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The last three decades have seen a tremendous amount of technological change and innovation. An environment of large mainframes and batch processing windows has morphed into a digitized, miniaturized, wireless, real-time, and--above all--GPS- and Internet-enabled marketplace where data is collected at an incredible rate and documents and messages circle the globe in minutes, if not seconds.

New business models are evolving as response time decreases in direct correlation to the increase in customer expectations. Important processes and interfaces are being automated. Business rules are being extracted and codified. Corporate spending on security and disaster recovery to protect all this critical information and manage regulatory compliance is escalating.

Although the industry reluctantly embraced the Internet as a vehicle to simultaneously build brand, service distributors and cut operating expenses, the systems at the core of most insurance companies were built decades ago.

These legacy or "heritage" systems handle the bottom-line business of the industry and manage decades of customer, financial and transactional data of greater or lesser quality. They have paid back their original investment many times over, even with the increasingly high cost of maintenance. They also represent a major stumbling block to change and an excuse for its absence in a notoriously risk-averse market sector.

This is not to say that insurers have not incorporated newer technologies into their technology infrastructures. Most in-house and vendor policy administration systems have been wrapped with Internet technology for easier information access and transaction initiation by agents and brokers, and even some policyholders.

Some level of process automation has been applied to claims applications, particularly in the property/casualty sector. Attention has been devoted to automation of underwriting and rate/quote applications.

Extensive discussion concerning straight-through processing and services-oriented architectures has taken place at industry conferences and in the industry trade press. Some things in some places now run faster and produce better results.

The industry, however, still runs on the same track, in the same direction, using the same functional silo business models around which the still-functioning 30-year-old applications were built.

Blatant attempts at innovation at the industry level--and there have been a few in the years past--were rigorously quashed after the appropriate multiples of millions were spent, in part because the amount of implied cooperation and organizational change in the models ran counter to industry culture and competitive positioning.

True innovation, after all, takes more than a technology platform and a couple of full-page ads in the financial news. It takes incredible intestinal fortitude at the corporate level.

For IT departments in all insurance sectors to significantly change the way insurance companies do business, there must be a level of awareness in the industry that change would be worth the undoubted pain it will cause.

Based on past experience, this will come about only when some truly leading-edge insurance company significantly alters the way it produces, markets and services its products, making the necessary system and infrastructure changes to get it done. Once that company blazes the trail, however nascent or thorny, others will follow. There is plenty of new technology out there to work with.

Meanwhile, insurance IT organizations must do some serious thinking about how to decommission some of the old workhorse applications and replace them with something flexible enough to use some of the technology goodies the IT industry has on offer. The risks posed by those new technologies are not nearly as great as those of drowning when the industry's innovation dam finally breaks open.

JUDY JOHNSON is vice president and principal solutions architect with Patni Computer Systems.

To get the other side of the issue, read the "Point" by Dennis A. Steckler.

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September 15, 2007

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