Responding to a Changing Market: The Core Is Key

In Celent's recent report, "Insurer CIO/CTO Pressures, Priorities, Projects, and Plans for 2007: Survey Results," the majority of surveyed insurers had policy administration system (PAS) upgrade or replacement high on their to-do lists, planning to spend "significant new project dollars" in 2007 on these areas. Midsize property/casualty insurer respondents were most aggressive as a group, with half planning PAS replacements in 2007, followed by large life insurers (40 percent) and large property/casualty insurers (14 percent).

Core systems replacement has been compared to open-heart surgery -- it is one of the most drastic changes that insurers can make to their IT infrastructures. In the past, core systems replacements were often approached from the perspective of cost containment. Certainly, many of the legacy systems beating at the hearts of insurance companies are expensive to maintain and modify. They may rely on outdated technology and outdated licensing models.

Sudden Death

But compared to the project risk involved in core systems replacement, cost-based arguments have been difficult to justify. Bleeding to death slowly will always be preferable to dying on the operating table. However, over the past couple of years, two trends have converged to make core systems replacement not just acceptable but even attractive to many insurers.

The first is the increase in quality of vendor-based solutions. Some of the new products that emerged at the end of the dot-com boom have matured (others, less successful, have faded away), and even the older products have at least partially evolved into more-modern solutions that include support for Web interfaces, tools-based (rather than code-based) configuration and support for Web services-based integration. Most insurers, with the exception of the very largest, are turning to the vendor marketplace confident that they will find more than one possible solution to their needs.

The other trend, more important than the first, is that the choice has changed from a choice of "bleed to death slowly or risk dying on the operating table" to one of "risk dying on the operating table or risk being left for dead by the market." When insurers consider policy administration system replacement today, cost is not the first consideration. The first consideration is time to market. The second is product flexibility. And the third is supporting real-time information and transactional capabilities for distribution channels.

Speed Imperative

In an increasingly competitive market, insurers must be able to launch products faster. What's at risk is not just missing individual sales, but losing distributor mind share. An agent that can't get what he or she needs from his or her favorite carrier two or three times in a row will find a new favorite carrier. Legacy policy administration systems, with code-based product logic and dozens of undocumented dependencies reaching into document creation, claims, billing, etc., are a major speed bump in the product-introduction process. Product flexibility is likewise inhibited by code-based product logic and unmapped dependencies that prohibit insurers from introducing new products or making needed modifications to older ones.

In addition, many insurers are unable to support agent demands for real-time interactions due to the batch nature of their core systems or their reliance on interfaces that are not designed for agent use. While this shortcoming often can be at least partially addressed by "wrapping" these systems with Web-based interface layers, the limitations of the underlying core system often bubble up in areas ranging from inability to rate in real time to inability to consolidate customer-level data.

Again, agents who cannot get what they need when they need it from their favorite carriers will find a new favorite carrier. Insurers increasingly understand the risk of being left behind if they do not evolve to meet current market needs. For many insurers, the key is in the core.