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Insurance Legacy Modernisation and Transformation

Along with my colleague Chris Ling, we have put some of our thoughts together on the challenge of Legacy Modernisation in Insurance.

The history of insurance systems goes back a century, but as each new technology wave has emerged, so Insurers have had to adapt to meet the new customer demands, expectations, channels and more. More often than not, that has meant adding to the application estate with a view to fixing it later. Central to this has been the ability to access the new opportunities that these technologies have brought in order to improve productivity and transform their competitiveness.

Insurance and Technology

Insurance is a Risk Transfer Mechanism. Increasingly, insurance involves the exchange of information about Customers, their cash-flows and their risks for information about capital and future cash-flows. I.e. data about customers, their environment, dependencies, channels, risk of default for data about product contracts, risk capital default ratings etc. What we have seen in recent times has been an exponential expansion of the variety, reach and depth of information captured or leveraged by insurance IT architectures. And this Moore’s Law expansion continues.

Insurance has been an early adopter of technology over the past century. In 1913, the first mechanical Samas punch-card machine was implemented into a European insurer and in the 20’s and 30’s, these mechanical computing machines drove a step change in accounting accuracy and productivity.

The late 50’s saw the advent of IBM and ICL dominated Mainframes that not only improved reliability and efficiency but also drove centralised policy record keeping and processing.

The 80’s and early 90’s saw the extension of processing within the Insurance firm through client server architectures, call centres, central planning systems and early claims ‘image and workflow’ (early examples of unstructured data being held). Data exchange followed (through half and then full-cycle EDI), but it took the Internet explosion to provide external extensibility into customers and distributors and to really start to engage them in the fulfilment process.

Resultant trends

A number of associated trends have continued to develop

  • Cycle and processing times are shortening;
  • reach and influence is extending;
  • volume and mix of data is increasing;
  • levels of innovation in business models increasing;
  • associated customer intimacy and understanding of economics is deepening;
  • reliability of implementation and realisation of associated benefits improving

Digital Wave

We are now into the next wave - ‘Digital’, which leverages the world of Big Data, Social Media and Analytics and so much more. A number of patterns have emerged but three important ones to consider in this context are:

  • Simplification: The older technological and economic constraints of volume vs. complexity in the IT service delivery mix are being broken down. No longer do insurers require a separate systems for straight thru’ processing, service-shop handling or in support of expert case-handlers. As a result, single systems or system components are now feasible for many insurers.
  • Extensibility: The extension of the information value chain beyond two degrees of freedom, deeper both into distributors and customer’s worlds and also back to capital providers and reinsurers. The wealth of data around risk interdependencies, changing business needs and liability intensive exposures is expanding dramatically as insurers endeavour to gain a greater understanding of the risk transfer mechanism.
  • The need for Immediacy- and not just real-time processing. As cycle time-frames shorten and customers have even shorter attention spans, insurance products and business processes are becoming disposable. One example recently seen is an increasing need for real-time dynamic exposure and loss data to help insurers actively manage their loss exposures as they happen rather than waiting two weeks for a loss report to be submitted.

Case Studies

So what does all of this mean for Insurers as they try to drive greater and greater performance improvement capabilities? Central to this is an understanding of what drives value from a revenue, cost, margin, risk and strategic positioning lenses and how is that future value accessed. If we examine some case studies in the context of the key trends then these examples might offer some insights.

Insurer A has grown by multi-business / team acquisition over a period of 15 or so years. Then, research suggested that most IT projects failed and that “parenting” by the centre destroyed value. So the business and its associated number of siloed systems were allowed to grow in a federated manner. Now, it is running out of road. Complexity is constraining agility, skills to develop new products are diluted and the cost base is now one and a half times the benchmark. Here the clear focus has to be on simplification and cost take-out enabled by a transformed modern future state architecture and associated application and infrastructure rationalisation, and then transforming IT Operating Model. This will get them to a manageable position from which to drive further improvements.

Insurer B has a strong Innovation ethos and extensively measures benefits. It continually segments all aspects of the market value chain looking for new niches to launch offerings into. Furthermore it has gained superior insight into the overall economics of its extended customer to risk value chain. It derives value from very flexible and rapid product development and launch, combined with a multi-channel view. It knows that it has to stay ahead of the game. As such, it needs to place as much IT into the hands of the business and marketing, and then support them accordingly.

Insurer C is large but entrepreneurial, constantly looking for opportunities. It also has strong financial control aspects. It wants to do the basics efficiently and be able to acquire, divest or enter new markets rapidly. It wants to standardise on a single core system of record, whilst being able to rapidly change channels, user interfaces and claims processing to suit market needs. To achieve this, it has moved from a siloed to a horizontally-layered architecture with more change capability in the upper channel and presentation layers.

In conclusion

Fundamentally, insurer legacy systems never envisaged the volume, variety and reach of data available today, and many were designed to be functional rather than customer-centric. In the new digital data-rich world, Legacy systems will hold and process an ever smaller proportion of the overall customer and risk data as we finally move to meet customer expectations of an always on, agile fast response in world where treating customer’s fairly is no longer the hygiene factor. A move back to true customer centricity enjoyed and demanded by consumers across almost every other sector and ensuring customers truly understand the outcomes..

There are many reasons why clients chose to go on the Legacy Modernisation journey. Running out of road, new strategies, need for continued market leadership, operational risk. But whatever the reason, insurers will find that modern systems are much more modular, flexible, extensible and reliable to implement

And for the future? We are starting to see a number of very exciting trends. Complex Event Analytics systems, which are making sense of Big Data ground-up turning, perceived underwriting good practice on its head and product manufacture. Key here will be not to be having this same debate in 10, 20 or 30 years from now about how we modernise legacy.

Christopher Ling is Vice President at Capgemini and leads its Business and IT Transformation practice.


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