Unwilling to deal with the tribulations of converting to new IT hardware, many insurance companies cling to legacy systems despite inconvenience, high costs, inflexibility and a decided lack of nimbleness.And the consequences of relying upon past-its-prime hardware and operating systems don't end there, according to Chad Hersh, a senior analyst for the Boston-based research and consulting firm Celent LLC and author of the report "Legacy and Mainframe Migration: An Insurance Imperative."
"There is no ability [for them] to try new products, new billing formats, new payment plans and new ways of paying commissions," Hersh says of the companies that insist upon nursing along their aging hardware.
One of Celent's insurance company clients could serve as a poster child for the inflexibility and cost of such an approach, Hersh continues. The carrier needed 10 weeks to change the wording on a regular customer statement. They would need just as much time, he adds, for a task as simple as changing the company 800 number.
Just the same, Celent has found that some 40% to 50% of all American insurers aren't actively replacing legacy systems (see chart on page 36). Worldwide, the picture looks much the same.
"There is a strong resistance at first-tier insurers to replace legacy applications due to the massive complexity and the hard-wired process and product specifications," says Klaus Hackbarth, CIO, Deputy CEO and board member of Württembergische Gemeinde-Versicherungsverein AG (WGV), a Germany-based insurer.
"The second-tier insurance companies are much more inclined to replace," Hackbarth continues, "as their existing applications have not reached that level of old-fashioned sophistication and tend to be less complex and easier to change."
Pushback still comes from top management as well as the rank and file, observes Petra Wildemann, director of insurance for the EMEA (Europe, Middle East & Asia) financial services industry of the Palo Alto, Calif.-based technology solutions provider Hewlett-Packard Co.
"CIOs are not valued by their ability to obtain modern technology but rather on cost-cutting issues," observes Wildemann. "There is very little room for somebody to include innovative pieces."
She says the current generation of CIOs lack job security because their performance is evaluated after two to three years, rather than the five- to 10-year cycle of the past. That gives them little leeway to think big and revamp the firm to reap long-term benefits, she says. Executives worry about delays and budget overruns with technology.
"Change equals risk," says John Pierce, vice president of global insurance solutions for Patni Computer Systems Inc., an IT services provider with headquarters in India and U.S. home office in Cambridge, Mass. "Insurers are risk-averse and have an interminable resistance to change of any kind."
Insurance executives' inclination toward caution with modern systems was deepened by the burst of the .com bubble and the unfulfilled promises of customer relationship management (CRM) and enterprise resource planning (ERP).
"By and large most of the excuses are either the result of lack of understanding what is available in the market today or a lack of trust of what is packaged software, or simply just a fear of the unknown," says Hersh.
Meanwhile, technology department staffers are sometimes unable or unwilling to master new technologies, or they worry that such systems will make them expendable. Hackbarth sees "strong opposition in the work force because major changes in IT induce redundancies [i.e., layoffs], especially because the cost-benefit analysis for these changes are based on personnel cost."
Resistance can make sense at certain firms. Some homegrown systems can process massive policy volume, notes Hersh.
He considers that heavyweight capacity the only legitimate reason-other than cost-for insurers to keep legacy systems.
Yet, some of the most resistant carriers seem to be considering new systems if only because they recognize they must make basic changes to respond to customer demands. "The customer wants to be served the way they want," says Neil Betteridge, vice president of product management at Whitehill Technologies Inc. in Moncton, New Brunswick.
Customers can become irate, he notes, upon discovering their policy information isn't available online.
Customers scarred by technology busts can remain receptive to new offerings if vendors demonstrate a system has worked for kindered insurers. "Insurers clamor, 'show me where it is running with my volume, with my scale, with products like mine and with a sales force that looks like mine,'" says Hersh.
Rather than migrating from legacy hardware or software, some insurers wrap legacy systems with modern technologies to isolate problem areas. However, that has not always proven effective, says Derrick Smith, director of IT for Assumption Life, a mutual life insurer based in Moncton, New Brunswick.
"This is simply a band-aid to a problem that will need to be addressed at some point down the road," says Smith.
While some argue that not all firms need to shift rapidly to new systems-a cost-benefit analysis must prove that now is the right moment, they maintain-experts agree it is prudent for most carriers to begin to move piecemeal. Though some carriers have succeeded in making a wholesale move to new systems, Hersh says some should begin by moving something that is not mission-critical, like a document management system, to get comfortable with modern systems.
P&C firms are migrating from legacy systems faster than are life, health and annuity carriers, observers say. Celent found that in 2006, 63% of L&H carriers' systems were legacy and predicted some 45% will be legacy in 2011, compared to 55% and 35%, respectively, for P&C carriers (see chart below).
HP's Wildemann agrees. The longer the contract is signed, the more data you have, the more you rely on that and the less flexible an insurance company really is," says Wildemann. P&C companies, with relatively short contracts with clients, can simply convert each policy as it renews onto the new system and then worry about historical data later. That option is rarely available to life, health and annuities firms, which must convert everything.
Several experts say they expect that technologies, including Web services, business rules engines (BREs) and business process management tools (BPMs), will grow briskly.
Assumption Life, which uses Whitehill's Web services, decided in 2003 to abandon the legacy environment, a journey expected to conclude by late this year or early next year.
"Overall the shift has gone very well," says Smith of Assumption Life. "But don't get me wrong: These types of changes do not come without a certain level of roadblocks."
Service-oriented architecture (SOA) also is expected to catch on among insurers. With SOA, insurers do not have to replace a legacy system but can instead work with the existing system, replacing the pieces they don't have to have while operating, says Wildemann of HP. She notes that SOA implementations are yielding ROIs as high as 200% for HP's insurance customers.
Along with SOA and Web services, virtualization is well-positioned to gain adherents, according to Smith. With virtualization, a single mainframe continues to run legacy applications as long as necessary while also running Linux or Unix applications on another virtual machine.
"Many insurance companies are starting to take advantage of the technology both to provide better benefits to their customers as well as run their data center in a more flexible manner so they can respond faster to new business opportunities and increase the efficiency of their data centers," says Raghu Raghuram, vice president of product & solutions marketing of VMware Inc., a Palo Alto, Calif.-based subsidiary of EMC Corp. He notes that virtualization can allow for server consolidation, which can save companies up to 70% of hardware costs and up to 50% of maintenance costs.
With packaged solutions gaining currency, proprietary technology is increasingly scarce. "The time when insurance companies build their own large legacy systems is certainly over," says Wildemann. "They still build enhancements and smaller systems or updates, but not the big systems."
That's because of their cost, difficulty of maintaining such complicated systems and CIOs' lack of time for such projects, says Wildemann. Today, insurers are more likely to customize a packaged system-no matter how far off it is from a carriers' detailed requirements-than to build and deploy a new system.
Daniel Joelson is a business writer based in Arlington, Va.
READY OR NOT, STAFFERS, HERE COMES CHANGE
Every company has at least a few employees who resist new technology. "We are facing people in the insurance industry who started their business in the old technology and still think in those kinds of terms," says Petra Wildemann, director of insurance for the EMEA financial services industry of the Palo Alto, Calif.-based technology solutions provider Hewlett-Packard Co. "We also are facing people who are not really being trained on new systems and on new technology."
One small carrier's IT management was keen on introducing XML Web service interfaces but rank-and-file staffers struggled to prevent the change because they lacked the right skills, according to Neil Betteridge, vice president of product management at Whitehill Technologies Inc., Moncton, New Brunswick.
The experience of that small carrier is far from unique, observers say. Regional carriers in smaller towns often face more problems finding staffers schooled in new technologies than do big insurers in metropolises.
However, many employees in many places see the need for change, says Chad Hersh, senior analyst for Boston-based research and consulting firm Celent LLC. "There is a pretty small number of people left out there today who really feel like their career will be best served as a COBOL programmer or mainframe system administrator," he says.
Sometimes management can jump-start reluctant employees, says Derrick Smith, director of IT for Assumption Life, a mutual life insurer based in Moncton, New Brunswick.
"Motivating staff to these changes and the value they will bring to the business down the road has helped Assumption staff to be excited about the overall process of change," Smith says.
VIRTUAL SOLUTION TO GROWING PAINS
Some carriers are taking a virtualization approach to maintaining and improving their legacy systems. Praetorian Financial, a provider of "non-commoditized" short and mid-tail specialty insurance and specialty lines, is one such company.
With headquarters in New York, Praetorian Financial has branch offices in Illinois, Tennessee, Kansas and Nebraska, and partners with specialty insurance general agents throughout the 50 states.
Facing significant growth, Praetorian's patchwork of servers and storage across multiple branch and agent offices was no longer keeping pace with business challenges. Praetorian also needed to increase protection of business and customer data, comply with strict state and federal regulations, and achieve the flexibility necessary to remain competitive.
So the insurer decided to centralize and virtualize its infrastructure and adopt an internal service-provider model for IT that could be more responsive and economical in meeting the diverse needs of the business.
That meant a complete overhaul of the company's legacy infrastructure and systems, which comprised dispersed storage and servers that were often managed by the individual business units with only local tape backup for data protection.
Working with storage systems provider EMC, Hopkinton, Mass., and Dell Computer Corp., Round Rock, Texas, Praetorian consolidated 52 physical servers into nine that now run approximately 90 virtual machines.
Praetorian uses VMware Infrastructure from VMware Inc., a Palo Alto, Calif.-based subsidiary of EMC Corp., to enable multiple instances of the Microsoft Windows 2003 operating system in VMware virtual machines to run on a single physical server.
These instances, which run Praetorian's Citrix, Microsoft Exchange, underwriting and claims, and other applications, are stored on an EMC CLARiiON storage area network.
For protection, EMC RepliStor software provides continuous replication of the virtual machines from Praetorian's production data center in New York to a remote site 30 miles away.
"We've made major strides in improving the availability of our critical applications," says Praetorian CIO Michael Anselmo. He also reports cost savings from improved speed of application recovery and says the company decreased tape backup windows from weeks to 24 hours.
In addition to reducing the number of servers, Praetorian increased utilization of each physical server from 8% to 10% to 80%.
"That's how we've been able to reduce our total cost of ownership by almost 50%," notes Abdur-Rasheed, Praetorian's vice president of infrastructure and operations. "Plus, we calculated an ROI of nearly 600%, which we achieved in just four months. Savings like these allow us to focus our IT staff on recovery management and other strategic initiatives that help build the business."
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