The benefits of modernizing core legacy systems are clear and compelling
- Gaining a competitive advantage—or achieving competitive parity
- Reducing operational and IT costs
- Making better underwriting and claims decisions
- Seizing analytic advantages when information and processes become completely digital
However, modernizing core legacy systems is easier to think about than to do. Modernization projects are costly: both in terms of cash out-the-door and in terms of staff resources (full-time or part-time assignments to design and implementation teams, back-filling those vacated positions). Technical complexity is usually high due to substantial amounts of IP (intellectual property) embedded in the rules, product definitions, and processes; as well as long established integration protocols (often point to point) with other internal operating and back-office systems.
The resulting execution risk means that some projects are never undertaken, others are delayed, and still others are done piecemeal. Consequently very few insurers have completed front-to-back modernization programs—and significant portions of most insurers’ application and middleware portfolios are still legacy.
So how can an insurer balance the costs and risks of legacy modernization against its benefits?
Insurers can choose from among four legacy modernization strategies:
1. Replace with a COTS (commercial off the shelf) package
2. Replace with an Internally Re-written System, from-the-ground-up
3. Wrap and Extend (using portals, rules, BPM, content management, etc.)
4. Continuous Improvement (regular incremental improvements)
The first strategy, replacing with a COTS package has become an increasingly popular option with all but the largest insurers—as vendors have made steady improvements in features, functions, and usability. More recently some very large insurers (over $5 billion in premium) have announced they will use COTS to replace several core systems.
The second strategy, replacing legacy with a new internally written system, has been the chose primarily of very large insurers, and of some specialty insurers and reinsurers. When asked why, CIOs are likely to say that their needs (rules, definitions, processes) are too complex and valuable (IP again) to be configured into a COTS.
The third strategy, wrapping and extending, externalizes a lot of the IP from monolithic legacy code bases, and often provides a more flexible and appealing user interface. Insurers tend to use wrap and extend solutions for somewhat limited lines of business or territories, because these solutions themselves require a significant investment to deploy broadly.
The fourth strategy, incremental improvement, is in fact the default choice. No IT group (well, almost no IT group) will go a year or two without addressing some of the operational and/or technical problems posed by legacy systems. These improvements typically combine elements of the second and third strategies (limited internal re-writes and wrap and extend).
A recent Celent survey of CIOs found that incremental improvement was the most popular modernization strategy (being used by 35% to 45% of CIOs, depending on the core system); followed by COTS strategies being used by 20% to 30% of insurers. Rewriting and wrap and extend jostled for third place. Rewriting was more popular for claims and billing systems (12% and 7%)—while wrap and extend was chosen for 12% of underwriting system renewals and 10% of policy admin projects.
(Note: This blog post first appeared in Insurance Technology Association.)