Core systems are expected to have a life span of at least 10 years to 15 years, and some insurers stretch it even longer than that. Today, that puts a lot of them past due for an overhaul.
Many big information technology purchases were put on hold because of the financial crisis in 2008. But insurers are now ready to look ahead, said Craig Weber, a senior vice president at research and consulting firm Celent. Although there is still a lot of uncertainty about where the economy is headed, insurers want to be ready for the next upswing in premium growth.
This has led to an increase in the pace of core systems renewal activity over the last 12 months. Roughly one in three insurers are in the midst of some major project involving the renewal of their core systems, Weber said.
The reasons for making a change are getting more compelling by the day.
Speed to market, for instance, is a big consideration. The old systems are a bit like the Pony Express in the digital age. It might take 18 months, for instance, to get a product to market with a legacy system. With a new system, that could be slashed to as little as three months.
Insurers are still likely to hit a bottleneck at the regulatory level. But at least insurers have the ability to get things moving more quickly within their own organizations.
While strategic reasons for systems upgrades are important, there are a number of other tactical reasons at work as well.
One big one is that the people who know how to run and maintain the legacy systems are themselves reaching retirement age. In the not too distant future, there won't be too many people left who can keep the old systems going.
"There is definitely a horizon or a cliff," said Patrick Vice, director of information technology at Frank Cowan Co. Ltd., a managing general agency based in Princeton Ontario. "Once we go over, retrieving us and our skills will be a challenge."
Another compelling reason: data analytics.
More and more companies are interested in what is known as "big data" but most legacy core systems were not designed to cope with the volume of data that is now out there.
Businesses today want to be able to analyze a lot of data and insurers are no different. Insurers are increasingly interested in sifting "big data" to give them an edge in underwriting or claims, and that's something they can't really do with their old systems.
Systems are also now much easier to integrate and update than ever before, bringing down the risk on projects that can run into the seven figures, and take as many as five years to complete.
Agents, brokers and other clients should see some big improvements as a result of these projects as well. These are likely to include improved automation, better and faster underwriting, and better processing speed.
As insurers weigh the decisions involved with an overhaul of their legacy core systems, insurers realize there is a price to be paid for sitting on the sidelines too long.
One of the only things that is off the table right now is business as usual.
PATRICIA VOWINKEL has worked for national media outlets for more than 20 years.
October 1, 2011
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