Understanding Legacy Modernization in the Insurance Industry

In the insurance industry, the operating ratios continue to stay high and the competition has become more aggressive.

Like any other financial firms, insurance companies are highly dependent on technology. However, most of their information technology systems include mainframe technology which is rapidly evolving and aging. As a result, serious issues are being encountered.

Legacy modernization systems require increased maintenance, which ultimately increases costs. Older systems cause process as well as decision making friction, which results in degradation of business agility and increases strategic risks. To correct such problems, insurance companies need to modernize their core systems.

The Need for Change

It cannot be denied that renewal projects such as legacy modernization in the insurance industry are time-consuming, multifaceted, controversial, expensive and risk-laden. With all this description, most insurance providers are discouraged to undergo such changes. However, insurance providers often fail to realize that legacy systems are relatively stable and reliable in a wide number of cases and industries.

On the other hand, there are some aspects like heightened client expectations, pricing pressures, regulatory changes, and competition have made insurance providers reconsider investing in legacy modernization. Besides, the need for improved operating efficiencies, leverage structured data for analytic purposes, and gain operating flexibility to remain in the competitive world of the insurance industry, insurers are considering legacy modernization.

The Prime Motivator for Such Change

Like any other businesses, the consumer plays an important role in the business cycle. In fact, the prime motivator for the legacy modernization in the insurance industry is the heightened expectations of the clients as well as the distribution partners.

It cannot be denied that in today’s societal innovations and the advent of digital services and the use of electronic devices, consumers are now demanding financial services that are accessible and available anytime, 24 hours a day, 7 days a week, and anywhere.

The insurance industry is not exempted from the changing market dynamics that emphasizes real-time services in addition to seamless and uninterrupted customer experience. Both clients and third-party partners of insurance companies are demanding guidance, information, product comparison, services, and purchasing channels to be readily available in real-time through numerous channels like in-person, mobile devices, PCs, and tablets.

While some insurance providers have already taken the challenge and started modernizing their legacy systems, others have remained with their outdated legacy infrastructures. Those providers who have not taken the step will be at a competitive disadvantage and are at risk of declining business performance, as they will start failing to meet their client’s expectations.

It is, however, important to note that changing the technology alone will not realize the full benefits of legacy modernization. In addition to upgrading technology, it is also important to improve business processes and services.

The Benefits of Legacy Modernization

Three main aspects are driving the need for legacy modernization in the insurance industry: risk mitigation, cost reduction, and revenue generation. All these benefits are derived from the creation of a technological platform that is efficient, effective, and can successfully support key business processes like policy administration, billing, new business underwriting, and improved customer service.

In terms of cost reduction, a well-managed legacy modernization initiative can accomplish the following:

• Decrease related business processes by about 20 percent through increasing operational efficiencies in terms of redesigning business processes, increasing automation, and improving adherence to business policies.
• Reduce technological maintenance costs by 5 percent through improving legacy systems, eliminating redundant platforms, simplifying existing platforms, and lowering maintenance costs.
• Increase the use of automation, as it can reduce costs up to 80 percent compared to manual legacy processes.

Maximizing revenue generation can be achieved through legacy modernization by following these steps:

• Increasing premium growth through improving distribution effectiveness as well as target marketing, maximizing cost selling, and improving pricing.
• Improving new products from development to deployment.
• Improving technology, as it directly correlates with improved customer experience.
• Expanding business analytics, data mining, and reporting to acquire new clients for better products and services.

Risk mitigation is also achieved with legacy modernization through the following:

• Adherence to company underwriting and standards.
• Improvement of customer experience and user experience to attract as well as retain customers and employees.
• Enhancement of the business’ capability to control risks associated with regulatory compliance.
• Enhancement of the business’ continuity and disaster recovery capabilities while creating highly flexible operating standards.

Recognizing Risks and Mitigating Them

To ensure success, legacy modernization projects should have clear vision and objectives, a well-defined plan, and a solid management program. It cannot be denied that there have already been businesses that attempted the changed but ended up spending millions of dollars without achieving their objectives. To avoid this from happening, the risks involved must be properly identified and mitigated.

Such risks include the following:

• Customer Service Risks. There are some customer critical services that need to be readily accessible and available.
• Regulatory Risks. Regulatory services must also be available all the time.
• Program Fatigue. Core modernization process can subject your business to program fatigue, which can happen during the upgrade process.
• Competing Priorities. Because legacy modernization tends to be lengthy and wide-range, it tends to affect other business processes.

While all of these are considered serious project risks, they can be avoided through proper understanding, preparation, and planning. When successfully reduced, you can achieve a smoother flow in the legacy modernization project.