or regulatory challenges and opportunities will arise over the
next few years, we all know intuitively that if we have modern,
flexible, functional, and data-rich core systems we will be in
a much better place to respond and take advantage than if we
are struggling with the core legacy environments. Core legacy
environments are not suitable platforms from which to launch
Let’s consider a few illustrations.
First, legacy systems are not data rich and they have minimal
if any ability to easily add additional data elements. Many
legacy systems were architected 30 years ago when data storage
was still a major cost inhibitor. This led to systems where data
elements were fewer, shorter, and codified in obscure ways.
Fields were often redefined and reused for different purposes,
depending on the data values in other fields.
Further, most legacy systems do not do a good job of editing
and validating data, leading to incomplete and inaccurate data.
Commonly, the data in policy systems was restricted to rating
information while the richer and more interesting underwriting
data remained in separate (often paper) files. As any actuary
will tell you the underwriting data is important for analysis of
profitability, concentration, and other financial trends analysis.
Similarly so with claims data. Legacy claims systems store
information to support financial transactions such as reserving and payments. The data required to find potential fraud,
for example, simply does not exist. So, how well can a carrier
implement business intelligence technologies with restricted
underlying transactional data?
Second, consider the constraints on a carrier’s ability to
deploy effective portal or mobile applications where the core
systems are hard to integrate. Another characteristic of legacy
systems is they were not engineered—except in a few predetermined instances—to share data with other applications in the
increasingly complex and sophisticated applications architecture. This leads to additional cost and risk in supporting new
customer-facing technology channels.
Also, the distribution of data to other platforms and channels is further complicated by the point made above: If the
data is abbreviated, codified, redefined, inaccurate, or in some
cases absent, the data-mapping effort becomes tortuous. The
great advantage that flows from exposing data to customers
and agents brings with it a more stringent requirement for data
accuracy and completeness.
Third, as noted by recent analyst studies, much of the
technology innovation going on in the insurance market is
aimed at growth which requires speed-to-market, new and
more distribution and service channels, and a better customer
experience. Speed-to-market can mean many things: the ability
to change rates quickly; to rapidly modify, enhance, and deploy
an insurance product; enter a new geography; support new data
and reporting requirements; and implement new workflows
and business rules.
None of these is easy to do in a legacy world. Not that I am
saying they are easy to do in a modern core systems world. Nothing is easy in IT, but they are more doable in a modern environment than in a legacy environment. Indeed, it is common to hear
of carriers that simply ignore, give up on or find an alternative
tactical sourcing for business opportunities when they find out
how long it will take IT to do their part of the project.
We talked above about core systems modernization as creating a platform from which change and innovation can happen.
We don’t necessarily know what specific change will be required
and at what time; what we do know is that regardless of what
the enhancement is or when it arises we will be better placed to
respond in a way that supports the business (or even facilitates
it) rather than hobbles the initiative.
It is for these and other compelling reasons that carriers spend
millions of dollars to modernize their core systems platform. Core
system modernization is the single biggest mainstream technology
innovation going on in insurance and will remain so for at least
another few years. Carriers that survive the journey and reach the
Promised Land will find they are better able to compete in their
respective markets on the basis of customer experience, better and
more varied products, and more granular pricing.
The IT department’s cost of maintenance, often driven by
non value-adds such as regulatory changes, will fall significantly,
allowing more dollars to be spent on strategic business support.
The systems environment will be future-proofed against the
looming threat of generational retirement of those who write the
systems being replaced. For those carriers that either choose not
to try, or try but fail to make the journey, the future will be bleak.
Those carriers will face competitive challenges to which they
cannot effectively respond. Their ability to keep legacy core
systems running will come under direct threat over the next five
to 10 years as the folks who wrote or maintained the software
retire and are found to be irreplaceable. It should come as no
surprise to learn that no one is training a new generation of
COBOL, Assembler, BASIC or RPG programmers.
The future is fun to contemplate and it’s true that self-driv-ing cars are just around the corner, but for many carriers it’s
still yesterday, and the only way to escape yesterday is to make a
major investment in time and money to fix the “boiler room” of
the core systems environment. Anything else done in the name
of innovation is merely a distraction from and a complication of
the inevitable. We used to talk about “putting lipstick on the pig.”
Technology innovation without core system modernization is
putting lipstick, Botox, and plastic surgery on the pig. ITA
(George Grieve is a popular writer and speaker on the
subject of insurance technology solutions and is the author of the book “Shop Talk.” He is CEO of the consulting
firm CastleBay Consulting. The views and opinions in this
column are those of the author and do not necessarily
reflect the views of the Insurance Technology Association
and its members.)