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The Difficult Task of Achieving IT Innovation

George Grieve | December 05, 2014

The popular phrase “you can’t get there from here” neatly captures some of the key difficulties in driving technical innovation in the insurance industry.  Many of the available technologies—business intelligence, mobile, portals and the like—are capabilities which can deliver added value to an insurance carrier though customer insight and ease of use. 

These are the technologies that CEOs want to spend money on.  These are the technologies that industry analysts tell CEOs they must spend money on in order to differentiate and compete in the marketplace.   They are also “cool.”  And yet they are dependent technologies; they augment or deliver data and services which originate elsewhere in the software boiler room we call core systems—policy administration, billing, and claims.  If the core systems are data and function poor, rigid, or hard to integrate with, implementing innovative technologies will be hard, costly, and unsatisfactory.  In other words, “you can’t get there from here.”

This edition of ITA Pro is focused on taking a look at 2015 and beyond and where insurers are going with technology. The future is fun. It’s also where we will spend the rest of our professional lives.  And it is where new leaders and innovations will occur.  So, it makes sense that this particular publication focuses on what companies plan to do or are in the early stages of doing. 

My major point here is to make sure the reader understands the linkages and dependencies between the core systems and the “cool” systems.  It’s not as if I am laying some deep insight on you here.  Look at where insurance carriers have spent much of their IT budgets in recent years and plan to spend in the next few years; core systems legacy replacement is at the top. 

There are several inherent difficulties is successfully pulling off a legacy transformation project.  Core systems are not “cool.”  Many of the functions they perform are not visible to the higher levels of the company who approve major IT spending.  They cost an arm and a leg.  They detract from the company’s ability to do other things.  They take years to complete.  They are complicated and hard to do well.  They suffer from unrealistic expectations.  They are hard to cost justify.

The CEO of a successful core system vendor once characterized the outlay on legacy transformation as the kind of investment you make in sending your kids to college.  Parents spend that increasingly exorbitant amount of money because it increases the potential of their kids, rather than a specific outcome.  We all know stories of 20-something college graduates coming home to live in the basement but we also know that a degree is a stepping stone without which few people will find their way into professions with well-paying jobs.  Without a degree “you can’t get there from here.” 

The CEO’s point was that a legacy transformation is not only an exercise in satisfying a list of functional requirements; it is more importantly the creation of a platform for growth and the creation of potential.  While we don’t know what market-driven or regulatory challenges and opportunities will arise over the next years, we all know intuitively that if we have modern, flexible, functional, and data-rich core systems we will be in a much better place to respond and take advantage than if we are struggling with the core legacy environments.  Core legacy environments are not suitable platforms from which to launch technology-based innovations.

Let’s consider a few illustrations.

First, legacy systems are not data rich and they have minimal if any ability to easily add additional data elements.  Many legacy systems were architected 30 years ago when data storage was still a major cost inhibitor.  This led to systems where data elements were fewer, shorter, and codified in obscure ways.  Fields were often redefined and reused for different purposes, depending on the data values in other fields. 

Further, most legacy systems do not do a good job of editing and validating data, leading to incomplete and inaccurate data.  Commonly, the data in policy systems was restricted to rating information while the richer and more interesting underwriting data remained in separate (often paper) files.  As any actuary will tell you the underwriting data is important for analysis of profitability, concentration and other financial trends analysis. 

Similarly so with claims data.  Legacy claims systems store information to support financial transactions such as reserving and payments.  The data required to find potential fraud, for example, simply does not exist.  So, how well can a carrier implement business intelligence technologies with restricted underlying transactional data?

Second, consider the constraints on a carrier’s ability to deploy effective portal or mobile applications where the core systems are hard to integrate.  Another characteristic of legacy systems is they were not engineered, except in a few predetermined instances, to share data with other applications in the increasingly complex and sophisticated applications architecture.  This leads to additional cost and risk in supporting new customer facing technology channels. 

Also, the distribution of data to other platforms and channels is further complicated by the point made above: If the data is abbreviated, codified, redefined, inaccurate, or in some cases absent, the data mapping effort becomes tortuous.  The great advantage that flows from exposing data to customers and agents brings with it a more stringent requirement for data accuracy and completeness.  

Third, as noted by recent analyst studies, much of the technology innovation going on in the insurance market is aimed at growth which requires speed to market, new and more distribution and service channels, and a better customer experience.  Speed to market can mean many things: the ability to change rates quickly; to rapidly modify, enhance, and deploy an insurance product; enter a new geography; support new data and reporting requirements; and implement new workflows and business rules. 

None of these is easy to do in a legacy world.  Not that I am saying they are easy to do in a modern core systems world.  Nothing is “easy” in IT, but they are a lot more doable in a modern environment than in a legacy environment.  Indeed, it is common to hear of carriers that simply ignore, give up on, or find an alternative tactical sourcing for business opportunities when they find out how long it will take IT to do their part of the project. 

We talked above about core systems modernization as creating a platform from which change and innovation can happen.  We don’t necessarily know what specific change will be required and at what time; what we  do know is that regardless of what the enhancement is or when it arises we will be better placed to respond in a way that supports the business (or even facilitates it) rather than hobbles the initiative.

It is for these and other compelling reasons that carriers are spending millions of dollars to modernize their core systems platform. Core system modernization is the single biggest mainstream technology innovation going on in insurance and will remain so for at least another few years.  Carriers that survive the journey and reach the Promised Land will find they are better able to compete in their respective markets on the basis of customer experience, better and more varied products, and more granular pricing. 

The IT department’s cost of maintenance, often driven by non value-adds such as regulatory changes, will fall significantly, allowing more dollars to be spent on strategic business support.  The systems environment will be future-proofed against the looming threat of generational retirement of those who write the systems being replaced.  For those carriers that either choose not to try, or try but fail to make the journey, the future will be bleak. 

These carriers will face competitive challenges to which they cannot effectively respond.  Their ability to keep legacy core systems running will come under direct threat over the next five to 10 years as the folks who wrote or maintained the software retire and are found to be irreplaceable.  It should come as no surprise to learn that no one is training a new generation of COBOL, Assembler, BASIC or RPG programmers.

 The future is fun to contemplate and it’s true that self-driving cars are just around the corner, but for many carriers it’s still yesterday, and the only way to escape yesterday is to make a major investment in time and money to fix the “boiler room” of the core systems environment.  Anything else done in the name of innovation is merely a distraction from and a complication of the inevitable.   We used to talk about “putting lipstick on the pig.”  Technology innovation without core system modernization is putting lipstick, Botox, and plastic surgery on the pig.

(George Grieve is a popular writer and speaker on the subject of insurance technology solutions and is the author of the book Shop Talk. He is CEO of the consulting firm CastleBay Consulting. The views and opinions in this column are those of the author and do not necessarily reflect the views of the Insurance Technology Association and its members.)

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