Legacy system modernization in the Insurance industry
Insurers rely heavily on their legacy systems
The insurance industry is highly dependent upon IT systems to support their core applications – issuing and servicing policies, processing claims, underwriting, billing etc. Insurers have relied on these systems for years, and for good reason. This legacy infrastructure has proven to be relatively stable, reliable and able to handle large amounts of data. This is crucial for a highly regulated and document intensive industry such as insurance.
Therefore, it is understandable why insurance organizations are reluctant to tamper with these systems. After all, they still work – most of the time. The problem is that the limitations of these systems have outgrown their usefulness. Manual re-keying of data between systems and hence inaccuracies, bottlenecks in data sharing, piles and piles of paper dominating internal processes but also distribution channels – these are just some of the issues. But most importantly, insurers are well aware that their customers expect more of them in terms of services and communication – legacy systems just can’t keep up. And if they don’t catch up, then an agile new breed of competition will.
Despite the urgency, the industry is clinging on to old systems and old methods while other industries are moving on. And they know it; more than half of insurance executives recognize that they are lacking behind other financial services in implementing digital technology. They also know, that they rely on systems developed in the ‘70s and 80’s, and the pool of experts in these dated languages and architectures is dangerously shrinking, further increasing the risk of failure. Not surprisingly, insurance organizations have identified legacy systems as the biggest obstacle to digital transformation. Insurers need systems capable of taking them into the digital age so legacy modernization is high on the agenda.
Legacy system modernization: 5 ways to do it
A survey by Deloitte shows that the most important business drivers behind core system modernization are product speed-to-market, technological relevance and service enablement. Modernizing and/or replacing legacy systems is a top priority for insurers today. It’s typically done to consolidate, rewrite, or wrap/extend existing systems. But it’s not a trivial task, especially when taking into account how many systems may be involved – a typical midsize to large insurer maintains four or more PAS systems alone –, and the level of customization done throughout the years and the degree these systems are intertwined.
Protiviti summarizes core system modernization efforts into five categories with different levels of disruption, risk and benefits realized:
- Greenfield core system development – starting from scratch with modern and simplified systems
- Preservation and protection – not interfering with core systems, instead wrapping them up with a new layer of modern technology to introduce new functionality
- Simplification – taking complexity out of the middle layers of the technology environment, while leaving central core and customer-facing layers untouched
- Big Bang – ripping and replacing
- Phased core replacement – implementing new core technology in phases that will gradually grow to handle all applications
Preserve your systems while allowing for new functionality
The approach each insurance organization must follow depends on what exactly they’re trying to solve and what is their technology vision for the future. A combination of approaches could also make sense in some cases. But more importantly, insurers must be pragmatic when choosing a strategy. Any approach needs to balance the expected benefits and the level of disruption they are prepared to accept. Insurance is a very risk-averse industry and naturally leans towards less disruptive approaches.
Therefore, insurers who have invested substantially in their legacy IT infrastructure but still want to the reap the benefits of modernization, will tend to favor the preservation and protection approach. This way the core systems are kept intact but new technology is employed to address specific issues bridging the gap in functionality.
Objectif Lune can help extend the functionality of the systems already in place, allowing insurers to start their digital transformation efforts in a pace they feel comfortable with. Contact us to learn more.