Three approaches to core modernization in insurance
The insurance industry increasingly relies on digital technology to develop products, assess claims, and—most importantly—provide customers with a satisfying experience. In today’s world, IT has become an integral production factor, and the booming insurtech wave has given companies a glimpse of what cutting-edge digital technologies can offer. As digitalization accelerates and encompasses an ever-wider share of the insurance value chain, an improvement on the front end alone is not enough. Achieving the full benefits of digitalization requires real-time data access as well as agile features development in core systems.
To enable this vision, most insurers must substantially overhaul their core systems and, in conjunction, transform their overall business model. Deciding which modernization approach to take depends on a range of considerations, including the state and stability of the legacy system, level of an insurer’s ambition, availability of a mature standard solution for the market, effectiveness of IT capabilities, and amount of available resources.
Modernizing the legacy platform
Insurers with legacy IT platforms that are functionally adequate but technologically near the end of their lives have limited options to modernize. Some consider “refactoring,” which involves altering a system’s internal structure without modifying its functionality. This process allows the insurer to upgrade to modern technology while retaining features tailored to its specific business needs.
Refactoring has two drawbacks. First, a 1:1 code migration can result in a missed opportunity for modern system integration and data architecture that supports digital requirements. Second, some insurers have seen costs for this approach grow substantially higher than anticipated. This is partly because the code transversion often cannot be automated as initially planned and partly because the refactored code structurally lacks the architectural advantages of modern programming languages. Furthermore, any future changes will be complex and time-consuming.
To address these challenges, some insurers use a somewhat different approach of “blackboxing” the modernization. In this approach, insurers expose core insurance functionality as services to the outside while carving out functionality from the legacy systems on the inside by either building it from scratch or implementing current technology. Thus, the core back-end systems are slowly modernized. While this approach can be appealing from a risk and cost perspective, it is only a viable longer-term solution if the existing core systems have been well-maintained, documented, stable, and well-performing.
Building a proprietary platform
In the early days of computer technology, building a new proprietary platform was the only approach for insurers. This typically involved building a system architecture that perfectly fit the unique requirements of the insurer and then seamlessly integrating it into the remaining landscape.
Some incumbent insurers continue to take this route. Numerous insurtechs have also taken this approach because they believed in the differentiating nature of a strong core system and a reliance on technical frameworks as foundations upon which to build their own platforms. However, in contrast to incumbent insurers, insurtechs do not have a legacy system to address or modernize.
The drawbacks of building a proprietary platform tend to include higher costs, longer timelines, and additional risks compared with modernizing a legacy platform or buying a software package.
Buying a standard software package
Standard software packages have become increasingly appealing to many insurers looking to overhaul their core systems. Standard systems are typically much more streamlined and include ready-made functionality for pricing, underwriting, customer self-service and automation, and claims processing. As a result, they can improve efficiency across the enterprise. Broadly speaking, a standard software package promises the following key benefits:
- Faster and less risky implementations compared with modernizing or building a new proprietary platform
- Best-practice functionalities and regular upgrades that include product and process innovations as well as regulatory requirements
- Cost benefits from shared development between multiple insurers
- Access to a pool of skilled resources outside the insurance company
While all these benefits can’t always be realized, the appeal of standard core insurance software remains strong. In the United States, for example, nine of the top 12 P&C insurers use standard software for claims and policy administration. Standard software is similarly popular in Central and Eastern Europe, the Nordics, and the United Kingdom.
While standard packages are gaining momentum, challenges remain for insurers that choose to take this approach. The software package must fit the insurer, and its implementation must focus on adopting rather than adapting to the standard software. For many insurance carriers, this implies a significant cultural transformation on the business side, evolving from an “anything goes” attitude to a “simplicity first” mind-set on the IT side—from coding a new solution to configuring an existing solution. Otherwise, the implementation of standard software could prove costly and result in a long timeline and lower-than-expected benefits. Furthermore, the insurer can develop a dependency on an external vendor and its software product road map, which could curtail flexibility and increase costs.
Choosing the right path depends on several important factors, including starting point, transformation preferences, capabilities, and business-model objectives. Leaders should ask themselves tough questions when considering the health of current core systems, investment ability and appetite, business and IT capabilities, and the true extent of the organization’s digital ambitions.