Insurers are engulfed in a multitude of incompatible IT systems that are costly to run and fail to offer what customers want. Michael Herson explains an approach that can change all that.
Decades of mergers and acquisitions, as well as under investment and a failure to acknowledge technological advances, have left many European insurers lumbered with outdated, antiquated IT systems. But rather than continue to struggle with the systems, or have to invest masses of cash and time in a complete overhaul there is a new approach – dubbed service oriented architecture (SOA) – that can help bring the back office up to date, piece by piece.
Insurers have already realised that they have to invest in their IT systems if they are to remain competitive. Tim Jones, senior executive of Accenture Insurance Services, says: “Insurance IT spend is growing and there are a number of drivers behind this. Primarily, the cost of maintaining legacy estates continues to rise, not only because they are old, but because layers of regulation create a significant barrier to quick change”.
So why are insurance companies so behind the times? Mergers and acquisitions have had a big impact. As insurers merge, the number of old systems they are working with multiplies, meaning they are now battling against increased costs for the burgeoning numbers of complex systems, which has in turn increased the pressure for systems integration.
The IT platform itself needs to offer consumers ever more choice, due to the rise of the price comparison aggregators which, in turn, drives the need for more transparent, flexible products for faster deployment in the market. This drives ever more sophisticated risk accumulation management tools which control both risk and consumer pricing.
The increasing requirement for these systems to integrate has stimulated the growth of SOA. Changing market conditions favour those suppliers with the ‘toolkits’ to replace parts of old systems or to migrate data to new systems altogether. This drive towards the new SOA architectural platform means that companies are much more likely to multi-source, as the whole principle of SOA is based on removing pieces of the old system rather than having to scrap it altogether.
This approach is endorsed by Bernhard Lang, chief executive of msg systems global solutions, a Swiss-based international consulting organisation which is part of the German msg systems group. He says: “One strategy to get away from this legacy environment is to approach it with smaller pieces. The strategy for this is a service-oriented architecture, so that you don’t have to change everything at one time. It is a piece by piece, modular-based approach.”
The open architectural forums also allow multi-country, multi-company platforms that can be deployed several times – which is good news for global firms. Jones sums it up: “There are now a number of organisations that are not thinking about having a platform for the UK and another one for their German or Spanish subsidiary, but are thinking multi-country, multi-company, multi-jurisdictional systems that are developed once and deployed many times. And they require operating models that can exploit that.”
But the size of the task remains daunting. Alex Robinson, chief information officer of Norwich Union, says: “We went through an experience in the UK where the complexity of the legacy began to constrain the business flexibility. So, at that point, we could see there was a significantly strong business case to invest in simplifying that legacy. And we spent a lot of time switching off systems. So it went from 1,500 systems to 700 systems, and we then migrated the data into those that remained.”
Frédéric Dutreuil, sales vice president of Prima Solutions, claims the balance of budget that is allocated to new investment and innovation versus maintaining legacy systems will swing round in the next few years. He says: “That’s the whole point. It’s between 80% and 90% of their IT budget, just to maintain them. That means that they have 10%-20% dedicated for new investment and innovation lines. So a lot of your competencies are actually focused towards this old legacy system and it’s really hard for the people to move to new technology and try to focus on what they can do there. It’s going to change drastically in the next years because of the age balance.”
According to Tom Rogerson, chief technical officer of consultancy CSC: “Many insurers feel they are between a rock and a hard place with their legacy systems. Although system replacement remains a good choice for those insurers with specific business strategies to support, for many this is too much to contemplate. For these, the good news is that approaches such as SOA, while not being silver bullets, do now offer the possibility of an evolutionary approach going forwards.”
For insurers struggling with their IT, outsourcing is one option. But they tend to insist on retaining ownership of core strategic IT components and processes such as data management, new technology and direction. However other things, such as the maintenance of business processes can be outsourced and offshored which helps to cut costs. This view is endorsed by Lang, of msg systems: “Some parts of course, it’s possible to outsource, the non-strategic parts, the commodity parts, but the strategic elements I would expect that the client wants to have in-house.”
“For many insurers, the good news is that approaches such as service oriented architecture, while not being silver bullets, do now offer the possibility of an evolutionary approach.
Tom Rogerson, CSC
Rogerson believes the landscape has changed as insurers have become more confident about their use of outsourcing. “Insurers have become far more astute about when and where most benefit can be derived from outsourced or offshored resources”.
But few feel it likely that IT will all be offshored at some point in the future. “We have taken a different approach where we are continually developing our system,” says Sharron Payne, GM systems development manager at Cardif Pinnacle UK.
Jem Eskenazi, chief information officer of Groupama, confirms that outsourcing is not an easy job. “You still need 20% of the resources you had before to manage outsourced relationships,” he says.
The consensus appears to be that the ‘best of breed’ approach can and does work, but mainly in large companies that have the resources to take ownership of the necessary integration where required. It is evident that multi-sourcing is commonplace within insurance IT, however Accenture’s Jones warns that the costs can be high. “I support a ‘best of breed’ approach, but I would caution that the business case needs to be really clear and robust, particularly in terms of ongoing cost of ownership,” he adds.
David Rasche, executive chairman of SSP, confirms that it is the management of ‘best of breed’ that is the key issue for the insurance company: “The potential issue with best of breed is who’s going to manage the complete putting together of that project, so if the internal IT department is going to manage all of that, and be good at it, then I think that’s a good perspective.”
So where should insurers turn for help? The proliferation of vendors can be as confusing as the outdated systems themselves. There is no single over-arching IT competitor within the insurance sector. Indeed it is easier to define the main consultancies which are engaged within the market and compete with each other, such as Accenture, IBM and CSC, than it is to define the software companies themselves.
The proliferation of vendors in this marketplace is summed up by Eskenazi, who started with a list of 165 vendors when sourcing a new system. He says: “What surprised me is that there is no clear winner or mainstream product.
Groupama now prefers to deal with a company that specialises in insurance, a niche supplier “to get somebody’s full attention”. Eskenazi’s plan is to create an internal toolbox to enable people to design their own products and services, while bringing IT within reach of more departments, enabling the smoother processing of requests internally.
What is clear is that insurance IT technology is an evolving sector with a number of drivers, such as customer needs and new architectural platforms. Insurers must invest in this long neglected area of their businesses, and they will need flexible vendors to work with them in doing so.
Michael Herson is managing director of The Strategy Works, a strategic marketing consultancy.