Insurance Transformation: How to go about it?

While software modernisation may become a struggle, there are ways to make it easier.

Nowadays transformation through modernisation is a must, and it doesn’t have to be risky if you do it wisely.

Integrating with legacy systems

While many insurers report about innovating their software, most of this innovation happens in a very incremental way and without transforming the legacy systems. This is one of the main problems faced by insurers – they implement modern fronts, which are often not well integrated with outdated back office systems.

According to Gartner, a legacy system is “a system that relies on outdated technology but is critical to performing day-to-day operations”. It is a well-known fact that core systems, even those built only a couple of years ago, have their limitations.

Moving outdated systems to cloud-based platforms is essential to modernisation, optimising and equipping them with new features and integrations. But making changes to the old, basic mainframe-based systems and building modern interfaces that interact with them in parallel is costing time and money. The problems that arise include:

• Core systems that are unable to keep up with the changes in the front office.
• Monolithic systems, often patched up without the appropriate upgrades.
• Systems that are incompatible with cloud-native architecture of market tools, not open enough to seamlessly connect to external data sources, especially in digital ecosystems.
• Systems that are inconvenient for users, often unable to provide customers with real-time information.

This results in insurers not being able to operate efficiently and they may lose income as well as current and potential clients.

Choosing the right modernisation approach

According to Deloitte, the goal for insurers for 2023 and beyond should be to more fully realise the benefits of technology investments, in order to become more agile and customer-centric. Technology investments should be tailored to differentiate insurers in customer segmentation, product support, and value-added services, facilitating sustainable growth and profitability.

Gartner identifies three types of innovations that will drive success in the insurance market: product and distribution, customer value proposition, and organisational vision. Insurers already started with innovating their product and distribution model, but embrace more massive transformation by shifting the customer value and organisational vision.

The reason may be that updating legacy systems is a daunting task. Ultimately, upgrading a legacy system means choosing between rebuilding (if an upgrade is possible), restructuring, or replacing. Restructuring or updating entails medium outlay and risk, while replacement provides the best results, but also means higher costs and higher risk. Whether it is a decision to completely replace the system or to gradually rebuild it and move towards – for example – modularity or microservices, depends on the scale of the business itself and on the efficiency of the insurer’s IT teams. Insurers are struggling with the decision partly because of lack of modernisation (or even liquidation) of outdated systems, and partly because of overly complex configurations.

How to face this challenge?

• Choose your IT partner wisely – niche solutions are no longer enough.
• Choose a flexible system – turn towards modular systems.
• Choose user-friendly, cloud native, open source systems.
• Put the client’s perspective first – start optimising total customer experience.
• Adopt the “simplicity first” mind-set on the IT side – from coding a new solution to configuring an existing one.

According to McKinsey, IT costs per policy for insurers with modernised IT can be 41% lower than for those burdened with legacy. Insurers with modern software gain more profit, cut spending, speed up time-to-market, and offer clients better services. This significantly drives a competitive edge in the current market.

Keep calm and carry on

As a result we can observe insurers turning towards modular systems. They can replace outdated, monolithic giants piece by piece, while maintaining the continuity of critical systems. Tearing down the existing order and building from scratch can be very risky and the fear of such change is not surprising. An organic approach can be a solution for breaking the impasse. A system with open application programming interfaces, made more flexible by its modularity, with a built-in product modeller and business administrator application, will improve the speed of operations. By ensuring that diagnostic capabilities are maintained in parallel, the insurer provides themselves with a safe environment and, in a step-by-step replacement process, can diagnose and make decisions about which legacy parts are still usable, and which are no longer useful.

While we overcome the obstacles, at the same time we are still in a threatening situation. The newly-implemented systems may as well turn out to be a problem themselves. There will be more and more challenges. The expansion of software towards cloud-native architectures and the development of applications based on the use of the IoT or AI mean that legacy systems have to be replaced, because upgrades alone may no longer be enough to drive innovation.

The expansion of software towards cloud-native architectures and the development of applications based on the use of the IoT or AI mean that legacy systems have to be replaced, because upgrades alone may no longer be enough to drive innovation.

To read about how Belgian insurer P&V has taken up the challenge of modernising the system and the effects click here

Author:?Aleksandra Romot, Senior Business Consultant at Comarch