Is a fresh report of the mainframe’s demise once again greatly exaggerated?
The report, issued by Celent earlier this month asks whether mainframe-based core insurance systems are “on the road to oblivion.” It turns out though that the research and consulting firm’s beef is not so much with mainframe hardware as it is with aging core systems software. And when the report’s authors say ‘aging’, they really mean it.
“Insurers often talk about their primary system that was installed 20, 30, 40, and even close to 50 years ago,” the Celent report states. “In an industry, computers, where the speed of technology doubles every 18 months, the thought of a 50-year-old system is somewhat stunning.”
Perhaps, but also completely sensible. Tom Scales, co-author of Celent’s mainframe report and research director of its Americas life and health insurance practice, explains that insurers didn’t mean to let their systems get so old. It’s just that the software was paid for and running fine and there wasn’t a compelling reason to replace it. Their attention was focused instead on creating new products that could grow the business.
“It’s like a car you drive to work every day,” Scales says. “It’s just your commuting car, it’s not very exciting, but it runs, the maintenance is low and the gas mileage is good. Unless you really need one, why would you go out and buy a new car?”
Back to insurance, Scales notes that the cost of moving a core system from one hardware set up to another can be astronomical. And the return on investment, especially for insurance products that no longer attract new business, is essentially nil.
Mainframe hardware, meanwhile, shows no signs of going away. SHARE, the mainframe user group founded back in 1955, is still going strong with more than 20,000 members from nearly 2,000 organizations. SHARE likes to point out that nine of today’s 10 largest insurers run the latest mainframes from IBM, and nine out of the top 10 life and health insurers currently process their high-volume transactions on mainframes.
Similarly, in a survey of nearly 1,200 mainframe users worldwide—with over a third working in finance and insurance—more than 90 percent of the respondents indicated that they believe the mainframe will continue as a viable platform. In the same survey, conducted last year by BMC Software, only eight percent viewed the mainframe as no longer viable. Yet more than 60 percent said that they expect their own organizations’ mainframe computing power, as expressed in millions of instructions per second (MIPS), to increase over the next two years.
IBM, the last of the tech industry’s mainframe-hardware suppliers, shows no sign of quitting the market. This year, in fact, the company announced not one but two new mainframes: the z13 in January and the LinuxONE last month. The z13 in particular offers features that are proving particularly attractive to insurers, including the ability to process both high-volume transactions and big data analytics, says Deon Newman, IBM’s VP of marketing for z Systems.
“We see large insurers that, in some cases, are paying out $750 million to over $1 billion in payments that maybe shouldn’t be made,” Newman says. “The root cause of these incorrect payments is that insurers aren’t able to score, on the systems they currently run, with analytics. Many of them are scoring just 10 percent of the clients, so there are all these payments that shouldn’t be paid, but are paid.”
By allowing insurers to score virtually all of their claims, the z13 can lead to savings as high as 25 or 30 percent. “Do the math, and we’re talking maybe $250 million to $300 million of potential savings,” Newman says.
Demonstrating the potential for sizeable cost savings is also an effective way to get insurers to invest in new core system software, but there are others.
The potential to generate more revenue is a powerful inducement, says Celent’s Scales, such as when management wants to sell a new product that the older core systems simply can’t support. Another is the outsized risks associated with no longer being able to support a major policy category or set of products.
An alternative to wholesale systems replacement, according to Scales, are what he terms “cafeteria style” offerings, which permit insurers to pick and choose the specific functions they want to upgrade. A growing number of insurance-software vendors are taking this approach. One example is Fineos, which offers modern claims systems for life, accident and health insurance.
Of this sort of thing, “You’re going to be seeing a lot more,” Scales predicts. He believes insurance CIOs are increasingly willing to spend money to improve their technology environment. That leads him to believe the next five years will be “pretty explosive” as insurers start to roll out new technology. Most of it will go towards supporting new products and initiatives, Scales predicts, “because, let’s face it, insurance companies are going to invest in places that bring in new revenue.”
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