Preparing for 2020 and a Modernized Insurance Industry
By Matt Isaly, North American Head of Product Strategy, Xuber

It’s no secret. Insurance has a lot of catching up to do in the push for modernization. In fact, it hasn’t been since Y2K that many insurers have updated their core systems. The year 2020 does not give the same technical reasons as Y2K to modernize, but does give a powerful psychological impetus to upgrade. Now is the perfect time for the insurance industry to assess its technology as we fast approach the beginning of the second decade of the third millennium. A renaissance is in store, and we may just be on the brink of it.

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Modernization is important for the insurance industry for several reasons. As new competitors enter the market, veteran providers need to stay innovative and current --- or jeopardize losing their business to the new players. Additionally, risk (e.g. climate, terrorism, political, cyber, etc.) is evolving faster than ever and insurers need to rethink the way they do business to stay ahead of the curve. Advancements in big data and the ways companies process it are also reshaping the industry while increasing consumers’ expectations for the level of personalization their policies can offer. Moreover, insurance markets are continually transcending local jurisdictions and moving towards a worldwide focus which will change insurance regulations accordingly. The above is just scratching the surface.

Here are a few key steps to consider as part of modernizing. 

The Replacement Blueprint

For a company to get started on its modernization journey, they first need to examine their IT health. This process involves taking an inventory of the current systems landscape including how each application interrelates (or perhaps doesn’t interrelate) to one another. This exercise should culminate into a decision point, “As an organization, do we see ourselves using this application in 2020?”

From here, a company has a better view to determine which systems are most outdated and begging to be replaced. Companies should also look at the level of risk for not replacing an old system. Does an antiquated system put your company at risk in that it cannot support the business? Or is the software very cumbersome to use, including too many workarounds and manual processes outside of the system? Is it an internally built application where only a few people are able to support it? Answers to these types of questions will help determine how high an application should be ranked on the “to be replaced list.” It stands to reason; the most outdated systems are also the hardest (and most costly) ones to replace; otherwise, they would have been replaced by now!   

Making the Case

Once a company has an idea for the applications that need to be replaced, they can begin to make the case to achieve their modernization goals by 2020. To facilitate this process, a company should conduct a cost-benefit analysis of its current systems. Factors to consider include: money being lost from outdated applications, the cost to implement a new application and the money that could be saved from using a new application.

IT leaders have used the term “technical debt” in reference to poor past investment in systems, meaning that the longer a company forgoes investing in new software, the more costs they rack up as they continue to use outdated technology. So while core systems are typically the most costly and difficult to replace, they will provide the greatest ROI and help a company pay off its “technical debt” faster.

Software Selection

A company can select the software best suited to its needs after they’ve earmarked what needs replacing and have an idea of their budget. Software can be categorized into roughly two buckets, ancillary and core. Ancillary software, e.g. document production, cat modeling, general ledger, reporting, analytics, etc. typically operate on the peripheral of the core solution and vendors offer specialized applications in their respective area. These are typically cheaper and easier to implement than core solutions. Core software runs the backbone of the business, e.g. underwriting, policy administration, claims, billing, and reinsurance. There are vendors that specialize in certain core silos and offer an interface to the others, vendors that have only monolithic type offerings, while some more advanced vendors have very good modularly designed applications across the entire core spectrum end-to-end.      

With these more advanced vendors, a company can opt for a surround and replace implementation versus a complete big bang overhaul. For example, a company might find that their policy administration and billing systems are in the most need of modernization, and its other systems can still run for a bit longer. In this case, modular replacements via the surround and replace approach can make the transition to new systems easier on the business.  

The Timeline

It’s important to have realistic timelines. These things always seem to take longer than you would first anticipate. That said, for most companies, getting a technology refresh is achievable by 2020. However, the key is starting now. As we look at the next three to four years, we’re going to see an influx of insurers seeking to modernize as they look to competitively position themselves for the future. The market will just demand it.

Staying current and modernizing systems is crucial for the insurance industry at this juncture. With increased M&A, the addition of new competitors from global markets and greater customer demand for personalized offerings, technology can help insurers gain a competitive edge and better cement their position in the market.  Now is the time to modernize or be left behind.