Carriers have continued to invest in core systems replacement throughout the recent economic downturn. While there has been less activity for life/health/annuity carriers than for their P&C counterparts, this is not entirely the result of the downturn.
It has long been the norm for P&C carriers to replace their core systems in greater numbers, since policies typically have a six or 12-month term. P&C carriers are able to roll these policies onto the new system as they renew. Life and annuity products, on the other hand, may stay on the books for decades.
WHY SYSTEMS REPLACEMENT?
Carriers with a stable or strong financial position look to take advantage of those weakened by the economic crisis. Familiar business drivers continue to push those carriers down the core systems replacement path: speed to market (introducing new products/product types and making product modifications); improvements to distributor and customer service; e-business (conducting business online); process transparency; more efficient, optimized and flexible internal workflow capabilities integrated throughout a carrier's new and existing systems; and data accessibility (including analytics, reporting and improved compliance).
WHERE CARRIERS GO WRONG
While buying a new system is a great start, life/health/annuity carriers seem to have made a habit of buying new core systems when existing ones can't handle a new product type (e.g., variable annuities, LTC, etc.) rather than as part of a broader systems replacement strategy.
Instead of using the replacement opportunity to remedy the underlying lack of flexibility in the current system(s), carriers typically buy a new system, put the new product(s) on it and use it as a "go forward" system. This type of initiative has often been justified as a strategic project that didn't require ROI justification, or whose ROI was calculated by looking at the opportunity cost of not offering the new product(s) versus the massive cost to customize the existing system.
However, many (if not most) life/health/annuity writers already have multiple policy/billing/claims solutions (often from M&A) prior to adding their latest one, and many of those have five, 10, 20 solutions or more. The net result of these types of purchases is that the new system may be (much) cheaper and easier to maintain, but it's merely a lesser additional cost than the alternative. The goal should be to reduce the total cost of ownership year after year across an entire systems portfolio. The only way to accomplish this is through consolidation and - in most cases - conversion, in order to reduce maintenance costs, licensing fees, ongoing integration, etc.
This, in turn, may mean a much longer payback period, but the long-term ROI is powerful and sustainable.
THE MOST BANG FOR YOUR CONSOLIDATION BUCK
Since nobody likes longer payback periods, especially in today's climate, how can a carrier minimize the cost and maximize the benefits of a consolidation project? The key is to retire as many systems as possible, as quickly as possible, where sensible. Each existing system has one or more ongoing costs associated with it: vendor maintenance, in-house maintenance, development staff, hardware, third-party software, infrastructure charges, etc. For any system, these ongoing costs should be determined, and then a simple cost-benefit analysis can be performed.
If the cost of converting off of a given system can be recouped quickly by eliminating the ongoing costs of that system, it is likely a good candidate for retirement, since you'll be maintaining the new system either way. This implies that minimizing conversion costs and maximizing conversion speed (to incur benefits sooner) is key, which is in fact true.
CONVERSION: THE MISUNDERSTOOD EXPENSE
Conversion has quite a bad reputation for being expensive, difficult, never-ending and worse. When done in-house, these things are generally true. Worse still, carriers typically take resources critical to implementing a new system and stick them on conversion tasks instead. This is a mistake.
There are three key reasons NOT to do conversion on your own:
1. Though typically the biggest expense in a consolidation project, it leverages skills you will never re-use (assuming you don't choose your new system poorly and have to start over with a new system).
2. You don't have automated tools to help you.
3. You probably don't have access to hordes of offshore resources, or for that matter, just hordes of resources.
WHY CONSIDER A THIRD PARTY?
As noted, carrier personnel typically never use the same conversion skills again. A third party, on the other hand, has experience with conversion - maybe even with your system(s) - and will use the skills again, meaning they can do it more time and cost efficiently (and potentially better). The faster you can go, in turn, the sooner you achieve benefits, generally speaking.
A competent third-party vendor will have tools to map data, cleanse data, test data, etc., and may even have pre-built adapters for your system(s). They also may have access to trained offshore resources, and perhaps even in large numbers; if there was ever work well-suited to offshoring, conversion is it.
There are many benefits to consolidating core systems rather than simply buying a new system and adding it to the mix.
However, a fast and cost-efficient conversion process is one of the key factors to realizing a strong ROI for a consolidation project, and cannot be overlooked despite what will likely be a daunting price tag.
While you may not need to consolidate and convert every single system, leveraging a third party's tools, capabilities and bench strength may make it much more realistic to retire more systems than you thought possible and jumpstart the ROI for a consolidation project.
Chad Hersh is a principal in the insurance practice at New York-based Novarica. He can be contacted at chershnovarica.com.
Find more about policy administration systems by searching "Core System Conundrum" at www.insurancenetworking.com.
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