Life insurance has always been a challenging business. It doesn’t help that at the very time that markets have slumped, carriers are confronted by unprecedented demands from both customers and regulators while new competitors from all quarters are threatening their traditional market share. At the very moment when they need to be nimble, efficient and innovative, they find themselves hamstrung by systems designed for simpler, more leisurely, more forgiving times.
While it is often suggested that insurers should replace their existing systems with a new, modern technology platform, that argument can downplay the very significant financial investment needed to build and populate a new policy system. It is not uncommon for insurers to pay tens of millions of dollars to replace their obsolete technologies. The fact that in most cases their legacy systems are still functional (albeit sub-optimally), and therefore represent value for the organization, can make it difficult to justify simply writing off the asset.
[For more of Brian DeMaster's industry insights, see: Life Insurers' 6 Keys to Strategic Cost Reduction.]
Legacy platforms are expensive to maintain and upgrade, and they will become increasingly so as the specialist skills required to carry out these actions become scarcer and more expensive. Many carriers have experienced the frustration of trying to retro-fit their legacy platforms to accommodate new product development needs. Even when these efforts are successful, the investment can have the long-term effect of increasing overall operating expenses due to the complexities of integrating the old with the new. A modern platform introduces back-office and process efficiencies that typically reduce IT operating costs by 20 to 30 percent, development costs by 20 percent, application and infrastructure costs by 25 percent, and service costs per policy by 30 percent.
In addition to cost savings, we see five significant benefits to upgrading and/or replacing legacy platforms:
1. Improved speed to market: Taking nine to 12 months to develop and launch a new product is a critical impediment when competitors are doing the same in two to four months. In a market where technology is changing daily, constantly creating new opportunities for insurers to improve their offerings to customers, the inability to keep pace is an embarrassing liability. Platform modernization allows insurers to swiftly modify existing products and launch new ones, reducing the time to market by anything from two to six months. What is more, it significantly reduces the cost of development.
2. Efficiently provision new, innovative services: All of our recent insurance research shows that consumers insist on a variety of channels for interacting with their insurer. Their preferences differ according to the type of interaction they require, and range from agents and call centers to mobile, e-mail and website access. Customers demand not only a self-service capability, but cannot understand why their insurer is unable to provide a seamless experience as they move from channel to channel. An optimized platform replaces product silos with a much more customer-centric operating model. This not only improves transparency and enables more convenient interaction with customers, it also provides the flexibility to continually enhance distribution as new technologies emerge and as customer requirements change.
3. Greater technological flexibility: Simplification, on its own, reduces risk, enables better utilization of resources and cuts costs. Modern systems bring with them a host of advantages, including service-oriented architecture (SOA) compliance, the ability to re-use common services, and quicker transaction times. Software as a service (SaaS) enables a shift from capital investment to an operational cost model, while cloud supports the development and production environment. The latest systems deliver an integrated multi-channel distribution capability and support a global business model. This all adds up to a lower total cost of ownership and a robust, flexible platform for growth.
4. Improved underwriting and pricing accuracy: With the prevailing pressure on interest rates and premiums, accurate underwriting has never been more important. Modern core processing systems help insurers gain a better understanding of the risks they cover. More sophisticated analytics, a more flexible and robust underwriting rules capability, together with performance evaluation and modelling features, put the insurer in a good position to select, plan for and price its risk.
5. Reduced business and IT risk: The risk to the business is significantly reduced by eliminating unsupported technology, limiting the reliance on resources with specialist knowledge, minimizing defect density, and being able to carry out agile development and deliver projects in small iterations. In addition, modern systems are better able to provide the data needed to report on risk and to comply with regulatory requirements.
While the benefits of platform modernization are indeed significant, the effort, cost and risk involved in a project of this scale can be sobering. Insurers that are contemplating it need to have a clear view of the implications, and a well-defined, realistic road map. They need to analyze the profitability of the portfolios under management, finalize the investment required and design a strategy for migration to the new system. Also essential is an analysis of what the portfolio modernization process will entail, and how set-up costs will be contained. Only when there is a clear understanding of the costs and risks involved – as well as the benefits – can a truly compelling case be made for life platform modernization.
About the Author: Brian DeMaster is managing director in Accenture Life Insurance Services.