10 Things most vendors won't tell you about modernization in insurance

The journey to digital insurance, however, requires significant technology transformation. Carriers have invested millions of dollars in systems that are built around old, traditional ways of selling and administering insurance policies. Insurance companies of all sizes are grappling with these aging, complex systems, which are costly to maintain and too inflexible to support new business initiatives.

Many carriers are well into their efforts to modernize. Most of these efforts focus on core administration systems, addressing the portfolio of older policy administration systems that carriers have accumulated over time.

Modernization, of course, is not a trivial task. A typical midsize to large U.S. insurer, for example, maintains four or more policy admin systems, and many have portfolios of 10 or more. The complexity and costs of maintaining those multiple, redundant systems can be overwhelming. In fact, they often distract a carrier from newly critical tasks, such as harnessing the wealth of digital data now available to create new products, enter new markets and underwrite more effectively. Insurers must also focus on building new applications to engage and sell to customers in new ways outside of traditional distribution approaches.

Carriers realize that distraction here is unacceptable. Next-generation analytics and new customer-centric distribution are exactly where insurers must invest to avoid being marginalized. The challenge is that insurers have to simultaneously tackle the legacy and build the new.

There is no silver bullet for modernization

Contrary to what most software vendors tell their customers, no off-the-shelf policy- administration software system will solve these challenges. All too often, vendors and even noted industry analysts become part of the problem by suggesting the silver bullet is to implement a completely new policy administration platform, often at a cost of tens of millions of dollars.

There is no silver bullet. And, perhaps some of the money earmarked for a new platform can be redirected to IT investments that truly drive competitive advantage. It’s important for insurance companies to understand and assess all of their options before making major decisions about upgrading, replacing or integrating systems.

What most vendors won’t tell their customers is that system replacement is just one of many options available to them. It’s time to get the options out in the open for all to understand. This paper explores best-practice approaches that an insurer’s IT organization can use individually or in combination to achieve their modernization goals.

Here’s a look at 10 things most vendors won’t tell insurers about modernization:

1. Sometimes it's ok to do nothing.

Depending on the admin system and its function in the organization, sometimes the best strategy is to leave the system in place and focus on reducing maintenance costs. Small blocks of business in runoff or even larger closed blocks that could be packaged and sold off are potential candidates for retention.

Remember, though, that any retained systems contribute to ongoing costs, requiring specialized teams to maintain and use these antiquated systems. At a time when most insurers have moved or are starting to move to shared-services organizations, these pockets of specialization could prevent both IT and back-office managers from achieving full value from their internal consolidation efforts.

2. It may be time to outsource system and processes.

A growing number of companies are looking into rehosting legacy systems — moving applications from one technical environment to another with no or very little change to code. This “lift-and-shift” approach is typically provided by an outsourcing vendor to manage the application for a predictable cost on a long-term basis.

Outsourcing enables organizations to refocus resources on activities that support the core business while leveraging third-party expertise and efficiency. Historically, this strategy came with a limited set of options. More recently, however, as systems have become more component based — and Web-based interface points have become more prevalent — outsourcing can be effectively applied to much smaller aspects of the business.

For instance, outsourcing can be used to support application development, maintenance and infrastructure — as well as individual business processes, such as customer billing, printing and mailing. Consequently, interest is high in outsourcing legacy blocks, through business process outsourcing (BPO), staff augmentation and application management. At the same time, interest in business process services is also growing as insurers seek ways to add world-class capabilities.

Application outsourcing can provide significant benefits, especially for legacy policy systems that are difficult to support in house. The policy administration system vendor often maintains a “center of excellence” using offshore labor and provides economies of scale that a single carrier cannot match. This allows the system’s life to be extended, without the associated risk of losing experienced IT staff to retirement or attrition. BPO can provide a customized, turnkey solution to administering older legacy policy blocks at attractive prices.

Outsourcing can potentially introduce new challenges, however, particularly when the goals of the outsourcer and the insurer are not aligned. An outsourcer, for example, may not be able to fully support new product launches or customer service strategies that were not considered when the contract was signed.

3. Consider converting your policies to a strategic in-house platform.

One of the best responses to rationalizing additional platforms and custom solutions that come into the enterprise through mergers and acquisitions is converting the business onto a single in-house platform. The ideal scenario is to consolidate to an existing strategic system that can carry the merged business into the future. This approach preserves the investment in company-specific system functions on the target platform, but will increase the in-force policy volumes on the strategic platform. So, choosing a target platform with proven scalability is critical. Conversions can have significant up-front costs, but the long-term benefits can be equally substantial. Articulating a good benefit case is a critical success factor. 

4. The cloud can breathe new life into certain older applications.

Some applications have perfectly adequate functionality but are just too expensive to run on their current infrastructure platform. Others may require multiple servers and environments that are lightly loaded and thus underutilized. Others may still reside on a high-cost platform such as a mainframe. In cases like these, one way to modernize can be to move the application to the cloud and dramatically lower infrastructure costs.

CIOs everywhere are moving their applications to public, private and hybrid clouds for cost savings and many other reasons. There are tools to migrate older COBOL applications that were once mainframe-only to cloud environments, and many newer x86-based applications can be straightforward to migrate.

But not every application is a good candidate for the cloud, so it is a good idea to scan your portfolio and identify the cloud-ready applications that can be migrated first. You will want to do this in the context of an overall cloud strategy and not just as a one-off. The economics of cloud computing are so compelling that every organization will make the journey to cloud — it’s just a question of when. If your organization does not have a cloud strategy yet, now is a good time to start planning.

5. Don't revise and customize any more than you have to.

Most vendors don’t mind if you want to revise or customize their software if it means more services revenue and possibly more retrofitting work down the road. In most cases, carriers purchase an administration platform and customize the source code to their specific requirements, or they simply patch an older version of the system to meet new business needs, such as new regulatory requirements. Revision can be a way to add new functions and fix problems faster than keeping the system updated to the most current release.

It is not uncommon for some carriers to have modified as much as half of the original source code to meet their custom requirements. But what saves you money in the short term almost always costs more over time; when carriers must update that old release, they have to deal with the plethora of custom in-house modifications, which can be expensive. Be wary of this strategy.

6. Rebuilding is not really an option.

Similar to code refactoring, the process of rediscovering the business requirements of an application and redeveloping it from the ground up may be practical only for specialized, proprietary applications. From a practical standpoint, however, it probably makes more sense to look for a software package that can be configured to perform the needed functions.

Unfortunately, many insurers over the years have tried to rebuild their core applications and failed. In today’s environment, with technologies and standards changing every 18 months, the prospect of a multiyear development project, with multiple iterations of testing and performance tuning, is too overwhelming for most IT departments to even consider. While the “build it in house” option used to be foremost on IT department agendas, few companies today would seriously consider rebuilding a legacy policy admin system.

7. Surround strategies can provide value.

Wrapping is a common strategy with predictable costs and well-tested patterns. One frequent approach is to wrap systems with a common user interface, which masks the idiosyncrasies of each system from the user. More recently, the focus has been on wrapping systems with service layers that let them plug into service buses; this architecture promotes reuse and high-level process assembly (see Figure 3). This strategy makes sense for companies seeking short-term improvements to specific processes affected by several legacy applications.

Customer service and claims are prime areas of the enterprise that can benefit from this approach, which can enable the IT staff to be more responsive to the business. However, if legacy systems have fundamental technology issues or they can be converted and decommissioned in a relatively short period, wrapping may not be practical. Many organizations initially viewed service-oriented architecture (SOA) as a silver bullet for integration woes, but it doesn’t necessarily eliminate the underlying legacy system complexity and costs.

8. It may be possible to upgrade instead of rip and replace.

For companies with vendor-supported applications, upgrading to the latest version is a common strategy for modernization. Unfortunately, many insurance companies wait too long to take advantage of the vendor’s modernization program. Many vendor applications have come and gone over the decades, leaving insurers with unsupported applications and no migration path to a new system. Instead of a series of routine upgrades, organizations often face a major licensing decision and complete system replacement.

The major obstacle insurers face is often their own penchant for revising and customizing the vendor’s code. Too much customization makes it difficult for companies to port these changes to the latest version of the software. Once two or three opportunities to upgrade are missed, the vendor system essentially becomes another legacy system maintained by the company’s IT department. As with the other approaches, insurers must weigh the costs and benefits of a continuous upgrade program against those associated with a big-bang upgrade or a complete system replacement.

9. System replacement may solve only part of your problem.

System replacement is by far the most common step recommended by outside vendors, but insurers seldom hear all of the facts about the potential costs and the impact on their current environment. For policy administration systems, for example, a replacement system may be implemented for new products only, and the older systems retained or outsourced. Another common strategy is to replace and convert the older in-force blocks to the new system.

As shown in Figure 4, the benefits of system replacement can be significant — the ability to deploy new products or capabilities, to provide Web-enabled producer/customer self-service, and to reduce the complexity of business processes, to name a few. However, it’s important to remember that the introduction of a new policy administration system actually makes the system environment more complex, as it is a new application that must be maintained. Long-term plans for managing or retiring systems, including the costs of conversion and infrastructure, must be included in the business case for the new system.

System replacement and consolidation simply may not be practical if there is no credible vendor package available, if the functional gap between systems is too great, if there is no real business mandate to support a large-scale change or willingness to compromise on requirements, or if the cost of replacement is too great for the size of the company.

10. Core systems can be brought as a service.

In the not-too-distant past, there were essentially no options for purchasing policy administration as a service versus buying and implementing a system on-premises. Today that’s changed, and there are a variety of options that don’t require an initial license and large implementation expense. In addition to reduced up-front costs, the carrier does not have to gain expertise with the software code itself or the technology stack that supports it. The carrier just has to learn how to configure the platform to administer the desired products, and the software vendor is responsible for maintenance and upgrades. In addition, software fees are paid as the software is used, converting fixed cost to variable cost, which changes according to the carrier’s business.

Today, many carriers are becoming quite comfortable with purchasing noncore applications as a service. Common office applications (such as Microsoft Office) and applications for sales force administration, payroll, timekeeping, IT service management and many other uses are now being delivered from the cloud, allowing dozens of home-built or purchased applications to be retired.

Carriers have been much slower to embrace core policy administration as Software as a Service (SaaS). One likely reason is switching costs. Whereas it is relatively easy to switch between timekeeping vendors, it is much harder to move off a SaaS policy admin platform that has tens of thousands of policy contracts under administration. If you choose a SaaS solution for policy administration, make sure the vendor is financially stable and will continue to maintain and enhance its platform — perhaps for decades to come.

Modernization in practice

Nearly every insurance organization has a unique application portfolio and a unique set of challenges, but relatively few companies have taken steps to reduce complexity by reducing the overall size of their portfolio.

Most insurers attempting these large, enterprise-wide modernization programs employ several different modernization approaches, both simultaneously and during different phases.

For instance, one top-tier life and annuity company, which had just merged with another major insurer, consolidated multiple systems onto a single platform. However, it proved to be more cost effective to retain some of the legacy systems and wrap them using a surround application as a common user interface. The company immediately lowered its IT maintenance costs and adopted a long-term roadmap for continued modernization.

In the property and casualty market, a leading insurance carrier took a completely different upgrade approach. The company used BPO to quickly introduce Web services to its commercial lines agents and decided to take a stepwise approach to replacing its core personal lines systems, which stretch across multiple business units. The carrier started with a few business services and is now moving to a SOA across the enterprise.

While very different in execution, both companies chose to follow a methodical, though flexible, modernization framework. As a result, both are achieving transformational change throughout their organizations. In addition to modernizing and simplifying their portfolios, they are increasing agility and reducing maintenance costs, which in turn is freeing up IT funding to support new business initiatives.

Ultimately, this kind of methodical, flexible approach — where priority is placed on simplification — is the best path to modernization. It’s just that most vendors won’t tell you that.