In 2007, Capitol Indemnity Corp. (CIC) began to prepare to enter a new business-commercial automobile insurance-and expand its worker's compensation business. A national P&C firm that writes business on both a standard line and specialty lines basis, admitted and non-admitted, CIC distributes products through an extensive network of independent agents, general agents, brokers and program managers. CIC is not only a complex organization, but also requires the infrastructure to support a sudden move by its parent company, Alleghany Corp., which is constantly on the prowl for merger and acquisition targets, says John Black, director of staff services for the carrier.
After taking a long, hard look at its legacy infrastructure, the Middleton, Wis.-based firm decided it had to simplify its internal structure so it could be more flexible and fleet-footed. Following an analysis of some 99 different software vendors, it selected the Wynsure platform last January from the Eagan, Minn.-based technology provider, Wyde Corp. Since then, it has been full-steam ahead. By March, CIC had already implemented a new producer management system and customer relationship management system. It expects to have brought up a whole new claims system by the end of November, and all of its remaining lines by early 2009. "Some analysts have told us 'you are crazy: you will never get it done,'" says Black. "But the marketplace has changed, and there really are rapid development methodologies now available. You can do some pretty big IT projects much more quickly today than you could five or 10 years ago."
Bogged down by legions of legacy hardware and software systems, many insurers are grappling with whether to embrace new technology or to cling to time-tested systems. While some carriers that have made full-scale legacy replacements are enjoying greater functionality, faster service and expanded online services, the jury is out as to how scalable and cost-effective such solutions are. Further, daunted by the cost of shelving their mainframes and legacy systems, and weary of resistance from both top business and IT officers to make a dramatic cultural and technological shift, many insurers choose instead to extend systems that have proven, over the years, their ability to expand with business goals.
THE CASE FOR CHANGE
CIC already has reaped rich benefits from its transformation. Wynsure's object-oriented framework has given the carrier newfound flexibility. Due to the highly configurable system, the carrier is reducing its cost of ownership because its business officers-rather than contracted developers-can maintain it. This also has helped it to rapidly conform to industry standards and regulations, as it moves to further protect social security numbers, credit scores and other confidential information. "We are beset with a good deal of regulatory requirements and changing regulations, and the ability to modify the system quickly is a godsend," says Black, noting that CIC followed ACORD standards throughout the design of the application.
Further, the company is better positioned to offer services online, and expects to take new products to market in only 30 to 60 days, down from three to six months, he says. Now, CIC is positioned to "play offense," aggressively launching new products or entering new segments, rather than reacting to business realities.
Driven by the demand to better serve customers, other carriers also are saying goodbye to those legacy systems. Three years ago, Allstate Insurance Co. began replacing its legacy claims infrastructure in a strategy termed "Next Generation Claims Systems" in order to be more responsive to customer and claims adjuster needs. The Northbrook, Ill.-based carrier finished deploying its property lines onto the new claims system early last year, and expects to have the majority of its other business lines, such as automobile and casualty, completed by year's end.
Relying primarily on an in-house, custom-development approach, the company integrated many disparate applications, and now has a single Web-based system for all claims work, giving adjusters access to everything they need anywhere via a mere Internet browser. Consequently, they can get a payment out in the mail immediately, and better serve their customers. "Many legacy rules are geared toward some of the internals of the company, as opposed to the way that you want to handle the customer," explains Mike Jackowski, VP of claim technology services for Allstate.
While modernizing, Allstate is leveraging the assets it has so it can drive new business processes without having to reinvent the wheel. Like other carriers, Allstate has embraced service-oriented architecture (SOA), and reuses the capabilities and services already built within its claims system, enabling it to bring solutions to market with much greater speed. (SOA's popularity has soared among carriers, largely triggered by legacy extension, though results in terms of goals and ROI are mixed at best, says David Inbar, director of marketing and international alliances for integration products of Pervasive Software Inc., a technology provider based in Austin, Texas.)
Dispelling naysayers, Allstate's new claims technology also has proven capable of scaling to its overall user base. Given that many carriers have run the risk of failing to scale solutions on modern architecture, Allstate spends "a lot of time and money making sure that we have redundancy in place across multiple data centers," says Jackowski. "And we are making an investment in the availability of our systems." Allstate has benefited from its claims system implementation in other ways. "We are getting more functionality on the new technology at a much lower run-rated cost. So we are seeing the benefits on the IT side and on the infrastructure side just by running things on Windows platforms, Unix platforms, etc."
HYBRID SOLUTION
Some insurance firms are choosing not to pledge full allegiance to their legacy systems, nor to modern systems. For instance, Germany's Basler Insurance sees merit in replacing its outdated software, but not its older hardware. "For big data volumes and for security reasons we are happy to stay on the mainframe system," says Dirk Stoehr, an actuary and the project manager in Basler's drive to replace its life insurance legacy systems with new ones.
But the complexity of the firm's legacy software systems, which leads to major maintenance work, required a overhaul. "You have too many breaks between the systems and too many interfaces," explains Stoehr. "And it becomes difficult to adopt new products to bring onto these systems." Additionally, some of the software Basler used, such as database engines or environments, could no longer be supported. After implementing an actuarial engine from FJA-US Inc., a New York City-based provider of life and health policy administration systems, Basler cut the number of employees (from 100 to 80) tasked with maintaining the policies of its insureds.
The engine calculates reserves and premiums. "Our old life insurance system just stored data, and that's it. It didn't capture anything, really," laments Stoehr. "So all of the calculations had to come beforehand and afterwards." And while Basler previously used four different systems for making calculations (for its various distribution channels), it now relies on just the one system for calculations. By 2011, Basler plans to have fully replaced all of its life insurance software.
MOVING PARTS PIECEMEAL
Many carriers look first at modernizing just those pieces that are holding them back, and elect to migrate customer-facing activities first. For instance, a large insurance customer of GT Software, an Atlanta, Ga.-based firm helping carriers to leverage their mainframes, re-implemented a portal for their agents, according to Rob Morris, chief strategy officer of the supplier. The carrier Web-enabled some of its existing mainframe systems, and provided SQL-based data access to centralize and optimize how its agents interact with the system. The carrier also integrated a document management system so that it would have scanned images of all policy data for customers (and it centralized this).
The nature of the carrier also plays a significant role in its thought process. Life insurance firms typically extend their legacy systems more. "If you are a life writer and the policies have a 100-year lifespan ... you have to keep that system alive or recreate it in the new platform," says Craig Weber, SVP of the insurance group of Celent, a Boston-based research and consulting firm.
Larger firms with more systems and greater complexity also might be more reluctant to part with their legacy systems. "For tier-1 carriers with millions of policies and dozens of lines, the issues are just multiplied several times beyond what the mid-tier carriers are," says Weber.
Ultimately, what outdated systems one should dump is largely a matter of cost and weighing risk versus reward. Carriers need to consider both short- and long-term costs, and look at strategic imperatives such as improving service or improving speed to market, notes Weber. Full-scale legacy system replacements can take years, so it is important to carefully plan the stages of migration.
IF IT AIN'T BROKE
Indeed, there have been many delayed and failed modernization projects for cost reasons in the industry and, for many insurers, full-legacy replacement simply is not economically defensible. "It is not that insurers want to hold onto legacy, but in many cases they have to because of the complexity of the systems and the way they have been built in the industry," says Jackowski. "Sometimes there is not a clean path to a full system replacement or to migrate off quickly."
Modern systems' ability to scale also is hotly contested. Wyde Corp., for instance, has tested some 17 million to 20 million policies in production without any noticeable degradation in its Wynsure system, and one of its users has 5 million policies, says Steve Franklin, VP of U.S. operations for the supplier. However, many carriers find solace in the proven capacities of legacy systems. "The old systems tend to scale better than the new ones," says Morris of GT Software. He explains that it is tricky to try to replace systems that have been running for 20 years, and that have handled "tons of data," and are enormously reliable. Some analysts agree. "Modern systems just haven't proven they can scale yet, though they probably can," says Weber. "We don't have examples out there of tens of millions of policies on a single instance of the modern platform."
Nor can top executives at carriers expect to be able to yield strong results if they push new systems onto skeptical businesses and IT teams. "If a senior manager or a senior management team is not willing to change the culture of their company, then investment in a modern platform could be effectively wasted," says Weber.
And some take issue with the fact that legacy systems will not be as effective as modern systems in delivering certain services. Carriers can provide offerings via the Internet just as effectively using legacy systems as newer ones, says Morris, adding: "Anybody who tells you otherwise is blowing smoke."
ECONOMIC CRIMP IN PLANS
The financial crises affecting carriers in the United States, Europe and elsewhere may put a wrench in the plans of some to make the costly legacy transformations they had planned. Carriers would need to spend lots of money upfront to implement new systems and migrate the data from the old system to the new at a time when slashing expenses may be the necessary medicine.
"We are hearing a lot of our customers say that IT spending is going to be pretty flat for 2009, and some companies are saying they are going to actually have to cut spending," says Kimberly Harris-Ferrante, VP and analyst with the insurance industry advisory service of the Stamford, Conn.-headquartered research firm Gartner Inc. "It's going to be difficult to do a legacy system replacement. And that is going to force [insurers'] hands to do more legacy modernization/legacy maintenance projects versus large-scale system replacement."
Economizing insurers also may be loath to emulate many of their peers that have introduced new systems without retiring old ones. With significant redundancy and cost concerns, Harris-Ferrante argues that insurers should instead consolidate systems. "Companies should start asking as they try to cut operations: How can I get rid of some of the redundancies?" she says. "It could be a great cost savings, help us through this time of economic crisis, and find some really good cost savings."
JOINT OWNERSHIP OF MODERNIZATION
It is vital for carriers aiming to modernize systems to first secure buy-in from both business and technological officers. Ensuring there is alignment between business and IT officers can take pressure off the latter and prevent myopic thinking. Many CIOs and CTOs have two- to three-year goals or benchmarks they are forced to try to meet, but when making major systems transformations, top executives may need many more years to achieve concrete, far-reaching results.
Allstate Insurance Co.'s technology employees have adapted to new technologies well. "There is a perception out there that if you were a legacy developer working only on the mainframe, then it was difficult to make the leap into a new contemporary world with .NET or J2EE," says Mike Jackowski, VP of claim technology services for Northbrook, Ill.-based Allstate. "But we have plenty of mainframe developers now who are developers in a .NET world and who have made that transition."
While insurers with modernization strategies may find it easier to recruit IT staffers-who often prefer modern computer languages-insurers certainly can still find plenty of people to work with their legacy systems. "Reports of the death of the COBOL programmer are much exaggerated," Weber says.
When modernization begins, skeptical business officers can be swayed by strong results. Last year, Basler Insurance, Germany, launched a guaranteed minimum accumulation benefit product with the new system in "times that were never to be thought of with the old system," says Dirk Stoehr, an actuary and the project manager for Basler Insurance. "Those are strong arguments that convince senior management to actually go that way."
Find more about legacy systems by searching "Are Insurers Outgrowing Policy Admin Basics?" at www.insurancenetworking.com.
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