The benefits of a modern, optimized operating platform for life insurers are quite clear. An optimized platform can reduce operational and technology costs; decrease complexity; and improve organizational agility.
An optimized platform can also improve a life insurer's speed to market. Taking nine to 12 months to develop and launch a new product is a critical impediment when competitors take just two to four months. Platform modernization can help life insurers provide innovative services -- using the channels that customers want to use – with a seamless experience as they move from channel to channel.
And, of course, a rationalized IT environment – with layers of complexity eliminated – reduces risk, optimizes resources and cuts costs. Life insurers with modern systems can reuse common services and decrease transaction times. They can take advantage of software as a service to shift from capital investment to an operational cost model, or use the cloud to support development and production.
Modern core processing systems also help insurers gain a better understanding of the risks they cover. More sophisticated analytics and a more flexible and robust underwriting rules capability, together with performance evaluation and modeling features, put the insurer in a good position to select, plan for and price its risk. Optimized systems also reduce overall business and IT risk by eliminating unsupported technology and limiting reliance of specialist knowledge.
Despite these clear benefits, many life insurers still rely upon a mix of old, obsolete processing systems. There are two main reasons for this.
Expense: Building and populating a new policy system is a very significant investment. Life insurers can easily pay tens of millions of dollars to replace their obsolete technologies. In most cases the legacy systems are still functional and still represent value for the organization, so it is difficult to justify simply writing off the asset.
Impact on the business: Even when organizations decide to invest in new technologies, they quickly discover that implementing and migrating data to a new platform is not for the uninitiated – or for the faint of heart. Relying on inexperienced resources, whether in-house or those of the vendor, can lead to missed deadlines, breakdowns in customer service, an increase in underwriting and rating errors, and a decline in new business sales as key staff become focused on simply responding to system migration problems.
Of course, system replacement is not the only course of action available to life insurers. Other approaches, such as a "legacy wrap" using tools which relate to business process management, portals, workflow, integration, reporting and other elements to "wrap" existing administration systems may suit particular situations.
Outsourcing is another option. A growing number of insurers are outsourcing parts of their system development and maintenance, as well as their non-core business processes and product lines, to third-party administrators or outsource partners.
No matter what path life insurers take to modernize their processing platforms, however, there will be significant efforts, costs and risks involved. Insurers contemplating such initiatives should have a clear view of the capabilities required and the level of sophistication required to provide competitive advantage, the implications of change, and a well-defined, realistic roadmap. There are also a number of issues which should be carefully considered and resolved before the detailed roadmap can be developed, including:
- Prioritization of portfolios to be migrated. This involves the upfront analysis of the profitability of the portfolios under management: their acquisition and administration margins, the portfolio erosion, the IT and administration costs, and the asset / liability exposure.
- Definition of the target policy administration system. This includes finalizing the investment required and the strategy for migration to the new system.
- Migration. How will the cut-over to the new system be managed, and what resources are likely to be required? Will any policies be transferred to other products, will any portfolios be disposed of, and will any other commercial arrangements come into play?
- Portfolio rationalization. What will consolidation and optimization of the policy administration process entail, and how will set-up costs be contained?
- Outsourcing. Are there benefits to be gained by outsourcing the portfolios – either in their entirety or with a focus on either closed or open books?
- Cross- and up-selling. How can the anticipated improvement in customer interaction and service be leveraged through the implementation of a cross- and up-selling capability?
Answering these and other questions requires input from a multi-disciplinary team that can align an understanding of the future state business capabilities and drivers with the system required functionality and dependencies they imply. This calls for people with a wide range of knowledge, including existing and future customer, product and channel strategies; system architectures and the IT cost base; and servicing operations and the associated cost base, as well as future development priorities and the capacity to meet them.
Platform modernization can deliver far-reaching benefits for life insurers. Insurers who undertake such initiatives with a thorough understanding of the issues as well as the costs involved, however, will be in a much better position to realize these benefits and to establish a lasting advantage in an increasingly difficult competitive environment.
About the Author: Brian DeMaster is managing director in Accenture Life Insurance Services.