Relic or Resilient? Unpacking the Truth About Legacy Systems in Insurance

Most insurance companies have been around for decades, and their core systems and technologies were built a looooooong time ago. These 'legacy' systems were designed to handle data and workflows from a bygone era when the industry operated very differently. However, in today's digital age, the volume of data and customer interactions has exploded exponentially.

Imagine trying to manage the flow of water from a fire hydrant using just a garden hose - that's essentially what these legacy systems are attempting to do with the massive influx of data and customer touchpoints. They were simply not built to handle such scale and complMost insurance companies have been around for decades, and their core systems and technologies were built a looooooong time ago. These 'legacy' systems were designed to handle data and workflows from a bygone era when the industry operated very differently. However, in today's digital age, the volume of data and customer interactions has exploded exponentially.

Imagine trying to manage the flow of water from a fire hydrant using just a garden hose - that's essentially what these legacy systems are attempting to do with the massive influx of data and customer touchpoints. They were simply not built to handle such scale and complexity efficiently.

This is where cloud-based solutions come into play. By migrating their core operations to the cloud, insurance companies can leverage the virtually unlimited scalability and elasticity that cloud platforms offer. Think of it like replacing that garden hose with a high-pressure fire hose – the cloud can handle any amount of data and customer interactions without breaking a sweat.

The true power lies in the fact that this scalability is dynamic and on-demand. Unlike traditional on-premises infrastructure, which requires expensive hardware upgrades and lengthy procurement cycles, the cloud can instantly provision additional resources as needed. This means insurers can quickly adapt to sudden spikes in demand, seasonal fluctuations, or even unexpected events without sacrificing performance or customer experience.

Ready for the BUT? Here it is:

While the benefits of modernizing legacy systems are apparent, insurers face brutal realities that have made transformation an uphill battle. One of the biggest obstacles is the astronomical cost and resources required for large-scale tech overhauls. Legacy systems are so deeply entrenched that "rip and replace" initiatives can cost hundreds of millions and take years to execute.

Additionally, there are Machiavellian forces at play. Many vendors and IT staff have actively resisted change to protect their lucrative annuity streams from maintaining these antiquated systems. The classic "nobody got fired for buying IBM" mentality has created a risk-averse culture clinging to perceived safety over innovation.

There are also ethical quandaries around the misuse of customer data from legacy systems. With lax data governance and outdated privacy controls, bad actors could potentially exploit vulnerabilities and access sensitive policyholder information for nefarious purposes like identity theft or unauthorized discrimination.

Ultimately, legacy system modernization is a "Gordian knot" - an intractable problem with no easy solution. Insurers are caught between untenable technical debt, soaring costs, competitive pressures, and existential risks of cyber breaches or market disruption from agile insurtechs.

Some have tried an incremental approach - creating "MacGyver" (brief pause while I dream of Richard Dean Anderson in the 80's using duct tape) hybrid environments meshing new cloud capabilities with old mainframes. However, this often creates as many issues as it solves through system complexity and integration woes.

Others have simply postponed the inevitable - kicking the can down the road by allocating paltry resources to band-aid legacy flaws. But this perpetual firefighting only exacerbates technical debt future-proofing costs down the line.

Even more concerning are some industry veterans nearing retirement who have become complacent and resistant to change. Some have adopted an alarmingly dismissive attitude, smugly proclaiming "I'm just glad I'm retiring soon so I don't have to learn all this new stuff!" (Regrettably, this was an actual quote overheard at the RISKWORLD conference in May 2024.)

This mindset represents a major hurdle - when experienced professionals who wield significant influence actively undermine digital transformation efforts. Their apathy perpetuates the status quo and emboldens others to stubbornly cling to archaic systems and processes out of mere convenience. Insurers must proactively combat this toxic culture before it severely hinders their ability to compete and satisfy modern customer expectations.

The future mandate is clear - the insurance industry will be digitally transformed, one way or another. Those proactive insurers willing to embrace change will prove resilient. Those stubbornly resting on relics of the past will be disrupted by more nimble insurtechs and competitors.

The choice lies with insurance leaders. Continuing to kick the legacy system can down the road is no longer tenable. Calculating inaction and technical debt accumulation against the potential fallout of a catastrophic cyber event or market disruption from a cloud-native upstart should spur change.

By formulating a clear modernization strategy that balances operational risks with competitive pressures, insurers can plot a pragmatic course into the future. Though arduous, these efforts will future-proof their technology backbone and position them to compete in today's digital age.

The path forward is difficult but necessary. Insurance has reckoned with transformative forces before - it's time to evolve or get stagnant (possibly replaced). Relic or resilient, the choice is yours.

Nerdy Nikki