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Core Systems: Out with the Old?

Although core technology systems lie at the heart of their business operations, property/casualty insurers can find it challenging to keep them current – even with the help of new technology and insurtech partners.

The new operational realities presented by customer demand for a digital experience, coupled with the COVID pandemic, have impacted insurers’ plans to update or replace their core systems -- or at least segments of them, such as distribution, billing, and customer interface. A recent study by Celent finds that while insurers may have slowed down their immediate IT update plans during the worst of the COVID pandemic, there’s an increased understanding of the need for these improvements.

“In the past couple of years, insurers have seen a significant acceleration in the value that modern cloud services can deliver compared to legacy core systems,” says Nicole Bruns, Group Director, Product Marketing, Core Platforms, Guidewire. “They've also seen a lot of success across all three P&C use cases: greenfield lines of business, upgrades of self-managed core systems, and legacy transformation. Taken together, this means the delta between what you get with your legacy systems and what you could get with modern technology delivered in the cloud is growing at an increasing rate, while the overall risk of adopting these new services has gone down significantly. This is accelerating the rate at which insurers are phasing out legacy systems.”

However, replacing systems can still be costly and time consuming, siphoning resources away from day-to-day operations. This is why many insurers are still modernizing legacy systems by building proprietary platforms or buying out-of-the-box software packages.


But there are challenges to both approaches, says Luke Magnan, COO of Combined Ratio. Insurers choosing a third-party software platform or legacy system must bridge the gap between what the software can be configured to do, and what it must be customized to do. “Configuration always leads to a lower total cost of ownership, but customization is where you can find business benefits that more directly align to an insurer’s differentiations,” he says. And to maintain legacy or home-grown core systems, insurers need technical talent with the right skill sets to service something built years ago. “This means insurers can’t take advantage of the speed, agility, and cost benefits of newer technology platforms, such as leveraging cloud providers as a platform as opposed to just infrastructure,” Magnan adds.

Lingering legacies

There are many benefits for insurers that regularly update their core systems: increased gross written premiums, reduced churn, more operations productivity, and reduced IT cost – in some cases, by as much as 40%, according to a 2019 study by McKinsey.

This is why many insurers choose to graft new systems or tools onto existing systems. But this can be problematic, says Samantha Chow, LAH Markets Lead for EIS. For insurers with multiple self-built legacy core systems, connected to other similar systems and written in code that is no longer used or taught, updates are difficult, expensive, and in many cases, “typically more trouble than it’s worth,” she says.

Still, legacy systems linger – in some cases, because it’s too difficult to replace them with off-the-shelf replacements, says Magnan of Combined Ratio. “Bending new commercially built software to match an organization’s current functionality with their legacy is a huge undertaking, and not something always understood at the time of purchase,” he says. “And insurers looking to rearchitect legacy applications on their own often face a technical skillset shortage in their available resources, and competing to hire net-new technical resources is becoming increasingly difficult.” 

Adopting new tools

A fully modernized core system is essential for insurers to get the full benefits of new technology and data sources. Life insurers, for example, use external third-party data sources to support a more advanced, non-medical underwriting approach, says Chow of EIS. Reinsurers are providing medical scores, such as Swiss Re’s Magnum and RGA’s AURA, or newer third-party data sources like Human API or Milliman with electronic health records. “Without modern core systems, using these external-third party data sources is either impossible or limited, which has driven insurers to implement new core systems or at least more modern underwriting solutions,” she adds.

Bruns of Guidewire sees tech tools falling into two broad categories: those that empower business solutions, such as AI, ML, and IoT; and tech ecosystems that allow insurers to deploy differentiating capabilities on top of core platforms. This includes modern integration services like REST APIs, Webhook APIs, and API mediation tools to streamline integration projects and automate more workflows across the enterprise.

“Containerization” technologies like Kubernetes and Docker means insurers can rapidly deploy their own apps and re-use code across their technology stack, while tech frameworks like Cucumber and Karate enable methodologies like behavior-driven development (BDD), so development teams can accelerate their time-to-market, Bruns adds.

“As insurers continue to evolve their products and user experiences, many are doing so with a combination of insurtech partnerships, and using their own developers to create differentiation – and the core system that enables both types of technology adoption tends to be the most attractive choice,” Bruns adds.

The challenge of CX

One of the biggest drivers of core system modernization is the increased demand by customers for a transparent, seamless, and personalized digital experience – and because insurers’ “customers” also include agents, brokers, underwriters, claims reps, and others, it can be especially complex.

“The core system can no longer function in a vacuum,” says Chow of EIS. “Systems need to be component- and microservices-based, with persona-based applications to meet the individual needs of each user.” In addition, the core system must use APIs to speak to any other system -- legacy or insurtech -- and be able to deliver a true customer 360 view along the entire value chain and all lines of business to drive personalized service and marketing, she says. 

This high level of functionality can’t be achieved by merely “adding on” digital components to existing core environments, says Bruns of Guidewire. “Insurers are recoding complex operations, duplicating data, and building new integrations to existing systems – not just one time, but for each channel solution: consumer mobile app, web portal, agent portal.” While this strategy may work in the short term, it restricts speed-to-market and increases costs.

“Insurers need a well-thought-out user interface development process and design system that includes tools that auto-generate UIs integrated with their core system and data that serve as the source of truth,” Bruns says. “By having a P&C-specific digital and UX framework that's part of their core system, insurers can rapidly design, deploy, and update their customer user experience.”

In the quest to provide a customer 360 experience through their core systems, insurers must also consider their relationship with their distribution force. A recent study by Nationwide finds that while 93% of agents feel digitization has enhanced their agency’s success, eight in 10 also say they have found it difficult to integrate digital tools into their agency.

“I’m a commercial P&C insurance guy, and I think the most important thing I’ve seen is a lack of focus on the independent agent distribution channel,” says Magnan of Combined Ratio. “I don’t think we’re ever going to disintermediate the buying of commercial insurance, so it’s time to refocus on managing those independent agents appropriately and giving them the experiences that keep them placing business with you.”  

To achieve this, insurers need core systems that allow them to provide fast, accurate quotes through an omnichannel experience that is intuitive and easy to work in, says Bruns of Guidewire. The process impacts everything from customer retention, cross-selling, and new customer acquisition. Core systems must be able to eliminate inefficiencies in the intake process, such as the ability to automatically read PDFs of ACORD forms to help minimize manual data entry.

“Tools for the salesforce shouldn't be difficult to use or need major amounts of training,” says Chow of EIS. “They should be intuitive and follow processes that are typical of this persona. It is important to know that the core system provider or solution provider the insurer is investing in, has a clear understanding of the role the agent/broker plays and has taken clear measures to develop tools that support high-performing distribution teams.”



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