Three reasons for insurers to modernize their IT systems

Insurance companies can capture the following three benefits by transforming their business model and modernizing their core IT systems, according to a new paper from management consulting firm McKinsey & Company.

• Increased gross written premiums and reduced churn – Flexible, digitized product systems enable insurers to revamp their product innovation process, often resulting in a faster time to market for rate changes and new products. As well, digitally enabled integration capabilities can facilitate a more satisfying front-end user experience and increased support for agency and broker sales processes – a key driver of sales, McKinsey reported. All told, improved and faster processes enhance the customer experience and reduce churn, for which insurers have seen premium increases from 0.5-1% in P&C.
• Increased operations productivity – The benefits stretch beyond IT. The disruption of introducing a new core system often motivates insurers to overhaul their operations setups and adapt workflow mechanisms, thereby improving work organization. McKinsey’s Insurance 360° benchmark showed that players with modernized IT are “substantially more productive than their peers with legacy IT systems – for example, the total number of policies per full-time equivalent they achieve is more than 40 per cent higher.”
• Reduced IT cost – Once implemented, modern IT systems can substantially reduce the cost of IT core systems by, for instance, running on commodity hardware versus the mainframe systems used today by many insurers. McKinsey’s Insurance 360° benchmark showed that IT costs per policy with carriers with modernized IT can be 41% lower than that of players with legacy IT systems. “Still, some players struggle to realize these potential savings, partly because of a lack of decommissioning of old systems and partly because of overly complex configurations and challenges in project management.”

Other benefits of IT modernization can include lower loss adjustment expenses through automation and increased accuracy of claims handling – for example, by connecting policy and claims systems to better match policy clauses and covers with claim events.

“Of course, the extent to which an insurer can take advantage of these benefits depends on its starting position and how well it can realize the full potential of these systems through product rationalization and organizational and process changes,” said the paper, IT modernization in insurance: Three paths to transformation. “As a result, many insurance companies that have embarked on a journey to modernize IT have experienced growing pains.”

For example, insurers too often treat systems transformations as IT projects rather than acknowledging them for what they are: overall business transformations. This shortsightedness can result in rebuilding old functionalities within the new systems, often leading to budget overruns and, more importantly, wasted opportunities to modernize.

Successful programs follow an integrated transformation approach that combines a radical rethinking of the business model, with transformation from the customer and IT perspective. There are three approaches to core system modernization: modernizing the legacy platform; building a proprietary platform; and buying a standard software package.

“Deciding which modernization approach to take depends on a range of considerations, including the state and stability of the legacy system, level of an insurer’s ambition, availability of a mature standard solution market, effectiveness of IT capabilities, and amount of resources available,” the paper said.

Which one should you choose?

“In our experience, insurance companies that have low internal IT capabilities yet hope to benefit from market standards for IT, products, and processes usually benefit most from buying a standard software package,” the paper said, noting that there are exceptions.

“Some insurers – such as those with idiosyncratic requirements or strong beliefs in the differentiating nature of a core insurance system – might choose to build a new platform using either prebuilt components or parts of a preexisting landscape. Similarly, insurers with relatively stable, well-maintained, and incrementally modernized systems that still rely on outdated technologies might choose to modify their existing platform and upgrade other components of the architecture, such as the integration layer, to capture the sought-after business value.”

Each path to modernization has pros and cons, and the timing and extent of existing policies migration need to be considered, the paper said. Choosing the right path depends on a variety of factors, including starting point, transformation preferences, capabilities and business model objectives.

“Given the digital advances in insurance – especially in personal lines – transforming the core is the next frontier,” the paper concluded. “Combining core and business transformation, through an appropriate and considered approach, can yield significant IT modernization benefits.”