Products, Market Impede Investment in Systems for Life Insurers
Robert Regis Hyle | February 12, 2014
Carriers are not as quick on the draw when it comes to investing in new policy administration systems.
By Robert Regis Hyle
The life insurance side will never be as fastest-growing area for software solution providers compared to what goes on with carriers on the P&C side.
“You can see it in the number of vendors,” says Karen Monks, an analyst with Celent and author of a new Celent report on policy solutions for life insurers (North American Policy Administration Systems 2013: Life, Health, and Annuities ABCD Vendor View). “There are many more P&C insurers as well, which is part of the reason, but the market is fairly stable from year to year.
Life insurers investigating new systems generally face two issues: There’s a long tail to the process of pricing; and it is harder for them to justify the expense because legacy systems run well for them.”
“Older systems are stable, but insurers have difficulty introducing new products,” says Monks. “Depending on how often they want to introduce new products, that’s a decision they have to make, whether they are going to replace their legacy systems or not.”
One reason they don’t do replace their systems is the life side has long-tailed products, which on average last for 40 years. Also, there is not a lot of interaction between life insurers and policyholders, which is nowhere near the amount of communication a P&C company has with its customers. The main driver for new systems is modern platforms have the ability to introduce new products.
“If life insurers think there is cost effectiveness, they may replace their legacy system,” says Monks.
It normally takes insurers about a year to replace its legacy systems, but with new systems insurers get varying points and Monks thinks carriers could bring that timeline down to a more reasonable three or four months.
“Sometimes the difficulty is not in the systems, it is in the state insurance departments,” says Monks. “You’ve got so many tied systems in life insurance. You have to develop a new product on the policy system, but also on the illustration system as well. The application and the rates have to be approved and once those are done it flows back into the policy system. The illustration system may be a critical path, but more times than not it’s the insurance regulators.
Newer systems allow carriers to configure the products, but Monks explains that it is important they have the template or, at the least, the ability to clone a previous product and the ability to change rules based on the template.
“Quite frequently, that’s what speeds them up,” says Monks. “Having web services and open architecture that interfaces more frequently allows them to work quickly,” she says.
Conversion of old data usually is the last thing done, according to Monks. Normally, carriers take new business and go forward and slowly convert the old data. The conversion of old is a carriers’ biggest headache because the systems don’t open easily and because matching the data fields is difficult.
“There may not always be an equal place for it to go or data points are missing that the new system would require,” says Monks. “Depending on how old the product is, it is not unusual to have many policy administration systems running at the same time. Forty percent of all premium today is closed book, but the policies are still being administered.”
Since some policies may be 30- or 40-years-old, Monks feels it might not be worth the conversion.
“I always look at it as the majority of the new products are frequently sold for new product lines,” she says. “The existing system might not have the capability of handling the policies or getting into a variable product. If they are going to replace older legacy systems it is to move forward with the conversion of older policies coming later.”
Newer systems are able to collect a lot of data and quite a few are moving toward where the system can pull out data related to policies themselves, but with the core features of policy systems—issuing the policy, being the system of record, underwriting—it’s not as clear cut as P&C insurance.
“There are quite a few systems where, if a carrier decided to use all that data, they could potentially go into applications, underwriting, policy, and claims,” says Monk. “You can get a good picture. The ability to do something with the data is out there. Analytics isn’t the strong point, but the data flows fairly clean if they are using all the life-cycle aspects.
Monks believes some of the new systems that have come into the market since 2011 have been eye opening for some of the staid carriers that had been using the same systems for years.
“About 45 systems were sold over the last 30-month period,” says Monks. “This market is a lot smaller than the P&C market, so I don’t see life insurers introducing a lot of new products. What we have found is insurers are so concerned about sales that they would rather spend money on the front office, with things like illustration tools and then spend the data to the back office.”
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