Insurance companies have relied on legacy systems for decades to manage policies, claims, billing, and more. Insurers continue to struggle to provide customers with contemporary experiences; according to 41% of CIOs, legacy systems are the biggest obstacle to success in the tech industry. It makes sense, considering this mindset, that 68% of insurers intend to raise their application modernization spending, according to a Gartner report.
What Exactly Are Legacy Systems in Insurance?
A legacy system refers to old hardware and software that still works but is becoming outdated. You can read more about this. But for now, it is important to understand that in the insurance industry, common legacy systems include:
Policy administration systems. These manage the lifecycle of policies from enrollment to renewal to termination. They track policy details, calculate premiums, send renewal notices, and more. Many insurers still run decades-old policy admin systems built on mainframe technology.
Claims management systems. Claims systems handle the claims process from first notice of loss to settlement. This includes tracking claim details, reserving funds, corresponding with adjusters and policyholders, calculating settlements, and closing claims. Legacy claims systems make it difficult to get a holistic customer view or leverage new data sources.
Billing/premium accounting systems. Billing systems generate invoices, collect payments, track accounts receivable, and more. Aging accounting systems can hamper an insurer’s ability to offer flexible billing options.
Customer relationship management (CRM) systems. CRMs manage sales interactions and track customer data. Outdated CRMs prevent insurers from truly understanding customers and tailoring engagement.
Agency portals/management systems. These portals allow agents and brokers to quote policies, submit applications, manage accounts, and more. Aging agency systems are disconnected from core underwriting and policy admin systems.
Reinsurance systems. Reinsurance systems manage complex reinsurance treaties, track coverage, and handle settlements between insurers and reinsurers. Manual reinsurance management ties up resources.
Data warehouses. Data warehouses aggregate information across systems into one place for reporting and analytics. With siloed legacy systems, creating a comprehensive data warehouse is extremely difficult.
Other common legacy systems include document management, product configuration, compensation management, data reporting, and specialized line-of-business systems.
Why Are Legacy Systems Problematic for Insurers?
Legacy systems served insurers well for many years. But today, these antiquated systems are keeping insurers from innovating and hindering critical business needs:
- Poor customer experience. Disconnected legacy systems make it impossible to get a unified customer view or seamlessly manage policies across channels.
- Product limitations. Hardcoded legacy systems can’t support modern, usage-based insurance products with dynamic pricing and billing.
- Operational inefficiencies. Manual processes and fragmented systems lead to duplicated efforts across departments and channels.
- Weak analytics. With data locked in legacy systems, insurers struggle to leverage analytics and AI to improve decision-making.
- Soaring IT costs. Maintaining aging systems drains IT resources. And custom integrations between systems add complexity.
- Regulatory pressures. Updating systems to meet new regulations like IFRS 17 requires expensive, risky changes to legacy systems.
- Security and reliability risks. Out-of-date legacy systems lack robust security and resilience measures, increasing risk.
- Inability to scale. Modernizing products, channels, and partners requires scale and agility that legacy systems lack.
Due to these legacy system challenges, many insurers see stagnant premium growth, declining market share, and shrinking margins. Hence, the push towards digital transformation in insurance and migration off legacy systems.
Why Are Insurance Legacy Systems So Challenging to Replace?
Given their downsides, why do so many insurers struggle to modernize legacy systems? There are a few key reasons:
- Complexity. Policy admin, claims, and billing systems have decades of complex business logic baked in to account for various lines of business, regulations, products, and more. Replicating all this complexity is hugely difficult.
- Data migration. Insurers are terrified at the thought of migrating decades of legacy policyholders, claims, and financial data across systems. Bad data = big problems.
- Cost. Budgets for a full system replacement run into the tens or hundreds of millions of dollars over many years. That’s no small investment.
- Risk. Switching core systems brings massive operational risk. If new systems don’t work perfectly at go-live, customer service, cash flow, and more could suffer greatly.
- Disruption. Transitioning systems and business processes could negatively impact productivity across an insurer for months or longer. There are also tough IT skill gaps to address.
Given the high cost, risk, and effort, insurers often try to prolong legacy systems through add-ons, custom integration, or manual workarounds. But even these band-aids come with major drawbacks.
The Case for Insurance Digital Transformation
Despite the challenges, insurers just can’t afford to stand still on aging legacy systems. The costs and risks of inaction keep rising while carriers fall farther behind digitally savvy competitors, InsurTechs, and Big Tech.
Thankfully, advancing insurance technology and digital transformation approaches make modernization more achievable than ever without a hugely disruptive “big bang” legacy system overhaul. Some key digital enablers include:
Cloud platforms. By moving legacy systems to managed cloud platforms like AWS or Azure, insurers can gain agility, efficiency, and resiliency. This lifts the burden of hardware management and upgrades.
Insurance PaaS. Cloud “platform-as-a-service” solutions offer ready-to-use, configurable core insurance capabilities to accelerate legacy modernization in bite-sized pieces.
Insurance SaaS. Insurers can retire legacy systems faster by adopting best-of-breed “software-as-a-service” solutions, such as modern policy administration, billing, or data/analytics systems in the cloud.
Integration middleware. Integration platform-as-a-service (iPaaS) makes it easier to connect legacy with modern systems during incremental modernization journeys.
API enablement. Exposing legacy system capabilities via modern APIs accelerates integration and interoperability while extending system value.
Low-code platforms. Citizen-developer low-code platforms let insurers quickly build customer experiences on top of legacy systems, removing overreliance on IT.
IoT and telematics. The Internet of Things and connected devices feed real-time contextual data into legacy systems, enhancing analytics and functionality without core modernization.
AI and advanced analytics. Artificial intelligence, machine learning and big data collectively optimize decision-making, modernize experiences, increase automation, and maximize legacy system value.
Key Steps for Modernizing Insurance Legacy Systems
With the right motivation, strategy, and mix of modern capabilities, insurance companies can transform rigid legacy systems into agile, customer-centric technology stacks. Here are best practice steps to guide legacy modernization initiatives:
- Audit and assessment. Catalog all legacy systems and interfaces. Assess systems for technology status, data quality, integration complexity, costs to maintain/enhance, and more.
- Business case. Build a strong business case for modernization tied to customer experience, operational, risk management, and financial goals. Socialize cases across key executives and lines of business.
- Roadmap. Create a multi-year roadmap to retire legacy systems and meet business goals through a series of incremental modernization releases.
- Quick wins. Deliver some quick, high-impact legacy enhancements first (like customer and agent portals) to build confidence for bigger changes later.
- Communication. Overcommunicate modernization vision, roadmap specifics, and release outcomes across the organization and ecosystem partners.
- Cloud migration. To increase agility, access, and resilience, determine which legacy systems and datasets can first be migrated to managed cloud platforms.
- Data governance. Institute strong data governance, management, integrity, and security measures enterprise-wide early in the modernization journey.
- Integration. Use iPaaS and APIs to ensure legacy and modern platforms exchange data and interoperate smoothly during the transition.
- Testing. Conduct extensive end-to-end testing of components before going live, with a special focus on downstream legacy system impacts.
- Retirement and renewal. Once interoperability and data flows are verified, retire legacy systems and incrementally renew with modern platforms.
- Change management and training. Help people across the organization adapt to technology/process changes with training and post-go-live support.
Conclusion
The window for insurance companies to transform legacy systems doesn’t stay open forever. As customer expectations and market competition continue rising, the costs of legacy system inertia will soon outweigh investments lost from past modernization failures. Insurers must get transformation right this time. Following structured frameworks can help overhaul rigid policy admin and claims systems while adding innovative digital capabilities that rekindle premium growth and customer loyalty over time.
