Copyright © 2003 Business Insurance

"Insurers Confront Legacy of Outdated Systems" June 2, 2003

by RODD ZOLKOS

As insurers seek to upgrade their information technology systems, in part to improve their relationships with agents and brokers, many are facing thorny problems involving their legacy systems.

"Organizations are trying to upgrade, enhance or move out of their legacy (systems) for a number of reasons," said Michael A. Jackowski, a partner in the insurance solutions group at Accenture in Chicago.

At the same time, though, "I have seen carriers struggle with legacy replacement over the past 10 years," Mr. Jackowski said. "For the most part, it always ends up being a much more lengthy, time-consuming process than they ever have imagined." One problem is that "some of these systems have been built up over 25 years," he said.

Given the age of many existing systems and companies' search for ways to do more and more efficient business, it's not surprising that many are looking at IT upgrades.

"Three out of four carriers are in some phase of a system overhaul," said John Raguin, chief executive officer at Guidewire Software Inc. in San Mateo, Calif.

One major factor driving many insurers' moves to address legacy systems issues is a desire to improve their relationships with agents and brokers.

"Carriers have various relationships with their agents," said Mr. Jackowski. "I will say that touch point between a carrier and an agent is one of the things driving" legacy system changes.

Carriers increasingly want to make it easier for agents to do business with them, he said, "and in that, they have to put in new technology that benefits the agent."

In many cases, he added, it's in that ability to work with agents that the changes many insurers are making to existing systems are falling short of the mark.

A key in those systems is the flexibility to customize the way the carrier works with different agents, which puts a premium on system applications that allow customization for various groups of clients, agents or coverages, Mr. Jackowski said.

There are other possible benefits insurers can gain through IT improvements-and that they can pass on to their agents.

"Eventually, cross-selling is a fundamental area where carriers can derive a lot of benefit," Mr. Jackowski said.

"As claims come in, you can understand characteristics of the customer," he said. "But the same thing can happen on the underwriting side."

"So it's really being able to capture that data and do it in a much more accurate and precise manner than most legacy systems currently can," Mr. Jackowski said.

In upgrading their systems, companies are taking different approaches, Guidewire's Mr. Raguin said. For some, a system overhaul might entail installing a document management system.

"Some are putting a new front end to their legacy system, some are installing a document management system to improve the paper flow, and some are looking at, `How can I improve the business logic?"' Mr. Raguin said.

In trying to deal with evolving business needs and marketplace demands, insurers' approaches to dealing with their existing IT systems often involve three options: renew, rebuild or replace, according to Judy Johnson, vp of insurance strategies at consultant Sapiens Americas in Cary, N.C.

Deciding which route to take will depend on time, cost and complexity, Ms. Johnson said.

And she noted that there's less pressure and pain for an insurance company with a stable model as opposed to one undergoing a major change, such as merger and acquisition.

"Complexity is also high when the company is changing, and that change needs to be reflected in the system," Ms. Johnson said.

Cost, meanwhile, is often related to how much of the business is supported by particular IT applications, she said. A company whose major lines of business are supported by automation, for example, may experience a significant cost in making a change.

As for time, "When you're starting to spend 50% of your time maintaining a system, that's high," she said. A key concern is that time spent on system maintenance is taking away from time that could be devoted to system development to better meet customer and business needs, she said.

Some insurers face IT system challenges that span the complexity, cost and time considerations.

"Most applications have not only business logic that is embedded in them...they frequently have certain processes embedded in them as well," Ms. Johnson said. "As more and more of this happens, those applications become in some ways more useful, but in some ways, more cumbersome and difficult to understand."

And there could actually be factors the business no longer understands about policies and procedures that are embedded in the legacy system.

"If you lose the system, you lose all of that," Ms. Johnson said, an issue that becomes a factor in deciding whether replacement is the proper approach. "The more and more layers that are there, the more and more time it takes to do anything to that system. Can we make a distinction between what is current and what needs to go forward and what we can get rid of, and do we have time to do it?"

"Everything you do in terms of a system impacts on everything else that is going on, if it's a core system," she said.

"When you've looked at all those things, you have to look at how you balance complexity, time and cost and make a decision," Ms. Johnson said. "If all of these are high, that probably points you directly to going out and buying a new one."

In many cases, a company can't afford not to make changes to its existing system. For example, if a company is looking to grow, it must decide whether its existing IT capabilities can support that growth.

Guidewire's Mr. Raguin cited a survey his company took of approximately 50 insurance companies' claims operations, and found that many of them had key operational initiatives driving desired changes in the claims process but lacked the systems to make those changes.

"The majority of them said the systems are hindering those initiatives," he said.

In meeting insurers' IT improvement goals, Mr. Jackowski said, Accenture takes an approach of doing so through components, "But doing it on a functional basis."

Many companies that have attempted to completely replace systems quickly have met with disaster, he said. "There have been a number of carriers that have tried to do it in 12 to 18 months and just outright failed."

Mr. Raguin agreed that complete system replacement isn't necessarily the only option.

"There are ways you can do it with a phased approach," he said. "They will replace it in time, but start by replacing noncore systems."

© Copyright Business Insurance 2003