November 12, 2019 by Jason Contant
Insurance companies can capture the following three benefits by transforming their business model and modernizing their core IT systems, according to a new paper from management consulting firm McKinsey & Company.
Other benefits of IT modernization can include 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,” said the paper, IT modernization in insurance: Three paths to transformation. “As a result, many insurance companies that have embarked on a journey to modernize IT have experienced growing pains.”
For example, 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.
Successful programs follow an integrated transformation approach that combines a radical rethinking of the business model, with transformation from the customer and IT perspective. There are three approaches to core system modernization: modernizing the legacy platform; building a proprietary platform; and buying a standard software package.
“Deciding which modernization approach to take depends on a range of considerations, including the state and stability of the legacy system, level of an insurer’s ambition, availability of a mature standard solution market, effectiveness of IT capabilities, and amount of resources available,” the paper said.
Which one should you choose?
“In our experience, insurance companies that have low internal IT capabilities yet hope to benefit from market standards for IT, products, and processes usually benefit most from buying a standard software package,” the paper said, noting that there are exceptions.
“Some insurers – such as those with idiosyncratic requirements or strong beliefs in the differentiating nature of a core insurance system – might choose to build a new platform using either prebuilt components or parts of a preexisting landscape. Similarly, insurers with relatively stable, well-maintained, and incrementally modernized systems that still rely on outdated technologies might choose to modify their existing platform and upgrade other components of the architecture, such as the integration layer, to capture the sought-after business value.”
Each path to modernization has pros and cons, and the timing and extent of existing policies migration need to be considered, the paper said. Choosing the right path depends on a variety of factors, including starting point, transformation preferences, capabilities and business model objectives.
“Given the digital advances in insurance – especially in personal lines – transforming the core is the next frontier,” the paper concluded. “Combining core and business transformation, through an appropriate and considered approach, can yield significant IT modernization benefits.”