Insurance has obtained a reputation for being stuck in its ways. For 50-odd years, the way insurance has worked has remained the same. But in the last few years, catalysed by the pandemic, the rise of digital solutions and insurtech looks to break down historical insurance preconceptions have emerged.
Innovative solutions have changed how insurance companies interact with customers, how they underwrite and price policies, and how they manage risk. But why does the insurance sector seem to be far slower than most other financial industries to adopt more modern technologies?
Let’s hear from our industry experts, who reveal the challenges insurance companies face when modernising legacy systems.
‘Think of it like a new tree’
Technology is often complex, and the longer a system has been around, the more difficult it may be to modify, suggests Josh Schwaber, head of customer experience at portfolio analytics and investment management platform Kwanti.
“They could have a number of interconnected components that make it tough to change certain parts without breaking another part of the system.
“Think of it like planting a new tree in an old forest: the new tree may bring new growth and energy to the forest, but it may also be difficult to integrate it into the existing ecosystem without unforeseen issues arising.
“There is a risk that the modernisation process could lead to disruptions or downtime, which could impact the business’ operations and reputation.”
‘Because they can’t start from scratch’
Legacy systems are hard to modernise simply because they can’t start from scratch, says Daniel Green, co-founder & CTO at travel insurtech Faye Travel Insurance.
“Whereas new insurtechs are hitting the scene doing just that – especially when it comes to being digital and mobile first, with a focus on digital payments and quick claims resolutions and reimbursements.
“For example at Faye, when our travellers qualify for a reimbursement on common travel inconveniences – like a flight delay – we immediately send them funds to Faye Wallet, our secure digital debit card that they can add to Apple Wallet or Google Wallet, rather than having them paying for things like meals in the airport out of pocket.
“We also enable them to file claims digitally, in-app which takes minutes. You can try to build such products at legacy companies, but it can get lost in the noise. Legacy players in insurance – especially travel insurance – will be losing customers looking for a more personal touch and a strong digital experience that newcomers have.”
‘It’s a costly business’
“Some challenges of legacy are the speed and performance of big batch processes as databases grow, the ability to find skilled programmers, obsolescence and lack of support for hardware and operating systems, thus the overall cost of keeping the lights on,” says Eoin Lyons, CEO of conference organiser Opal Group.
“It is often costly to make simple changes to products or indeed launch new ones, so this can inhibit a business keeping pace with the market.
“One approach which has been successful in some instances has been to preserve legacy systems as ‘system of record’ and retain key business processes but integrate with more modern technology. More cutting-edge digital technology can be deployed and develop at the pace the business needs augmenting the valuable and sustainable element of the legacy system.
“In other words the optimum transition might be a partial one not a full replatform.”
For Rory Yates, SVP of corporate strategy, global, at digital insurtech EIS, it’s simple.
“In a word, people. Specifically, their mindset and motivation. For most, modernising means iterating on what you’ve got. But that only improves what you can do today and won’t allow insurers to compete in a landscape dominated by a proliferation of distribution, massively changed customer expectations and new products in embedded, risk-removing and adaptive solutions.
“To truly transform, insurers must drop legacy mindsets and business models and adopt data-fluid and intelligent ecosystem models. This will change the operating model, massively increase the knowledge of a customer and crucially, an insurer’s ability to act on it.
“Until they make this shift, they will only be able to fight for profit between the cost against the risk.”
‘It can be high risk and disruptive’
The challenge for most insurers when transitioning away from legacy systems is that they are typically highly complex, extremely inter-connected and business critical, says Daniel Derham, insurance specialist, SAS UK & Ireland, a business analytics software company.
“Therefore, transitioning can be high risk and cause significant disruption to the business. Some systems (such as Mainframe) have been in place for 30, 40, even 50 years and have organically grown – that’s decades of processes, data and functionality to rationalise and then replicate. Insurers are often hostage to legacy for these reasons.
“For those in charge of deciding on transition, determining your target state is often the easy part. Unpicking your current state, what’s downstream? What’s upstream? What’s the flow of data through the system? – everything that feeds into it and everything that it feeds and then qualifying its validity is the challenging part. The answers to these questions aren’t always easy to come by.
“For those insurers who have taken on the challenge of modernising, there are many benefits. Cost avoidance with significant improvements in security, significantly reduces risk. Rationalisation and consolidation of code and data sets often results in a smaller footprint of compute and storage, lowering infrastructure costs.
“Optimisation of code often results in better performance. A modern ERP or business management system is cheaper to run through cloud analytics and AI. They afford insurers speed and agility and can help them better tackle core issues like fraud.
“Transparency and governance are also key. A modern system typically organises and segments data in a more detailed way, allowing insurers to treat customers in a personalised way and act fairly – for example, identifying vulnerable policy holders who may need extra support.”