PAS, Legacy Replacement and Honda Accords

The biggest danger for most carriers is not failing to survive the downturn, but rather failing to be competitive as it ends. Long sales and implementation lifecycles mean that carriers trying to get ready for the upswing are already late in starting the process if they haven't already, and few project alternatives offer similarly strong business cases while also being competitive necessities. As a result, we're not likely to see the trend of core systems replacement end anytime soon.

By Chad Hersh

A very good friend of mine from college drives a 1991 Honda Accord that's quickly approaching its 20th "birthday." But in case you're wondering what a Honda is doing in an article about policy administration systems, then read on as my friend and this car are a surprisingly appropriate analogy for many insurance carriers' situations.When my friend bought the car in college, he expected to keep it for about five years. Just in case, though, he bought a practical car that he knew would last a while, and he took excellent care of it. After a while, the car was completely paid off and still running well. It drove nicely, didn't look much different than the 1996 models and was still very reliable, so despite having a good job and few expenses, he decided to keep the car for a while longer.

By the late 1990s, the car was starting to look somewhat dated. Although he could afford a much nicer car, in the end, he couldn't justify buying one; the Honda still got good gas mileage and was still somewhat reliable; plus the insurance and maintenance costs had become nearly negligible. It didn't have a CD player, or many of the other amenities that virtually every other car on the road had by this point.

By 2003, although the car was running fine, problems-and maintenance-were becoming more frequent and parts harder to come by. A minor accident knocked off the bumper cover, and my friend had to use a wire hanger to reattach it to avoid a very costly bumper replacement. A sideview mirror had to be put back into place with epoxy, effectively turning it from a power mirror to a manual one, and the motors on the rear power windows stopped working.

Today, my friend still has his Accord, though he's resigned to riding the bus to work to make his car hold out a bit longer. He still stubbornly says that it works when he needs it to, mostly, and while he could replace it, it's just not causing him enough inconvenience for him to bother.

In the last 20 to 30 years, many carriers bought practical systems with plenty of room to grow, and kept the systems on maintenance for a while. By the mid-90s, with their current systems still humming along and few better alternatives, most of those carriers saw no need to change. But all carriers would soon find that by the late 1990s agents were beginning to expect-but not able to get, in many cases-online self-service. Carriers' core systems were never meant for this purpose, and many carriers just buried their heads in the sand and just hoped the Internet would go away, while some began a long path of "wrap and extend."

Likewise, carriers looked at the dot-com boom in the late 1990s and into 2000 and said "it's a fad," and largely ignored it, choosing instead to wrap and extend their existing systems as much as possible. But by this point, Progressive and GEICO were starting to make inroads in the direct market for P&C, and aggregators were starting to take over the Web for Life/Health. Carriers continued to use similar strategies to force systems to do the bare minimum necessary to not fall too far behind. Much like the car's bumper, I've heard rumors of wire hangers being used (if only metaphorically) to hold legacy systems together, and carriers really do build entire systems around their aging admin systems as they've come to realize how difficult it will be to replace them.

Many carriers are using replacement avoidance tactics (such as outsourced maintenance, ITO, BPO, etc.), but many more are looking at the current down cycle as an excellent opportunity to replace their core systems, so that as the markets for P&C and life insurance rebound over the next few years they'll be ready to take advantage of it - or even leapfrog their competitors.

This attitude has driven strong sales of core systems despite the economy, as carriers forge ahead knowing that the biggest danger (for most), is not failing to survive the downturn, but rather failing to be competitive as it ends. Long sales and implementation lifecycles mean that carriers trying to get ready for the upswing are already late in starting the process if they haven't already, and few project alternatives offer similarly strong business cases while also being competitive necessities. As a result, we're not likely to see the trend of core systems replacement end anytime soon.

Indeed, Novarica's surveys have indicated that 30 percent of life and annuity carriers and more than 50 percent of P&C carriers cite policy administration replacement projects as a "top three" initiative for 2009. If even a quarter of those projects were to get funded, we would have to more than double our estimates of the number of PAS replacement projects for 2009. So carriers-like my friend-may look to this down cycle as an opportunity to renew rather than refresh, a strategy that we see as having a real chance to improve a carrier's standing. Perhaps the only real question left is how soon my friend will replace his car!

About the author: Chad Hersh, principal, Novarica, is a leading authority on insurer technology strategy, with a focus on core systems and the policy administration system marketplace in particular. He can be reached at 212-419-2520 or [email protected].The biggest danger for most carriers is not failing to survive the downturn, but rather failing to be competitive as it ends. Long sales and implementation lifecycles mean that carriers trying to get ready for the upswing are already late in starting the process if they haven't already, and few project alternatives offer similarly strong business cases while also being competitive necessities. As a result, we're not likely to see the trend of core systems replacement end anytime soon.