To find the wellspring of the insurance industry's reputation for being technologically backward, one need only follow the glow of green screens to the heart of carriers' data centers where "Big Iron" still holds sway.To get a countervailing view, one could visit Erie, Pa., where Erie Family Life Insurance Co., a member of Erie Insurance Group, is undergoing a platform consolidation of its policy administration systems.
In May, the company signed a multi-year policy administration contract with TAG, a subsidiary of Plano, Texas-based Perot Systems, to consolidate Erie Family Life's four platforms to a single one.
The company is also reducing the number of servers it uses, says Jeff Stempora, senior vice president and division officer IT, Erie Insurance Group, "We're toward the end of it at this point and really fine tuning," he says. "We started out with 500 servers, and we've been able to consolidate that down to 400."
Stempora says virtualization software played a key role in the consolidation. "The great thing about virtualization products is you get your server utilization to be very high," he says. "Most people only realize about an 18% utilization, a lot of the box goes to waste. So when you consolidate, you get utilization up to 90%, close to 100%.
Is the experience of a carrier such as Erie indicative of the industry as a whole?
"The majority of carriers still do their own thing," says David Pedersen, senior vice president with Hartford, Conn.-based applications provider, Insurity. "There is still a much higher spend on internal build and maintenance than buying outsourced solutions."
The average age for carriers' core systems hovers around 20 years, notes Marcus Ryu, vice president strategy and new products for San Mateo, Calif.-based Guidewire Software. "This doesn't mean they don't have newer systems," Ryu says. "But the core transactional systems, the 'mothership' that ultimately holds the mission-critical data tend to be COBOL-based mainframes."
It is not only the systems themselves that are showing their age. The industry is facing a demographic time bomb as the people who understand how the systems work approach retirement en masse. "This is a major point of enterprise risk because once they leave, who will know how the systems work," Ryu says.
COSTS MOUNT, FEARS LINGER
Another unfortunate legacy of these legacy systems is cost. "Some of these old systems cost an arm-and-a-leg to run," says Chad Hersh, senior analyst for the insurance practice of Boston-based Celent LLC. "You have to run them on outdated equipment that you can't get parts for. You have to maintain code that nobody graduating college in the last 30 years has learned."
So, why are some carriers seemingly sticking with costly systems teetering on the brink of obsolescence and taking their time in consolidating? One reason is risk. Policy administration systems are the core parts of a carrier's business. If consolidation doesn't go well, it can put the whole business at risk.
"Many carriers out there don't have an appetite for risk," Pedersen says. "They continue to inch along with what they have. When you look at policy administration systems, you can't afford to get it wrong. You're jumping across a river, and if you don't jump far enough, you're in trouble."
Additionally, many carriers, conscious of big IT projects that promised big things and delivered considerably less, have all the more reason for caution.
SEPARATE LINES, CONTINENTS
Risks notwithstanding, the pace of platform consolidation is picking up, especially for P&C insurers, Hersh says. "On the P&C side, it is full-tilt now. There's a widespread attempt not only to replace systems but to consolidate."
The nature of P&C policies, which usually renew annually or semi-annually, makes consolidating platforms simpler for a P&C insurer than for a life insurer.
"Converting the data is much less of a challenge. If they're going to convert data, at most it's going to be a few years of historical data for the purposes of adjudicating a claim," Hersh says. "A life insurer, on the other hand, has to move decades worth of data, some of which nobody has looked at in years. So they really don't know what rules comprise that policy. What are the rates that were used? What types of trailing commissions? So it's a much more complicated initiative for them, that's why you see a lot less of it. That being said, the value is for a lot higher a life insurer."
A recent survey by Bermuda-based Accenture confirms that life insurers, too, see the value in platform consolidation. The survey of carriers in North America, Europe and Asia found 63% have consolidated platforms or were in the process of doing so. Of those that had consolidated, the primary benefits achieved were reduced business operation costs, more automation of manual functions and elimination of obsolete technologies. The survey also found that European and Asian carriers were consolidating policy administration systems at a faster rate than their North American counterparts.
MERGERS AND REGULATIONS
Pierre-Louis Seguin, North America managing director of Accenture's life insurance solutions group, says that a decade of mergers and acquisitions among European carriers has stoked a need for platform consolidation. In the merger and acquisition of a life insurance company, he notes, IT consolidation is 70% to 90% of the economies of scale.
Today, Seguin says two types of carriers primarily populate the European landscape. The first group comprises big carriers that consolidated as they merged with other companies and, now, possess a maximum of five platforms. The second group also went through mergers and acquisitions but didn't consolidate and now carry 10 to 20 platforms. As a result, those companies are now struggling with cost.
Yet, reduced operating costs are but one of the benefits of platform consolidation. Carriers with consolidated platforms also enjoy a quicker time to market, Seguin notes. "One of the barriers to creating new products is the number of systems you have to touch to get the project running," he says. "It's only when you consolidate on a single platform that you are able to launch new products more proactively."
Others contend that the reason U.S. insurers are slower to embrace platform consolidation is due to the vastly different regulatory environment in the United States. The highly regulated, federated environment in the United States, with a different insurance commissioner for every state, contrasts sharply with conditions in member states of the European Union.
OVER THERE, OVER HERE
Carriers in markets such as Germany and the U.K., not hindered by state-by-state regulatory requirements, can access larger populations of customers and achieve economies of scale.
"I always tell people that if you want to see where the insurance marketplace is going and how competitive it's going to be, go to England," says Brian Cohen, president and CEO of Westminster, Colo.-based Clear Technology Inc. "It's one jurisdiction, and you have people competing in a much more commoditized environment than here."
What's more, bigger carriers beget bigger IT budgets and investments in new technologies.
"It has given them the ability in some instances to accelerate Web-enabled solutions simply because they can spread the cost over a larger group and do it faster," says Doug Roller, CEO of Bolivar, Mo.-based Duck Creek Technologies. "So what you find is countries such as Germany and those in the U.K. have gone far ahead of us in their ability to Web-enable and go consumer direct with Web technologies."
This is not say the United States is devoid of technological innovation. To the contrary, Roller notes, the maze of compliance issues facing carriers in the United States is in itself a spur for innovation. "Some pretty sophisticated technologies are needed just to keep the U.S. market going to begin with," he says.
In a similar vein, Guidewire's Ryu notes that the software being used overseas is primarily made by American companies, and the seeming lag in consolidation may be more a by-product of the greater legacy baggage here than elsewhere.
NEW RULES, DIFFERENT SCHOOLS
One factor that has spurred consolidation both here and abroad is the increasing prominence of rules-based technology. "The new rules-based admin systems are finally getting to the point where they can scale at levels worthy of consolidation," Celent's Hersh says, noting that older platforms are being revamped with SOA and greater rules capability for things such as underwriting. "So there's finally something to look at, to consolidate to. For the longest time there wasn't anything worthy of getting rid of what you had, as long as it worked. Now there are actual reasons to buy."
Another important development is maturation of development standards such as XML and Java.
"It's a healthy standardization and consolidation. There are fewer philosophical discussions about what the technology base of a new system will be. It's going to be Web-based," Ryu says. "The basic questions are answered."
Although the underlying technological assumptions may be answered, competing philosophies exist as to how to undertake a platform consolidation.
The first school of thought is the "rip and replace" model, in which all legacy systems are jettisoned. Proponents of this philosophy say maintaining any legacy systems just pushes the problem. "To transform, you need a disruptive event; consolidation is that disruptive event, and it's difficult to do on a business-as-usual basis," Seguin says.
"The successful consolidations are ones where you migrate to a platform that has a rules engine at the center of the architecture," Seguin continues. "That's where you can leverage your agility to integrate several different products at very low cost. There's no gain in consolidating one-to-one, or apple-to-apple."
The second school of thought advocates a more gradual approach, and uses a new layer of Web-based technology to overlay and leverage legacy systems. This approach, proponents say, enables a carrier to break up legacy solutions into smaller components and leverage back end parts longer. "You don't have to completely shut down your mainframe," Pedersen says. "You can work out a three- to five-year plan to move it over component by component."
Regardless of the philosophy a carrier employs, another consideration is whether to employ business process outsourcing. Seguin contends that the streamlining of processes is best done by a third party rather than internally. "Streamlining processes won't happen with the same system and same people," he says. "It's a major trend, not because it is cost driven, but because it's the only way to transform and simplify your operations and consolidate several platforms to a single platform."
Despite the many benefits of consolidation, the sheer amount of legacy baggage held by carriers ensure it should be many years before the last green screen fades to black.
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