Given all that is written and said at conferences about enterprise modernization, one may be forgiven for thinking that carriers' core insurance systems are riding massive waves of technological change, moving from creaky legacy systems into the standardized, open era of the Web.
But all it takes is a look at the raw industry numbers to quickly recognize that the industry has a long, long way to go. I recently had the opportunity to chat with Chad Hersh, analyst with Novarica, about the state of policy administration systems. He graphically laid out how much work actually does lay ahead of the industry.
At this time, he explained, only about 10 to 20 percent of the functioning systems within P&C and life carriers can be considered “modern.” Consider the fact that “there are probably more than 3,000 to 5,000 policy administration systems in use today”—in fact, many carriers have multiple policy admin systems. Then, based on data that shows about 100 new policy admin systems are sold each year, do some math. “That means there are probably no more than 300 to 500 modern systems in production today,” Chad says. Even the existing vendor base probably could only support a “max of 50 upgrades,” he added.
The entire article on policy admin systems, with Chad's comments, can be found in the latest issue of INN.
Still, if you think 100 per year is a glacial pace of technology turnover, consider the even more sluggish pace of change at life and annuity carriers. Essentially, life insurers have no compelling business reason to move off their older policy admin platform, Chad says. The difference being that P&C carriers renew policies every year, creating regular opportunities to move policies to new platforms. On the life side, there are policies that can be more than 50 years old, he says. “They never have to renew, so the expense of conversion is just pure expense. On the life side, it's been incredibly hard to justify the conversions.”
Thus, we have a classic example of business necessity, or lack thereof, driving the rate of technology change, which is how it should be, actually—what's the point of making a massive migration to a system that the business doesn’t really feel it need? Some of the worst and most costly technology mistakes of the past two decades occurred because shiny new technology was brought in before the business case could be thoroughly justified.
Nevertheless, there are emerging business cases that can be made for policy administration. Number one is the flexibility the newer systems provide to businesspeople, allowing them to make changes to rules engines – without having to tear apart their infrastructure in the process. “Historically, if you needed to make a change to a packaged solution, you and the vendor had needed to go into the source code of the solution and make that change, and regression-test the system to make sure you didn’t break anything else,” Chad said. “That requires either owning the rights to the source code, or having the vendor make changes for you.” In other words, have your checkbook in hand and ready when you want to make a change.
Today's technology, on the other hand, makes it easier for end-users to go in and make changes to configurations and rules. That means greater agility and faster time to market. This is a choice that needs to be communicated to the business side.
Joe McKendrick is an author, consultant, blogger and frequent INN contributor specializing in information technology.
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