In an era where the insurance industry is rapidly embracing digital transformation, the reliance on legacy systems by mid-market insurers stands as a testament to the historical roots that have shaped their operational landscape. In the digital age, the legacy systems are creating problems for the insurers because they aren’t capable of adapting with booming technologies making it difficult for insurance companies to launch new products.
In this blog, we embark on a journey to unravel the complexities surrounding using legacy systems in the insurance sector. From their historical significance to the contemporary hurdles they pose, we aim to shed light on the operational implications that mid-market insurers grapple with. Join us as we explore the intersection of tradition and innovation, dissecting how these insurers can navigate the digital age and ensure sustained success amidst the evolving technological landscape.
What are legacy systems in insurance?
Within the realm of insurance, legacy systems stand as relics of the past – aging and obsolete tools that, despite their dated nature, continue to persist in the operational landscape. These antiquated systems encompass unsupported platforms, outdated mainframes, and applications that have long outlived their technological prime.
In the fast-paced evolution of the insurance sector, numerous organizations find themselves tethered to these outdated monolithic systems, lacking the capabilities and advancements offered by their modern counterparts. The complex web of reasons that keep insurance companies clinging to their legacy systems often includes perceptions of adequacy or fear of disruption associated with a potential transformation.
However, such justifications are increasingly becoming short-sighted. The passage of each month marks a steady decline in the viability of these legacy systems, with deteriorating levels of security, compliance, compatibility, and performance. Furthermore, as these systems lag further behind, the end-user experience – impacting both employees and customers – experiences a parallel decline. It becomes imperative for insurance companies to recognize and address these issues as the initial step in the crucial process of transforming their legacy systems.
How are legacy systems affecting insurance companies?
1. Upfront and ongoing expenses
One of the primary reasons why insurers love legacy systems is they fear of upfront costs. However, when viewed in the context of maintenance expenses, this initial investment pales in comparison. Gartner’s analysis reveals that the costs associated with system implementation constitute only 8% of the total expenditure over the system’s operational life, which averages around 15 years.
2. Direct system costs
As legacy systems age, the expertise required to maintain them becomes increasingly scarce and expensive. Hiring a COBOL programmer, for instance, is more challenging and costly compared to finding someone well-versed in modern languages like Java. McKinsey’s research suggests that companies with modern IT systems can potentially enjoy a 41% reduction in IT costs per policy.
Design challenges
Introducing new features or enhancements to an existing legacy system incurs significant expenses, ranging from $400,000 to $900,000 on average. Integrating essential functionalities such as customer self-service and telephony becomes a complex and costly endeavor.
Support complications
Supporting a system burdened by numerous past modifications poses a formidable challenge. The likelihood is high that previous alterations were implemented by teams with limited understanding of the core systems, leading to a convoluted maze that the current team struggles to navigate.
Manual resourcing
Legacy systems often necessitate manual data entry, demanding additional staff and introducing a higher potential for errors. Some projects have witnessed clients reducing data entry by up to 75%, emphasizing the inefficiency of manual processes.
3. Indirect costs
Beyond the tangible expenses, the use of outdated and inefficient systems incurs hidden costs:
Revenue loss
Without the ability to harness data and insights for targeted marketing, insurers might unknowingly bleed revenue every day.
Profit erosion
Lacking real-time data analysis leaves insurers operating blindly, unaware that a seemingly successful portfolio might have been a financial drain from the outset.
Increased wage costs
The reluctance of programmers to work on legacy systems may force insurers to pay a premium for programming talent.
Misguided investments
Inadequate data may lead to misguided strategic decisions, risking investments in unprofitable areas.
Compliance risks
Regulatory bodies like APRA are focusing on insurers with aging legacy systems, identifying them as obstacles to reform.
Customer attrition
A cumbersome system lacking user-friendly features may drive frustrated customers to explore alternatives with competitors.
Inefficiencies
Insurers agile enough to adapt during crises, such as the COVID-19 pandemic, without sacrificing productivity are reaping enduring benefits from flexible work arrangements.
In essence, the true costs of maintaining legacy systems extend far beyond the visible expenses, encompassing lost opportunities, hindered growth, and the erosion of competitive edge. Recognizing and addressing these multifaceted challenges is crucial for insurers navigating the complex landscape of system modernization.
Why insurance companies prefer legacy systems?
Opting to modernize enterprise systems and software may seem like an unequivocal choice, given the associated benefits of enhanced performance and competitive advantage. However, despite these advantages, many institutions remain tethered to the familiarity of legacy technology, citing various justifications that hinder or delay the crucial transition.
Doubts surrounding cloud computing often impede progress, as decision-makers and stakeholders express concerns about its reliability and potential risks, including security and compliance. Contrary to misconceptions, leveraging cloud vendors can reduce such risks, with providers consistently updating security technologies and staying abreast of compliance requirements.
Time and cost emerge as significant obstacles, as upgrading or replacing legacy solutions demands substantial resources. Recognizing the absence of a one-size-fits-all roadmap for legacy modernization, organizations must carefully consider development lead times, deployment strategies, and the maintenance of functional legacy systems throughout the project life cycle. Varied approaches, such as complete rebuilds for smaller organizations or tiered modernization for globalized multinationals, allow for tailored solutions.
Moreover, the transition entails additional challenges related to training and onboarding, impacting business continuity. Overcoming resistance, adapting to new technologies, and aligning stakeholder input with onboarding strategies are essential steps to ensure a smooth transition without compromising customer experience or financial stability.
How to implement strategic modernization in the insurance industry?
Embarking on the journey of modernization necessitates a meticulous examination of existing systems to pinpoint inefficiencies, security vulnerabilities, and integration complexities. This step lays the foundation for tailoring the modernization approach to align precisely with the unique needs of your insurance business.
Following this assessment, the creation of a phased modernization roadmap becomes imperative, strategically prioritizing areas demanding the most critical improvements. Investing in technologies that facilitate seamless integrations not only boosts operational efficiency but also ensures scalability for the future.
The adoption of cloud-based solutions emerges as a pivotal strategy, offering heightened flexibility, scalability, and accessibility. Cloud technology facilitates smoother integration with emerging tools and services while concurrently reducing maintenance costs.
Conclusively, a key driver of efficiency lies in providing comprehensive training programs for employees, acquainting them with the intricacies of the new systems. Effective change management strategies play a crucial role in easing the transition and garnering staff buy-in.
While legacy systems have played an integral role in the historical tapestry of the insurance industry, their operational implications cannot be underestimated in today’s digital landscape. Proactively addressing these challenges through strategic modernization endeavors empowers insurers to elevate operational efficiency, curtail costs, and position themselves for success in an increasingly competitive environment.
