radical differences in the business models of the two organisations, Issa knew a fine line had to be walked between the adoption of best of breed applications and processes and ensuring those actions did not put the customer side of the business at risk. That meant consolidation would predominantly occur at the back end - but not until IAG could define an entirely new business model for the expanded entity.

"When you bring two organisations together it's not just a matter of bolting one to the other, you've got to start looking at where there is a best of breed in like functions in the organisations, and to try to make sure that you're getting the benefits of that," Issa says. "At the same time, what you don't want to do - and this is the fine line that you must walk - is to actually put at risk the customer side of the business. You don't want to make changes that get some benefits, for example at the back ends, if what it does is to impact the actual front-line staff that deals with the customers."

Under those circumstances defining a new business model was an entirely natural precursor to action. The IAG approach was to start with an understanding of which functions should stay the way they were because they had a direct relationship with the customer and the revenue stream produced from the customer, and only then to consider what could be merged at the back end with transparency to how that customer is being dealt with. It was a detailed, complex process that should culminate in a fully merged operation by the end of this year.

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Finding Synergies

IAG, providing personal and commercial insurance products under a range of brands including NRMA Insurance, SGIO, SGIC, Swann Insurance, State and Circle, claims for itself the title of the largest general insurance group in Australia and New Zealand. As well as providing a full range of general insurance products, IAG also provides financial products and services for people nearing or in retirement under the brand ClearView Retirement Solutions. In January 2003, following the decision by CGU's UK-based parent company Aviva plc to sell, IAG welcomed the CGU Insurance Group into the family, with the acquisition including all CGU Insurance Group divisions and stakes in joint ventures with other insurers, together with its subsidiaries.

The acquisition was premised on a determination the merger would be transparent to CGU's customers, and that all existing business channels and established brands would continue to operate. Customers were promised they would continue to receive the same products and services from brands they had come to know and trust. Policy benefits, terms and conditions and claims servicing processes would not change.

But the acquisition was also seen as attractive precisely because IAG and CGU largely operate using different distribution models. By taking on CGU's business, IAG could expect to greatly enhance its position in the SME commercial, rural and intermediated personal channels. Indeed the companies claimed CGU's expertise with intermediaries and business partners - which it remains committed to further developing and enhancing - was one of the key reasons IAG pursued the acquisition.

Issa's job is to help ensure the merged organisation achieves the maximum synergy benefits while maintaining needed flexibility to move forward on new technology initiatives.

Come Together

To kick the merger process off, IAG first put together a program office headed by an IAG executive and manned by people from the front lines of both businesses, to manage the planning and design phases of the merger. There was also significant board level governance of the entire project. "We've had to keep our board informed very regularly about how we're going, because from the board's perspective, we paid nearly $2 billion for CGU and they really want us to deliver on the integration, and it's very high profile in the board," Issa says.

One of Issa's team was seconded to the group full time, as were subject matter area experts from the technology side of the business. The 12- to 14-strong project team was also able to draw on other people with expertise on an "as needs" basis. The office, which has recently handed execution of the work back to the businesses and technology services, began by defining both companies' entire work streams - both functional and business - as the first steps to drawing up a brand new business model.

"We took the best people we could out of the front line in those businesses, and actually put them into the program office and the different work streams that we had, in order for them to actually come up with what the new business model was going to look like," Issa says. "See, you've got to take your best people and put them into those positions; otherwise, if you take whoever is left around who hasn't got much to do, you're not going to get the right result.

"It seems to happen in project teams; you know, people usually say: 'Who's available?' rather than: 'Who's the best person for the job?' It's a hard decision, because yes, sometimes you do take people out of their current roles, which are critical, and you have to put them into these roles, but I think if you don't, as I said, you don't get the right outcomes."

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With the team assembled, it immediately began tentatively defining a new business model and then looking at the likely impact of required changes on the two businesses. Flowing from that came the understanding of the technology changes required if the program office was to deliver and benefits flow through to the business.

"The initial considerations were made at a relatively high level as far as what actually was going to have to change. You haven't yet got that fine degree of detail, but at that stage you have to understand the quantum of change you're talking about in order to be able to understand when you can deliver it, in order to understand when the benefits can flow through to the business," Issa says. "Flowing out of that comes technology requirements that need to be done to actually deliver."

With the quantum of that change now thoroughly understood, IAG has moved into the execution phase, which involves going into more detail on each of the proposed initiatives. Issa says so far the organisation has found the high-level estimates the program office came up with match pretty closely the ones generated after more detailed analysis.

"So we felt pretty good about the work that's happened over the last three to six months," he says. "I think it's because we had the technology people living with the business people in the one team: not toing and froing between the two, but having people sitting together and working together and actually being part of one team."

The initiatives will see IAG move to a single general ledger (SAP), which already runs at IAG; amalgamate data in MIS to produce certain management reports; merge the systems used to assess risk in insurance portfolios; and move the claims processing function from CGU into the IAG systems at the back end to take advantage of the many interfaces to suppliers which have been built there.

"We in IAG have built a lot of interfaces to our suppliers. For example, we've now got a lot of systems in place whereby when someone has an accident they can take photos of that accident, ship them off to us through the Internet, and we can assess those at our desk rather than having assessors driving around to all these different smash repairers. We've actually reduced the cost of our claims processing as a result of building all those interfaces to our suppliers - in this case, the smash repairers. I think in Australia, at least what I've seen of the general insurers, there's no one else that's moved into this area as quickly as we have," Issa says.

In the underwriting area, where risks of writing insurance are assessed, the program office determined that some of the IAG businesses understood the risks better than those in CGU, so Issa's group has had to implement a lot of the IAG underwriting rules within the CGU systems. "That entails, if you like, plugging in what we call our underwriting engines into their systems as well," Issa says.

At the time of writing, IAG was about to have completed basic implementation on the general ledger and risk management areas and was looking to a June 30 cut-over. It remains in the detailed design phases on some of the claims processing and underwriting engines, and expects to move into the coding phase over the next two or three months, with deliverables due over the next six to 12 months.

Issa says so far the initiative is tracking very favourably, but that the "rubber will hit the road" over the next six months. To ensure work progresses smoothly and effectively, the team has put a detailed tracking mechanism in place. Issa says close management of all the tasks is essential because the work has such a high public profile and because the organisation claimed strong synergy benefits would arise from the merging of the two organisations. "We're on track at the moment, but over the next six to 12 months as we move into full-blown execution, we'll start seeing whether we can deliver on the benefits we've identified," he says.

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Staying the Course

One of the biggest difficulties with the merger planning has been the need to ensure the project did not detract attention from other priorities of the businesses. Issa says it proved important to get everyone lined up behind the effort by telling them that within 12 months time, if the work proceeded well, the organisation would have fundamentally changed and would be extracting major benefits.

"You've got to focus people on what the big things are, and try to deal with as many of the smaller business-as-usual things as you can, but don't let them override the big things that you're trying to achieve," he says. "It's easy to say, but difficult to do, because at the high level you can agree, but as you get down within different levels of the organisation, and there's people at the front line performing their day-to-day functions, they basically don't want to stop doing what they normally do just because you're doing these big integration tasks.

"The way I approached it was to get the executive buy-in at the executive team level."

Indeed Issa says he only accepted the appointment as IAG CIO because he knew he would sit at the executive table. All roads lead to some sort of technology change, he argues, and a CIO who does not sit at the executive table will struggle to make his or her voice heard.

The other key to the progress so far has been the adoption of a top-down approach designed to ensure the big things were done first. Now, Issa says he will judge the success of the work in part by whether the organisation does indeed gain the desired synergies from the merger, and whether the business benefits are flowing on to customers.

But he says there are also two other planks of the work under way in his area which need to be simultaneously progressed. The first is the huge task of insourcing IT from IBM GSA. When IAG took over CGU, CGU was running all IT in-house, while IAG had an outsourced operation. Yet Issa says even though CGU was roughly one-third the size of IAG, it was achieving better service levels at a better cost. He says although the decision to outsource to IBM four years ago was probably the right one for the time, IAG is now at a different stage of the business cycle.

"I think that with the outsourcing experience gained over the last four or five years, people have re-evaluated the outcomes versus what was perceived as being the outcomes when people first went into those things," he says. In making the decision one of the key risk management factors in Issa's mind was the fact that IAG, which is based in Sydney, already had the infrastructure capability in Melbourne to allow that move back in-house.

A second major initiative involves the building of a new, far more flexible front end for the direct sales force.

Issa says the main driver of all the work is the belief that by getting bigger, IAG is making it possible to build up scale and hence reduce costs, which can be passed back to customers through savings in insurance product costs. The idea is to create a virtuous loop which will consistently deliver benefits.

"What that means is that if you can get bigger and get scale in your operation, and reduce the cost of the way that you deliver the product - in this case insurance to the customer - you need to pass some of those savings on to the customer, and on to the way you price insurance for the customer. That way you can grow your customer business more, which gives you more scale. So unless you're giving something back, then you're basically going to get to a point where customers are going to say: 'Well there's nothing coming back to us in all this'," he says.

Issa is dedicated to transforming fundamentally what was until it demutualised a fairly staid organisation, and says he is happy to put his job on the line for the effort. "I've committed to delivering that, and making the department of technology services a better place for people to work because they're actually at the front line of what is happening in technology and working very closely with the business to deliver it," he says.

"Yes, my reputation is very much at stake, but I'm having fun, and I think that's the main thing - making a difference - which is what I get up in the mornings and come to work for."

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