Listening to an insurance executive talk about replacing an old mainframe-based administration system is a lot like listening to a farmer talk about getting rid of an old tractor.It still pulls a heavy load, but competing farms-especially the larger ones-are bringing in faster models with advanced features that enable them to produce higher yields more efficiently. But these new tractors cost a lot of money and change the way work is done on the farm. How can a farmer afford the new equipment, learn how to use it, modify the work processes, and get all the crops sown and harvested on nature's strict schedule?

No doubt about it: Replacing an old "work horse" is expensive, time-consuming-and risky-for a farmer or an insurance executive. So it's no wonder they're sometimes reluctant to put their old ones out to pasture.

Over the past year, however, insurance carriers are getting more comfortable moving forward in replacing their aging legacy systems, according to industry sources. That's because in addition to a couple years of good earning-the growing use of component-based applications, Web services and service-oriented architecture (SOA) are making it much easier to finally make the switch.

"Four or five years ago, the No. 1 priority of CIOs was the replacement of legacy systems. Then, everybody pulled back after the dot-com bubble burst and 9/11," says Bill Jenkins, CIO and vice president of information systems at Penn National Insurance Group, a $450-million regional personal and commercial P&C insurer based in Harrisburg, Pa.

"Now, they've had some successful years economically and they're getting serious about replacing them again," he says. "So, we had this interim step where carriers said, 'We'll keep our legacy systems and Web-enable them. Now, I'm seeing, from talking with other CIOs, that they are getting very serious about replacing the legacy systems they have."

The spectrum of carriers' progress varies widely, but only a tiny percentage have no major replacements complete, underway or planned, says Chad Hersh, senior analyst at Celent LLC, a Boston-based research and advisory firm for the financial services industry.

In part, that's because business is in the driver's seat, he says. "The days of IT wielding the power on IT projects is disappearing. And when the business starts to have the final say on IT projects, they get more interested in ways they can be more successful and cost-effective-so they start to notice things like open standards."

Developments such as ACORD XML and Web services have made it possible for insurers to take on large IT projects that involve integration at a much lower cost, Hersh notes. "So insurers can replace component by component quickly."

SOA Makes It Easier

Service-oriented architectures have definitely made it easier for carriers to contemplate large legacy replacement projects, says Chris Steward, CIO of Arbella Insurance Group, a $650-million regional personal and commercial property/casualty insurer based in Quincy, Mass.

In April 2004, Arbella made the decision to replace its multiple policy, billing and management information systems with best-of-breed components based on SOA. Beginning development early last year, the company is now providing Web-based functionality to 550 independent agencies, in an initiative its calls e-SUITE, which stands for "electronic servicing and underwriting insurance technology environment."

"We've been able to devise a system delivery schedule in phases that brings meaningful functionality to our agents early in the game, while simultaneously building and deploying components of the end-state architecture," says Steward. Describing the process as similar to putting together a big jigsaw puzzle, Steward says this phased approach reduces the risks associated with a "big bang" implementation.

At press time, Arbella was approximately one-third of the way through the project's multi-year time line, having delivered seamless sign-on and access to policy, billing and claims information to its agents directly from their agency management systems.

The company also launched the Arbella Reference Center on its Web site, where agents can find information about the company, such as coverages and the company's underwriting guidelines, as well as third-party data, such as distance from the coast and property valuations.

Arbella agents also receive financial reports online, and soon will have full transactional capability with Arbella directly through their agency management systems.

Observing the industry overall, Steward predicts legacy transactional systems will be replaced or completely overhauled to be used as Web applications. "These new transactional systems will be flexible, so they can accommodate changing workflows, business rules, products, markets and price points," he says.

In fact, accommodating changing business needs is the primary driver for legacy replacements-even above high legacy maintenance costs, according to industry sources.

"I'd like to say that somebody [in an insurance company] at some point looks at the legacy system and says, 'Man, this is costing us a lot of money so we have to replace it. But that's pretty rare," says Celent's Hersh. "Realistically it's when the old system prevents them from embarking on new initiatives that they start to think seriously about replacement."

Arbella's Steward agrees. Although the eventual reduction in IT expenses was a factor in the company's legacy replacement decision, the primary driver was the company's independent agents. Specifically, they were demanding easier ways of doing business with Arbella.

"Many of our independent agents perceived us as lagging behind other insurance companies in technology," says Steward. "There is a lot of competition, especially in commercial lines, from national carriers that have bigger technology budgets than we do, which could potentially result in adverse selection by our agents."

For instance, Arbella realized it had to eliminate double data entry for its agents-once in their agency management systems and once to the carrier's Web site. "The agents told us they absolutely do not want to do that," says Steward. "It is a high cost for them. So we see seamless systems integration with agency management systems as the solution."

Arbella's decision was also influenced by the fact that implementing a new administration system could eliminate many of the manual workarounds that had developed over time within its own operations, as well as make it easier for the company to respond to market changes more quickly with fewer IT resources.

Penn National's Jenkins has had similar experiences with old systems preventing the business from competing effectively.

"I've lived through two situations where I had to look at replacing legacy systems-and there are a number of drivers-but the primary driver is the business driver," he says. "When the legacy systems you are using today do not allow your organization to move forward-when they become inhibitors-that is the main driver for replacing them-on top of the expense to maintain them."

For example, Philadelphia-based General Accident Insurance, where Jenkins was CIO in the 1990s, decided to replace 26 legacy systems because the company couldn't make changes quickly enough to bring new products to the market. "We had an old product, and we were losing market share," says Jenkins.

Lowering IT Maintenance Costs

The new system not only enabled General Accident-which is now Boston-based OneBeacon Insurance-to make product changes more quickly, it also enabled better integration and easier access to data, he says. In addition, the company lowered its IT maintenance costs from 80% of the IT budget to approximately 40%.

At Penn National, Jenkins is overseeing another legacy replacement. At press time, the carrier was establishing specifications for a new system and deciding whether to build or buy new core functionality. Either way, Penn National-like many other carriers-will implement component-based functionality on a service-oriented architecture.

"We want to take the components and plug them into best-of-breed solutions, such as ratings engines," says Jenkins. "And whatever we choose has to be scalable, because, like other companies, we look at acquisitions as a viable way to grow."

In addition, the carrier expects to reduce its IT maintenance costs, which currently are between 80% and 85% of its IT budget. "Our legacy systems just cost too much to maintain," says Jenkins. "That saps our resources-not only people, but dollars, which leaves very little discretionary money to do the things we need to do to move the organization forward to compete."

Indeed, although reducing maintenance costs has not been at the top of the list when insurers make the case for legacy replacement, it is a considerable benefit, sources say. "We've seen carriers spend $1 million a month to maintain a single mainframe," says Celent's Hersh.

The Good News

The good news, according to Hersh: Insurers are using Web services-even if they have not replaced legacy systems as quickly as in other industries.

"Web services is a step forward. It might be yet another technology that buys the industry enough time to do the right thing a little later."

And, what is the right thing? With a handful of exceptions, getting rid of legacy systems, Hersh says. Exceptions include closed books of business that are on a system that isn't costing a lot to maintain, he says.

"But, by and large, getting rid of legacy systems gets rid of a lot of expense and a lot of problems-no matter how expensive it is to get off that system. The industry still doesn't quite understand that, but it's getting there."

Advice from the Front

Planning a legacy replacement? Don't forget this advice from two CIOs who are now in the process.

* Gain true executive commitment. "And I mean the words 'true' and 'commitment,'" says Chris Steward, CIO of Arbella Insurance Group, Quincy, Mass. Massive replacement projects are lengthy and costly, and there will be bumps in the road, he says. "You'll need business executive backing to get over those bumps."

* Enlist a good project manager. Bill Jenkins, CIO and vice president of information systems at Penn National Insurance Group, says he uses two project managers: one external and one internal. The external manager makes sure the project meets its specifications and time schedule, while the internal manager makes sure the right people are on the team, reports on progress and navigates the political waters.

* Deliver meaningful functionality in "chunks." Make each chunk build incrementally toward the overall end solution, says Arbella's Steward. "It's probably slightly more costly to do it this way, but it builds confidence and lowers overall risk."

* Don't farm out management of any major piece of the project. "This is your company's future," says Steward. "People who have the best interests of your company at heart need to manage it."

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