Many Tier 1 life and annuity insurers are in the market to purchase new policy administration systems. Problem is, there’s no clear consensus of what to buy.
“Our research shows that insurers are back in the market for systems after backing away during the financial crisis,” says Tom Scales, Research Director with Celent’s Insurance group and author of a new report, “The Tier 1 Dilemma: Is There a New Life/Annuity System for Us?”
The report points to “an almost complete lack of investment on the part of insurance companies in any new core systems” following the financial crisis of the late 2000s. This lack of spending resulted in a stagnant market for vendors, many of which reacted by minimizing investment in order to ride out the doldrums.
That lack of investment in new systems has resulted in many large insurers continuing to use production systems that are outmoded, inflexible, and unresponsive to the fast-evolving needs of today’s business, the report finds. Among the concerns associated with the insurance technology in production today are:
- Obsolete technology often no longer supported by the vendor
- Resources in short supply and costly
- Inflexible systems that cannot easily support today’s product combinations
- System changes that require programmers, not business people
- Problematic data quality
- Difficult to access data, hindering modern analytics
- Incorrect interfaces to support web and mobile devices
- Poor inter-system integrity, resulting in different calculations as well as data integrity issues
- Systems from vendors that have left the field or dropped support
- Senior management fails to fully understand the situation
- With other financial services competitors ahead in technology, insurers face a competitive risk
Today, with the economy showing signs of recovery and renewed strength, the report finds, “insurers are moving into buy mode and asking, What is worth buying?’”
For many large insurers, the dilemma comes down to what the report refers to as “the classic build vs. buy question.” In other words, Tier 1 insurers have the capital and skill set to create their own in-house system. In fact, many currently depend on homegrown business applications. As the report points out, the downside risks associated with a single-company custom-built policy administration system are high.
Among the various options for insurers are:
- Do nothing
- Continue to depend on an aging, heavily used system
- Choose a newer or refreshed system
- Make a major, potentially long-term leap to a new but unproven system
In conclusion, the report poses the question: does an insurer remain with the old and established, or go with the new and modern. Current newer systems tend to offer less rich functionality that the older systems. They also tend to have a smaller user base.
“The clear challenge for any insurer, but particularly a Tier 1 insurer with a broad product suite, is finding a system with new technology, broad features, expansive product support, and easy customization,” Scales writes. However, as he concludes in his state-of-the-market appraisal, “Fundamentally, such a system does not yet exist.”
