Insurers have long been accused of using 20th century technology and processes to respond to 21st century problems. I don’t buy that. Insurers across all lines of business are forging ahead, albeit slower than other financial services industries, in their efforts to keep their technologies and processes current. And thanks to pressure from their boards to reduce costs and increase efficiencies as well as pressure from competitors that are already putting systems in place that can provide the ultimate customer experience, insurers are well aware that core modernization is critical.
But there are still some holdouts.
Sales of core systems in the life/health/annuities sectors have continued to lag the pace of their property/casualty counterparts, but the level of interest has started to grow, notes New York-based Novarica.
Novarica notes that the pattern of investment profiles for L/H/A carriers is following a similar path to actions taken by P&C carriers at "a somewhat delayed pace, undoubtedly a consequence of the relative risks associated with implementation and the challenges related to in-force block conversions.”
The risks Novarica points to are real, but so are those associated with the onslaught of M&A activities both in the insurer and solution provider space. New York-based Mercer reports global M&A activity is up 32%, with few signs that it is abating any time soon. One mid-size life insurer in the middle of a joint venture told me recently that his organization’s evaluation of a core systems upgrade is on hold as his company considers what he described as the “great unknown. Among his concerns are financial risks tied to IT staff turnover, loss of productivity, issues with service level agreements and service disruption. “Even if IT staff is untouched by the merger, there are still strategic risks to consider inherent with combining cultures, IT and business objectives,” he said. Finally, operational risks stand out, as post-merger goals typically include the pressure to innovate while executing on the organizations’ day-to-day requirements.
Are risk-management-related delays considered a legitimate alternative to the risks associated with doing nothing?
I was struck by an article this week in Forbes by Kalev Leetaru, “System Failure: What I've Learned as a Data Scientist in Washington,” in which the author describes the government’s excuses for accepting legacy system status quo:
“In a meeting with the data leads of another data-rich government agency, I was told they had no need to be innovative because government has no competition, people simply have to accept the services they provide as-is. Their job was simply to keep the lights on until the next administration arrives. One put it quite simply: “As a senior manager if I sit quietly and keep the legacy systems running as-is, I’ll retire with a nice pension. If I go and hire some innovative people to replace those systems with something modern and something goes wrong, I’ll get fired and publicly shamed. If it works and people are happy, my boss will take credit. Show me where the incentive is for me to do anything creative.”
The United States government may not have competitors, but insurers certainly do. Those insurers that embrace the risk management issues inherent in modernizing core systems—regardless of where they originate--instinctively know that updated technology is essential to their ability to compete effectively in an increasingly complex and dynamic market.
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