Legacy systems have always been an integral part of insurance companies. As one of the early adopters of modern computing technologies, insurers have been developing and building on vintage platforms over the past few decades. This is especially true during the financial crisis, when organisations focussed their attention on strict cost disciplines rather than strategic investments. The current situation is one that promises relative stability and security, catering for the needs of traditional core functions across underwriting and pricing, accounting, sales and policy administration, and claims processing.
Nonetheless, aging legacy systems are increasingly causing insurers set-backs due to a plethora of reasons. Rigid business rules, siloed databases, disproportionate total cost of ownership, along with complex interfaces are just a handful of issues that hamper incumbents’ operational efficiency, business effectiveness, ability to comply with regulatory reporting, and ultimately developing (new, innovative) offerings to meet changing customer expectations.
Furthermore, a lack of consolidation between internal data repository systems (with external data sources) is inhibiting value-capture of new data-driven propositions to enhance performance along the value chain in the digital age. These emerging drivers of change range from data-enhanced underwriting and pricing of risks in close to real-time, developing granular understanding of customer behavioural profiles to cross-sell products, to advanced fraud detection through tools such as anomaly detection. This is set against the backdrop of an increasingly competitive landscape with the potential threat of new disruptive technological offerings, making the issue of system modernisation all the more pressing. Whilst such strategic trends are pulling incumbents towards a future of tech-savvy systems and workflows, aging legacy technologies have been trapping them in the bygone age. As market conditions saw improvements in the past few years, companies have begun investigating options to strategically upgrade their legacy core systems.
At this year’s Insurance Times annual conference, Bertrand Lavayssiere chaired a roundtable discussion with around 30 leading industry figures, exchanging views on challenges and opportunities surrounding core legacy systems. Most of the respondents stated that their general ledger systems were between 15-20 years old, indicative that modernisation goals are yet to be fulfilled. Likewise, ‘change the company’ projects typically last well beyond 18 months, with some extending into the scope of 3 years. In comparison to modernised, agile systems, incumbents have not yet realised the expected benefits of core system modernisation endeavours. The majority of IT architectures are also vertically integrated, resulting in a lack of unified, ‘single source of truth’ across functions to enable straight-through processing. For instance, over 80% of respondents admitted that neither data lake nor data warehouse yet existed in their organisations, which are considered as core technological enablers of operational flexibility for the digital age. Indeed, the conversations revealed the extent of the challenging odyssey to successful system modernisation, through which insurers are still navigating.
How to proceed?
Given the probability of failure and time span of system modernisation projects – often spanning up to 5 years – a clear, recognised governance structure and realistic investment roadmap need to be established from the outset to monitor and measure project success. This would also ensure sufficient resource allocation to see the project through. A list of prioritised functions needs be communicated and agreed upon amongst stakeholders to cater for programme risks such as interruptions to other business requirements and change of project owners.
For most insurers, the majority of modernisation challenges boil down to a significant gap between their as-is and to-be capabilities. In terms of the action plan, a logical first step would therefore be a holistic assessment of existing digital maturity to identify skills gap to bridge the deficit. This goes hand-in-hand with a clear characterisation of technological requirements in the to-be IT architecture. From this, stakeholders need to communicate and agree upon a future-oriented technology strategy.
Naturally, the appropriate modernisation approach depends on the insurer’s strategy and the state of their legacy systems. Zeb believes that a drastic ‘Big Bang’ approach would not necessarily garner the best results for incumbents, especially considering the risks arising from poor data migration and potential business interruption. Largely speaking, there are several gradual, adoptive ways to modernise the core system:
A) Encapsulate as-is with new technologies
By far the most common and least disruptive approach has been to wrap a front-end presentation layer of the application to the underlying mainframe via an integration platform. Incumbents can benefit from partnering with tech-driven and customer-friendly applications without the need to radically convert their existing contracts. Nonetheless, this merely sidesteps the issue of aging technology with diminishing technical expertise to support and rectify system errors.
B) Progressively use Internet Standards for all new projects
From the prioritised list of functions, insurers can perform pilot projects using digital Internet Standards (including programming languages and databases). This ‘start small’ approach enables incumbents to integrate and leverage the insights and knowledge the legacy systems have built up over the years in increments whilst not risk destabilising the existing mainframe. New projects run this way might require additional resources for data management and migration to achieve project goals.
C) Stop every ‘old’ project and start anew
In a similar front to Approach B, this is slightly more intrusive and would demand the deployment of significant additional resources to complete the projects anew. The upside to this is that companies can achieve system consistency and standards without the need to re-modernise in the next system lifecycle. As antiquated systems will be retired, the steering team needs to ensure the data insights captured over the years are leveraged and systematically translated into the to-be architecture.
D) Buy components of a digital insurer
The digital landscape is replete with disruptive technologies that can run projects on modern and agile platforms. Traditional incumbents could benefit from outsourcing or acquiring such capabilities and consolidating them into their existing mainframe. The benefits of this approach would be that – providing the due diligence is adequately performed – the acquired has a clear value proposition to generate ROI in a much shorter time span and without much technical adjustments.
E) Rethink the organisation set-up
The most drastic approach, but nonetheless still viable, is to rethink the IT architecture from scratch. This would entail the implementation of new solutions with or without converting policies or retiring the vintage software. Companies undertaking this approach might be struggling to maintain their current policy administration system going forward. If this is indeed the case, a clear business case for improved speed to market, projected growth potential, and overall digital competencies that outweigh the risks inherent in a full-scale implementation needs to be socialised and accepted by stakeholders early on to ensure commitment.
From our accumulated experience, there are usually 5 universal key factors to consider in any legacy modernisation initiative to ensure a successful delivery from inception to project sign-off:
Legacy modernisation initiatives promise huge rewards to incumbents, but such programmes also bear significant operational risks. As a leading strategy and management consultancy in Europe specialised in financial services, zeb assists clients in the fields of digital and IT strategy amongst others — from strategy review and maturity diagnosis, platform and vendor selection, through to providing sparring advice and project management services to support the implementation and data migration of legacy system modernisation.
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