February 1, 2017 by Satya Sarangi, President and Chief Executive Officer, TmaxSoft Canada
The insurance industry is undergoing transformative change. Traditional insurance practices are being challenged by evolving customer expectations and cost control demands spurred by new technology, disruptive competitors and an evolving insurance business model.
It seems that many insurance organizations are feeling the pressure to innovate and differentiate themselves in a bid to remain both relevant and profitable.
Those efforts are unfolding as insurance IT budgets look to have flatlined. Statistica, a statistics portal that includes stats and studies from more than 18,000 sources, includes information on the average IT spending ratio of insurance companies as a percentage of premium from 2011 to 2016.
“In 2014, the insurance companies spent about 3.5% of their direct written premium on information technology,” the portal reports.
Most of the spending was dedicated to running and maintaining day-to-day systems and far less earmarked for transformation and growth.
Over the last 25 years, the insurance industry has relied on mainframes as they have been considered a good investment in terms of reliability, performance and security.
It has been reported that research conducted by Gartner in 2015 revealed more than half of surveyed global insurers still had more than 50% of their core applications running on a mainframe, while one-third still had between 10% to 50% still running on the mainframe.
MODERNIZATION IS ESSENTIAL
However, some argue that these once reliable and secure mainframes are quickly becoming antiquated, expensive and a hindrance to innovation. Modernizing mainframe applications has become a business imperative for several reasons.
Mainframes do not support innovation
Big data and analytics are driving innovation and competitive differentiation for insurance companies. Older mainframe applications tend to use more file-based data storage, limiting flexibility and analytics.
It is anticipated that organizations will need to make their mainframe data more available and compatible to support today’s digital businesses, develop new products and services and offer competitive information and insights.
Risk of losing market share to more agile competitors
More and more companies appear open to moving to the cloud for increased capacity, higher return on investment and the agility required for digital businesses. The result is a legacy application that incorporates the best of both worlds: business-defining intellectual property with demonstrated business logic.
Processes that have been refined over many years are reinvigorated by moving from a one-tier approach to more agile capabilities, including better scaling,
higher reliability and improved integration with big data analytics being delivered on a platform that is less expensive to acquire and maintain.
Expense of mainframes
Today’s mainframes run on COBOL, PL/1 or other languages difficult to support, which cannot be expanded or quickly adapted to respond to new market demands. Maintenance can be an issue as many users may employ mainframe hardware, software and tools from vendors who have retired, gone out of business or no longer exist.
In addition, mainframes require considerable space, and have associated power and cooling costs that, ultimately, can have an impact on the bottom line.
Mainframe expertise is limited
The mainframe workforce is slowly retiring and a very small percentage of younger employees are being trained on them. Companies face a great challenge when looking for the right talent to support and maintain their mainframes.
A recent Compuware Corporation study of 350 global chief information officers (CIOs) found that while 88% agreed the mainframe will continue to be a key business asset over the next decade, 75% of polled CIOs said today’s crop of distributed application developers have little understanding of the importance of the mainframe.
The talent challenge is exacerbated by findings of another Compuware survey released last December. Conducted by Forrester Consulting, the survey involved 182 input and output, IT and app development professionals in the United States and the European Union responsible for application development teams at organizations with mainframe systems of record. In all, 90% of respondent executives reported challenges in developing and delivering applications that involve the mainframe.
The survey further found the biggest challenges include unacceptably slow delivery, expensive workarounds, development teams saddled with changing priorities, and compliance and security risks. Despite mainframe application delivery challenges stifling innovation and speed to market, 57% of respondents reported new business initiatives involve
the mainframe and 39% said it is involved with at least some new initiatives.
With the majority of annual IT spend going towards running day-to-day business, legacy modernization is quickly becoming a critical priority.
Modernizing core insurance applications like claims management, policy administration, underwriting, commissions management and actuarial systems offer an opportunity to help reduce the day-to-day spend.
There is increasing awareness that legacy modernization can free up resources, making it possible to focus on high-priority investments that have the potential to help grow and transform the business.
Although there are tangible benefits to modernizing core policy systems, including improved security, mergers and acquisitions simplification and lower maintenance costs, a large-scale modernization project does come with some risk. There must be acceptance that modernization takes time and cannot be completed overnight.
Decommissioning mainframes requires planning and the implementation of formalized processes, as well as the support and buy-in from internal stakeholders across the organization.
One of the first and most critical steps is evaluating the organization’s application portfolio to better understand how the mainframe is being utilized. This is necessary for a modernization road map to be completed, thereby allowing an IT decision-maker to dive into his or her application portfolio and decide which applications need to be modernized.
Regardless of their size and scale, insurance IT decision-makers will find a number of options for modernization, including developing custom software, investing in commercial off-the-shelf software, and layering and leveraging an existing platform. Each option, of course, offers a varying level of risk, cost and customization.
Mainframe re-hosting is one option to help mitigate the risks on a less expensive and open architecture, without a complete code rewrite. Automated modernization and re-hosting solutions
can bring pre-structured query language (SQL), single-tier mainframe applications to an SQL database in a multi-tier cloud environment – without any change to applications.
The option allows those in the insurance industry to move mainframe applications unchanged to a modern open system, either on site or in the cloud.
Savings realized from re-hosting can be channelled into projects that impact transformation and innovation initiatives, with the idea being to enable insurance companies to grow the bottom line and increase the market share.
Satya Sarangi, President and Chief Executive Officer, TmaxSoft Canada