Why Legacy Transformation is Critical for Insurance Companies
The insurance industry, often perceived as traditional and risk-averse, is in the midst of a profound technological shift. For decades, legacy systems – those monolithic, often decades-old software platforms – have been the backbone of insurance operations, handling everything from policy administration to claims processing. However, in today's rapidly evolving digital landscape, these very systems are becoming an Achilles' heel, hindering growth, stifling innovation, and jeopardizing competitiveness. The time for legacy transformation is not just approaching; it's here, and it's an absolute necessity for insurance companies looking to thrive.
Why Legacy Systems Are Holding Insurers Back
This should be obvious to even the most casual observer. While the systems might have been revolutionary in their time, that time is long past. Sometimes decades past. Here's why they're no longer fit for purpose:
Operational Inefficiency and Soaring Costs
Legacy systems are often characterized by manual, paper-based processes and siloed data. This is particularly true of insurers offering differing lines of business, such as personal and commercial lines on the P&C side, or life and annuity on the life and annuity (L&A) side. This leads to time-consuming workflows, increased errors, and a disproportionate amount of IT budget being spent on maintenance rather than innovation. Processing a claim can take days or even weeks, frustrating customers and draining resources. Even a simple address change can be complicated. P&C insurers are farther along than L&A insurers in the use of portals. Many life insurers require a phone call, followed by manual forms, just for an address change.
Lack of Agility and Innovation
The insurance market is demanding real-time insights, personalized products, and seamless digital experiences. Legacy systems, with their rigid architecture and complex code, are incredibly difficult to adapt. This makes it challenging for insurers to launch new products quickly, respond to changing regulations, or integrate cutting-edge technologies like AI and machine learning. Launching a new product can literally cost millions and take months, if not more than a year.
Poor Customer Experience
Today's customers, accustomed to instant gratification and personalized services from companies like Amazon, expect the same from their insurers. Legacy systems often provide clunky interfaces, limited self-service options, and slow response times, leading to frustration and ultimately, churn.
Data Silos and Limited Insights
Critical data often resides in disparate, incompatible legacy systems, making it nearly impossible to gain a holistic view of customers or market trends. This hinders accurate risk assessment, personalized pricing, and effective fraud detection. Millions have been spent creating data warehouses, data lakes, and more. The application of AI to data still stuck in a legacy application requires extraordinary effort compared to a modern system.
Security Vulnerabilities
Older systems often lack the robust security features required to defend against sophisticated modern cyber threats, leaving valuable customer data and business operations vulnerable to breaches. Insurers are the new cyberattack target with too many recent announcements of breaches. We don’t know if those are attributed to legacy systems but it is entirely possible.
Talent Drain
As older systems age, so too does the pool of IT professionals with the specialized skills to maintain them. This creates a reliance on a shrinking talent base and makes it difficult to train new employees. The traditional response has been to move that support offshore, but even there, the availability of competent COBOL programmers is becoming limited and more costly. Don’t even ask about the older Life systems still written in 370 Assembler.
The Benefits of Legacy Transformation
We shouldn’t look backwards and consider legacy transformation as fixing problems. We should look forward to the potential of modern technology in insurance. Modernizing core insurance systems can lead to a host of significant benefits:
Enhanced Operational Efficiency
The automation of manual tasks, streamlined workflows, and real-time data access lead to faster policy issuance, accelerated claims processing, and reduced operational costs. Combined with innovations in AI, imagine a large life insurance policy issued in minutes.
Improved Decision-Making
Modern systems allow data to flow seamlessly across departments, providing comprehensive, real-time insights for better decision-making across the enterprise. From risk assessment and pricing, to customer segmentation, to agent categorization, to, well, the imagination goes wild.
Improved Customer Experience
Modern platforms enable intuitive online portals, mobile apps, and AI-driven chatbots, offering 24/7 self-service, personalized interactions, and quicker responses, leading to higher customer satisfaction and retention.
Increased Agility and Innovation
A flexible, modern IT infrastructure allows insurers to rapidly develop and launch new products, adapt to market changes, and easily integrate emerging technologies like AI, IoT, and blockchain. This fosters a culture of innovation and enables personalization.
Strengthened Security
Modern systems incorporate advanced security measures, protecting sensitive data and mitigating cyber risks. Most run on public clouds like AWS and Azure. Public cloud vendors are spending billions on cybersecurity, completely dwarfing the available spend to protect an insurer’s own data center.
Reduced Costs
While initial investment is required, modernization ultimately reduces maintenance costs, frees up IT resources for strategic initiatives, and improves overall productivity. Available metrics show significantly lower support costs and operational costs, both from the IT perspective, and insurance operations perspective.
How do you get there from here?
Legacy transformation is a journey that requires careful planning, a clear roadmap, and a commitment from leadership. The last, a commitment from leadership is often the make or break for large transformation projects. It includes:
API Integration
APIs allow for creating modern interfaces that allow older systems to communicate with newer applications without a complete overhaul. This is non-trivial and must be weighed against the cost of conversion to a newer system. Often this can be along a timeline, with new products on a new system and conversions over time.
Rehosting
Migrating existing applications to cloud-based environments can improve performance and scalability. This can be done by and maintained by internal staff or through the use of one of many outsourcers that specialized in these offerings.
Rewriting
Optimizing or completely rebuilding parts of the legacy code for better efficiency and functionality is possible but should be viewed as only a stopgap. There is no solution that makes an aging COBOL system the system for the future.
Replacing Core Systems
In most cases, a full replacement of outdated core systems with modern, cloud-native solutions is the most effective path forward. This leads to our summary for this blog. Celent is just kicking off our every two-year review of all global policy administration systems. This includes a sophisticated RFP process, demonstrations, and even customer references. We just recently published the global P&C reports for core systems in that space.
If you’re an insurer in the process of looking at systems, we suggest you reach out to us here at Celent. Not only do we offer these in-depth reports, but our knowledge of the systems goes far beyond what can possibly be in the report. In addition, we offer consulting services to streamline your system selection project, based on our research. If you’re a vendor in the Life and Annuity space and have not yet received an invitation to participate, we really suggest you reach out to us. There is no cost to participate beyond some of your time.
Feel free to reach out to us at info@celent.com
