Legacy Systems Add To Insurer Costs In World Of Thin Margins
As margins increasingly are squeezed in the insurance industry, company management is looking to rationalization of legacy systems as one area to cut costs, according to industry experts.
“We have seen an increased interest and focus on rationalization among our clients over the last year or two, and thats largely being driven by the intense cost focus within the insurance industry as a whole,” says Nick Meikle, senior manager with Accentures insurance practice in Manchester, England.
A stagnant equity market, increasing regulatory costs and the spate of mergers and acquisitions over the last five years have acted to put pressure on organizations to look at how they can simplify their IT architecture, he says. “In a world where you have great investment returns and growing business, you dont tend to focus on cost control as much. Were not in that world today.”
Global economic conditions, overcapacity and thin margins have created pressures for the insurance industry that can be addressed, in part, by improvements in IT, says Colin Rickard, senior consultant with Kognitio, a system integrator based in High Wycomb, England. A lot of the mergers and acquisitions over the last five to seven years have been completed to bring economies of scale, but then mergers create their own problems with efficiencies, he says.
Mergers have driven a lot of the projects to rationalize IT architecture and legacy systems, says Meikle. “There are many companies that have not just merged, but they are mergers of companies that previously merged,” he says. “So you have this cascade effect.”
In the United Kingdom, he says, insurers that have merged may have done some rebranding and some cosmetic IT rationalization by putting wrapper systems around old legacy systems. “But many really havent attacked the underlying number of legacy systems in their companies.”
Rickard notes that as a result of mergers, there have been instances where customers phone a call center and are asked which company their product is with: company A, B or C?
“The reason for that is that the insurer merged with these three companies a long time ago, but operationally it hasnt merged and hasnt conducted a platform rationalization,” he explains. “As a result, it isnt able to present a single new brand to the market.”
A group thats the product of mergers between three insurers that had four IT systems may now have 12 systems, although it probably needs only four, Rickard says. It is expensive for the company because an enormous amount of people, machinery and maintenance is required to run multiple systems, he says, adding that it is also bad customer relationship management because “you cant present a single face to your client base.”
As a result of these costs, a number of insurers have been forced by economic pressures to embark in platform rationalization of their legacy systems, he explains.
Meikle says there are two broad schools of thought about solutions to the problem of legacy systems.
Some companies will rationalize their existing systems down to a smaller number of systems–to three main policy engines from 12, for example. “Then they choose the one thats best suited and collapse the other two systems on to that one system.”
Another solution is to get a newer, leaner system and install it into the organization for new business, and then migrate the legacy systems on to that new platform, Meikle says.
Meikle explains that if a company has three main policy engines and they all have problems that are substantial and enduring, then a company may decide to “clear the decks and move on to something new.”
If, however, one of those systems is sustainable in the medium term, the company may decide to rationalize the other systems into the single viable system, he says.
The other possibility is to go from three to one and then one to a new one, he adds, noting that there are different routes a company can take.
In discussing the pitfalls of IT rationalization, Meikle says that some involve the generic problems of any big IT project or change programdoing it on time, doing it to schedule, doing it to quality and managing the risk.
“These are big programs and they need a lot of focus from both your technology and your business operations to get them to work,” Meikle says.
So the challenge for a company is to find a way to focus on data rationalization while it undertakes strategic changes in launching new products and new capabilities, he said. “Theres a real conflict in there, which is difficult to reconcile.”
As a result, he says, the organization must be committed to updating legacy systems. “The companies I know that have been the most successful at significant and radical rationalization have prioritized it very high on the strategic agenda” and realize it would be extremely difficult to undertake another change program at the same time because rationalization is their number one objective, he says. “Now if the company has spare capacity, it may contemplate doing other projects, but that requires a lot of commitment from very senior people in the organization.”
Meikle emphasizes that the IT department wont be able drive such a project. “It needs to be a business-driven change with an executive buy-in and commitment to prioritize rationalization above other things,” he says. “The IT department may sponsor it, but without the serious buy-in from management, youll always struggle to get them to buy into why you cannot do all the other functional and strategic changes they want at the same time.”
Meikle says that implementation is tricky with major rationalization because the company is making a very fundamental surgical change at the heart of the organization. “Again, if you tackle it purely as a technology project, youre going to miss a lot of activities. Youre going to miss the business training issue, youre going to miss the process issues, youre going to miss the reconciliation and the audit requirements.”
This isnt a technology project, he says. “Its a major business change project.” He explains that the companys end users in call centers or in operational centers or branch network will be going from working on perhaps three legacy systems to one.
“So all those processes need to be looked at to change in parallel with technology,” Meikle says. “This project requires a holistic change that sits significantly outside of the IT department.”