The Insurance industry increasingly relies on digital technology to develop products, assess claims, and—most importantly—provide customers with a satisfying experience. In today’s world, IT has become an integral production factor, and the booming insurtech wave has given companies a glimpse of what cutting-edge digital technologies can offer. Therefore, IT capabilities will need to fundamentally change as well; for example, costs must be driven down through procurement and vendor management, application development and maintenance optimized, and IT positioned as a strategic partner.
And yet a startling number of application landscapes across the industry continue to rely on decades-old technologies. Furthermore, as industry players have pursued consolidation for years, the IT back end has not followed suit. This inattention has left most large insurers with parallel or redundant systems that drive up the cost of both maintenance and new feature development. In addition, quite a few insurers have decided to focus their IT investments on selective new front-end tools with immediately visible impact.
As digitalization accelerates and encompasses an ever-wider share of the Insurance value chain, an improvement on the front end alone is not enough. Achieving the full benefits of digitalization requires real-time data access as well as agile features development in core systems. To enable this vision, most insurers must substantially overhaul their core systems and, in conjunction, transform their overall business model. Three options can help companies achieve this goal: modernizing a legacy IT platform, building a new proprietary platform, or buying a standard software package. While each has pros and cons, choosing the right path based on a cost-benefit analysis is critical for delivering on IT modernization and subsequently reaping the benefits.
Insurance companies can capture three primary areas of value by transforming their business model and modernizing their core IT systems (Exhibit 1).
In addition to these benefits, IT modernization can also 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. As a result, many insurance companies that have embarked on a journey to modernize IT have experienced growing pains.
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. Indeed, modernizing core IT systems could have ripple effects throughout the organization, requiring insurers to consider how they must adapt their operating model in response.
Successful programs follow an integrated transformation approach that combines a radical rethinking of the business model, with transformation from the customer and IT perspective. The key to such an approach is simplicity at the core, and results can include measurable efficiency, effectiveness, customer satisfaction, and sustainable improvements. One drawback, however, is that intensive transformation can place high demands on internal resources and skills. Still, success is more likely than merely following business-side improvements, which do not resolve the root causes of legacy complexity—many of which will only increase over time.
Within the overall complexity of internal capabilities and external trends, the question arises of how to best shape integrated business and IT transformation.
