Analysts: the IT checkbook opens a little wider—but for existing systems: the choice facing IT departments is whether to replace the entire policy administration system, or only a component part

Risk & Insurance, July, 2005 by Cyril Touhy

The C-suite is somewhat more receptive to IT projects and more willing to spend money on them than a few years ago, insurance technology industry analysts say, and many IT departments are focusing their attention on policy administration systems and core processing.

A recent study found that an estimated 41 percent of a carrier's IT budget is going to core processing, said Kimberly Harris-Ferrante, vice president and research director of Gartner Inc.

The percentage of the IT budget going to new investments is about ]0 percent, said Cynthia Saccocia, research director, insurance, at TowerGroup. "Usually new investment is pretty low," she said.

Systems architectures and insurance industry software applications of the future will need to have four attributes, said Matthew Josefowicz, insurance industry analyst for the consulting firm Celent Communications LLC: alignment, agility, accessibility and affordability, he said.

The insurance technology analysts said that legacy systems are starting to weigh down some insurance companies. "Legacy systems are causing delays in time to market," said Josefowicz. Such systems are expensive to maintain and are not good at quickly generating compliance reports required of regulators, the analysts said.

While legacy systems have borne the brunt of criticism for years, insurance carriers have so much data in them that they've been reluctant to switch to more efficient and modern systems.

No matter how far into the future carriers are able to extend their 30-year-old legacy platforms, they may eventually have to succumb to the forces of demographics. As skilled workers and managers trained to maintain these older systems leave the industry, retire or die, there are fewer of them around to troubleshoot when something goes awry.

"The staff and knowledge base of the system is aging, causing issues in terms of costs and maintenance," said Mike Key, president of Fiserv Inc.

Harris-Ferrante said that 24 percent of carriers surveyed reported they would replace their entire life insurance systems, and that 27 percent reported they were looking to replace one or more components of their systems. In the property/casualty segment, 22 percent of carriers said they were looking for a complete replacement of their systems, and 33 percent reported they were looking to replace components of the system.

Of the carriers opting to replace components of their systems, claims and rating/quoting systems are seen as the most difficult to replace, she said.

With senior executives more willing to loosen the purse strings, some carriers are adopting a strategy of buying "surround-type" applications layered over core processing systems, some executives said. Such applications include those designed to function with the Web and others designed to exchange data using a widely used standard.

There's no one policy administration application that will bring together the multiple applications currently used by the carriers, and carriers will likely be forced to select a flexible architecture able to accommodate different systems and designs.

But in an ironic twist that has become a hallmark of global economics, U.S.-based carriers can convert their older systems using the skills of software application engineers in cheaper labor markets like India and China, said Mike Risley, president of the life and health unit of CSC, the large insurance software vendor.

"It's suddenly more cost-effective to convert these old systems," he said.