In the Core Systems Hourglass, Sand is Falling Faster
Karen Furtado | June 26, 2017
The core systems replacement cycle is speeding up. Twenty years ago, even if you spent your entire career working at the same insurance company, you might have to go through the implementation of a new core system once, maybe twice. Technology—and the speed of business it enables—is changing that.
Technology is advancing at an exponential rate, and that includes the technology underlying the business of insurance. Moore’s Law predicts that processing power will double every two years. Other technologies exhibit similar exponential advances. Before solid-state drives emerged, the cost of hard-drive storage dropped by half annually. In 1997, 1 GB of memory would set you back about $100. Ten years later, the price had dropped to less than 50 cents per GB.
When processing power was limited and storage was expensive, that affected how we used those assets. The advancement of these and other technologies removes the obstacles that had previously restricted their use, which opens many new avenues of technological advancement and business innovation. In the next 10 years, we can expect similar advances in the technology we are using today.
Ten years is a critical number in insurance technology. In 2007, new insurance core systems did not have a variety of capabilities that are necessary to deal with the challenges of today. Mobile and policyholder collaboration is a mandate. Advanced use of data and analytics has become a base-level requirement. Insurers now need to be able to handle a wide variety of specialized lines of business such as cyber as well as shared economy elements like hybrid products to provide coverage for UberX and Lyft drivers.
Consequently, more insurers expect a new core system implemented today will be up for replacement in less than 10 years. In 2011, nine out of 10 insurers anticipated a new policy administration system would last for more than a decade. Today, only six of 10 insurers agree.
This is a tremendous shift in the market’s perceptions among P&C and L&A insurers alike. It reflects the accelerating pace of change and the exponential advances in technology. Insurers looking to the future—at the changing business models and products in the market—are unsure that an older core system will be able to face the challenges brought by digital and greenfield insurers as well as other insuretech advances. At a minimum, the core systems of today must continue to improve in upgradability to keep up with the advancing capabilities insurers need to match the pace of market changes.
Shorter lifespans mean insurers are rethinking how they allocate resources for core systems modernization. When faced with obsolescence in less than 10 years, insurers are more attracted to options that require less up-front planning and capital. This has translated into a greater number of cloud-based core systems as well as a shift toward more subscription-based pricing models.
The speedy implementations and quick time-to-value possible with cloud-based core systems appeal to insurers for the same reasons. Quick time-to-value is essential for insurers to be able to take advantage of new market opportunities, and implementations that take months rather than years and can increase insurers’ adaptability. These buying trend changes aren’t displacing insurers’ purchases and implementations of larger, enterprise-wide core systems. In fact, they often occur simultaneously—giving insurers the quick wins they need while they continue to advance enterprise-wide core systems modernization projects.
My recent report, Bridging to the Future With Core Systems Modernization, explores that trend and other ways that insurers are using modern core systems to increase the adaptability of their businesses. Core systems replacement and modernization is one of the seven SMA Bridges to the Future and is critical for insurers to prepare for the opportunities and challenges of insurance in the coming years.
When we look at how quickly our world is changing, 10 years doesn’t seem so long. It reminds me of a prescient quote from Bill Gates: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.” And he wrote that more than 20 years ago.
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The Email Chat is a regular feature of the ITA Pro magazine and website. We send a series of questions to an insurance IT leader in search of thought-provoking responses on important issues facing the insurance industry.
ITA is pleased to present the 2014 Webinar Series. We have many topics for you to choose from and attendance is open to all ITA members. The webinar topics are current and exciting — ranging from predictive analytics to telematics and will focus on the direction insurance carriers need to follow for the future. All webinars are presented by insurance IT professionals along with some of the leading analysts and consultants in the field. There is no cost to attend an ITA webinar. For more information and to register for the webinar, click the “title” of the webinar below.
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