Perennial questions about the utilization of technology arise as insurers prepare for the challenges of a new year. At press time, most budgets have been set and priorities organized to meet the needs of the carrier's business units and overall strategic direction.
That raises a critical question: What will happen to core systems as 2004 unfolds? Have some carriers already decided that this is the year to finally make a move to modernize those systems that set the tone for their entire enterprise?
The state of core insurance systems in a way represents the entire scope of technology utilization as it applies to the insurance industry. An insurance company can effectively ignore these old systems and continue nursing them to provide the same levels of service and performance as always. Alternatively, a carrier can decide to engage IT resources (internal, external, or a combination) to effect some level of change in the functionality these systems provide. Or a company can decide to start fresh and use the same IT resources to create or purchase a new solution to meet the tactical and strategic needs of the company's business model.
Any review of the state of core systems should take account of several facts. First of all, the underwriting, policy processing and claims applications that make up these core systems are the engines of daily operations for carriers. Therefore a preponderance of IT budgets go to maintain these critical systems. The maintenance includes fixes for known problems, requested enhancements, and required changes due to business or regulatory changes. While few of these maintenance projects significantly enhance a carrier's ability to offer new services, they do keep the company operating and processing the information that equates to revenue.
In fact, some carriers have already replaced or reengineered many components of their core systems. A combination of foresight, budget, executive direction and infrastructure readiness has allowed various insurers to rise to the next level of capability. These companies are better prepared to meet the changing requirements of a more complex financial services marketplace. Yet, even these forward-thinking companies rarely replace all of their core systems.
Technology is often the least of a carrier's problems when it comes to core systems. This has been reinforced by TowerGroup research that points out the need for understanding the human dimension with regard to the impact of information systems on the business of financial services. This includes morale, development opportunities, internal politics and corporate culture. The most obvious way to forestall problems in this dimension is to work on creating strong partnerships between the IT area within the insurance company and all of its customers and suppliers.
The manner in which a carrier has approached and executed the automation of its business over time often directs the way it behaves in regard to the lifecycle of its core systems. Some carriers seem to have an almost emotional attachment to established systems, making decisions without any apparent objective analysis.
Insurers need at least to visit the question of reengineering outdated core systems with greater frequency. Other carriers understand and address the reengineering of the systems that impinge on their success but then ultimately rely on an organic solution to meet the future. Such solutions are tactical and result in strategic problems in the long term. By adding new functionality to existing applications and interfacing it to existing systems, carriers may be creating larger problems for the future.
Need for Leadership
Insurance carriers generally do not take leadership roles in reacting to larger trends in the industry. Their natural aversion to risk has led them to be labeled as slow to make use of the latest technology. The reality is that insurers are pragmatic in their use of technology. Many carriers make use of technologies only when it serves their purposes and promotes their strategies. Some literally react, changing only when external forces make it a necessity. However, the combination of constant cost pressure, risk aversion, and the ability to operate in something less than real time has produced a climate that fosters the continued creation of systems akin to the old "legacy" systems. They create systems that behave as if they were created years ago, being inflexible or dealing only with the "siloed" system of which they are part.
There are persistent calls for modernization of the insurance industry in the hope that IT can deliver on the promise of cost cutting and higher customer retention. Underlying the capabilities of technology is a concern that the entire exercise of reengineering legacy systems will serve only to perpetuate the existing development cycles.
Many of today's core systems were developed as a second generation of applications that made use of the technology available at the time of their coding in the '70s. These were updated versions of the basic data processing applications created when computerized automation was first utilized by the insurance industry in the mid-1960s. And even though it was technically possible to create systems that were flexible and extensible by design, it was often hard enough just to create systems that were reliable and could handle the increasing volume of transactions required. Now that IT departments have the benefit of structured coding, object-oriented methodologies, and intelligent systems to assist them in the creation of information processing applications, are there reasons to fear they might just be creating new legacy systems?
Unfortunately, the answer is yes. In fact, now they can do so faster than before! To create information processing systems that meet or exceed the tactical requirements of insurance management requires a commitment to the essentials of good planning and open system standards. This may require a bias toward investing in architectural and infrastructure projects. Such an approach might restrict the IT solutions available to business at any given time but will ultimately provide better solutions in the future. It will also mean IT departments will need to act in a holistic fashion to capture and code for more than the minimum requirements presented.
Carriers need to review the methodologies and architectures used to create or update systems with an eye toward strategic goals. It is essential to adopt overall system design principles and architectures that do not exacerbate the problems that arise in system development.
The primary reason carriers cite for not having a single view of their customers is the siloed nature of legacy systems, with customer information held in different databases for different insurance lines. The creation of a company-wide customer information file (CIF) has occupied many carriers. When information about a customer is duplicated across several legacy systems because the customer has policies with more than one line of business, both the customer and the carrier suffer. External CIF mechanisms are needed because the siloed systems can't share data, so this adds another layer of cost from integration and maintenance of such systems.
What defines the "best" core system? Establishing and enforcing a flexible business services architecture for IT along with the constant evaluation and use of open standards will direct carriers to successful development projects. The advent of successful projects resulting from renewable designs will be a sign that carriers recognize the value in not being a system development company.
A key concept is abstraction-to define and map the business processes to be automated before committing them to code. The industry needs to separate the insurance processes from the code that enables the component functions to be automated. The historical knowledge the business areas took away from previous IT projects has to be challenged and supplanted by business-driven perspectives. Renewable core systems are the future. They focus around persistent insurance processes and not products that change over time.
Jamie Bisker is a senior analyst with Aite Group, specializing in Property & Casualty Insurance. He brings to Aite Group more than 28 years of experience across insurance lines of business, having served as an IT specialist, research director, consultant, and global thought ... View Full Bio