Influx of Data Creates Legacy System Conundrum

New data derived from technology innovation is just one of the many reasons insurers are considering the daunting task of implementing new claims systems. A number of recent industry reports indicate that insurance IT spending is expected to increase. Late last year, Strategy Meets Action (SMA) issued a report on emerging technologies and how they are expected to reshape the next generation of insurers. Denise Garth, SMA partner said, “the insurance industry is on the edge of a massive wave of wide-spread change that will unquestionably influence, disrupt, and transform insurance in major ways.”

Cost savings and better customer service are added reasons insurers are looking to improve legacy systems.

“I think actually in our experience the drivers for people changing systems and things that get boardroom approval tend to be less about technology directly and more about business benefits. The drivers typically are spent on IT, because IT is a barrier to growth or the expansion of an organization,” said Richard Clark, business development director at Xuber, a global insurance software provider.

Clark said that new technology acts as a catalyst for new insurance products because it is usually tied with an insurer’s desire to get into a new line of business or to launch a new product.

“Where the insurance administration software that an organization is using represents a barrier either in terms of administrative overhead that they would incur, or that they simply can’t do it fast enough to be competitive in that space, that tends to release funds from the board to spend on technology,” Clark said.

Managing information in a data driven world is also driving insurers to upgrade legacy systems.

“Many insurers are looking to unify that to save costs, but they’re also finding that the capabilities of those systems tend to be very policy centric and not customer centric. They also tend to be very focused on, at least in the life insurance space, collecting the data once or, for property and casualty, on a regular basis but not very often,” said Tom Benton, vice president of Research and Consulting in the Insurance practice at Novarica.

Clark said that better analytics information management is a major goal.

“Legacy is more the symptom rather than the cause,” said Clark. “The guys making the decision want more agile management information, better analytics. Of course whatever they’re sitting on doesn’t allow them to do that. They’re probably two examples of business drivers which if they’re presented the right way, tend to unlock funds for investment in software. That typically will be about replacing or supplementing legacy systems.”

As more and more information is obtained from the policyholder or on a claim it needs to be collected, stored and easily accessible.

“Whereas when we starting getting into the kind of data that’s going to be available through Internet of Things (IoT) and through wearables, we’re looking at data that’s going to be almost continuous,” Benton said. “The kinds of problems they’re running into are their systems are…getting older, harder to maintain, all the things that go with legacy systems. On top of that, the systems themselves can’t handle the kind of volume of input that we’re looking at with the data that’s being generated by the IoT and the wearables.”

According to Benton, smaller insurers tend to look at purchasing systems that will make the integration process easier.

“They tend to more look at suite solutions, whereas larger carriers and a lot of mid size carriers are struggling with how to put these systems together. They’ve recognized over the years that there’s a need to look at the roadmap and the architecture and make sure that they have some basic principles in place for developing a roadmap in architecture,” said Benton.

Rather than replacing a legacy system entirely one option is to make piecemeal changes.

Clark authored an article for Claims Journal recently which discussed an alternative to replacing an entire legacy system by doing it incrementally. He said that insurers could review legacy system issues and determine where replacement will derive the biggest benefit.

He cited examples like a company that still works with physical claims files or one with many activities still occurring outside of its administration system.

Clark said that component sized software might be the answer in these situations.

“In the example…you might recommend that an organization front ends their existing legacy system with a claims case management solution which provides all the benefits – electronic claims file, enhanced workflow – but underneath it’s interfacing back to the same administration system that they had previously,” the Xuber executive said. “They’re getting gains, they’re solving the issue, seeing benefit without the whole rip and replace fear and overhead. Of course, once they see the benefits of having implemented the component which gave them the biggest bang for their buck initially, then they may well be able to justify the subsequent step.”

Another consideration that comes up in the debate on whether to buy software as components or as an end to end solution is the silo nature within insurance organizations.

“I’m sure you’ve heard it before…claims is not an island,” Clark said, stressing the interdependency between claims and underwriting in particular. “Don’t miss the holistic benefits that organizationally come from actually informing other parts of the value chain…to improve the overall quality of your underwriting for the future.”

Technology might just be the answer to breaking down those walls, he said.

“I think the whole topic of us not operating as separate universes, but actually remembering we’re all part of the greater overall performance of the organization is a good lesson when you’re thinking about how that technology fits into the overall architecture,” Clark said.

Some carriers are working to develop their own systems internally while others are seeking to update their claims systems with products from third party vendors.

“The trend is more towards buying externally,” said Clark. “Different countries, different cultures go at different paces. I think certainly from what I’m seeing in the UK and the US the tendency is much more to buy rather than to develop yourselves. That’s not to say there aren’t exceptions to the rule.”

Clark said companies may sometimes feel uncomfortable using the same software package as their competitor.

“Everybody wants to feel that their technology gives them competitive edge,” the Xuber business development director said. “Therefore, using the same software as the guy down the street feels contrary to that objective of differentiating yourself through your processes, your technology, your products.”

Configurability built into modern software is invaluable, said Clark.

“Whilst in the past if you bought the same software package as the guy down the road it would behave the same. It would look the same. It would impose the same processes on your organization whereas today we have highly configurable software,” Clark said. “The same software package can look, behave, handle business in a very different way from one implementation to another.”

Clark said this the benefit configurability is most evident on the front end.

“How you underwrite, how you rate, how you construct your products, how your products are developed differently to other organizations, then how you run your workflow, and how you give your customers perhaps some differentiated service can all be done through configuration rather than hard coding,” said Clark. “That means that people perhaps are less concerned than they used to be about using the same underlying technology as their competitors.”

Larger carriers seem to have more interest in developing systems in-house, Benton said.

“One of the reasons I think we’re seeing the large carriers do the experimentation with drones and other IoT is that they have the resources to be able to build systems that can handle the extra input of data and interfaces to data sources,” said Benton. “I think right now, the vendors have not really been able to provide solutions that can integrate that data into their solutions, at least seamlessly. There are certainly vendors that are looking at those kinds of capabilities…but they’re still in the development phase, for the most part.”

The experts weighed in on what insurers need to consider when evaluating end to end replacement versus component replacement.

“I think one of the things that is important for anybody acquiring new software is to actually think about the capability of that software to handle the requirements that they don’t yet know about, “said Clark.

Clark, who often finds himself reviewing Requests for Information and Request for Proposals, said the standard tick list of requirements don’t usually contain thought into future business direction.

“Very often those requirements are articulating whatever their current application does or the things that they know about their current application that doesn’t do very well,” Clark said. “What organizations don’t seem to be very good at doing is actually thinking about the agility that they need in the applications that they’re buying. Actually, I think there’s a very important mindset shift that buyers of software need to get into and that’s assessing the agility of that software to cater for the unknown.”

Clark admits it’s difficult to predict where future business will lead.

“It’s a difficult thing to do, but I think it’s something which will be the acid test as to whether the technology removes the constraints that there might otherwise be on an organization to go wherever the next opportunity comes from,” said Clark.

Benton said insurers need to do their due diligence in vetting vendors.

“If I were a CIO in the industry now, I would look at the roadmap of my vendors and look for their plans to be able to develop these kinds of capabilities into their systems,” said Benton. “Especially if you’re looking to replace legacy systems, make sure that there’s a roadmap to be able to handle this Internet of Things phenomenon that’s becoming even bigger this year.”