Insurers face a number of daunting challenges today. The insurance market is maturing, meaning growth is slower, competition for market share is increasing and product differentiation is increasingly difficult. Regulation is also a big unknown, with the fate of Obama healthcare reforms up in the air. So, what can insurance companies do to adapt quickly and move their business forward?
I recently had a chance to talk with Mike Carrier about the trend of application transformation and modernization for insurance companies. Mike is HP’s U.S. practice leader for application transformation and modernization in financial services. He and his team focus on helping financial institutions improve business performance by rationalizing portfolios and modernizing core systems. They have helped several top 10 insurers in the US to modernize. Here’s an overview of our discussion:
Q. What trends and challenges are driving application transformation and modernization in insurance today?
A. Several major trends are driving the need for transformation. Insurers need to adapt to these changes in the industry in order to grow – or they will stagnate. Trends include:
- Competition is increasing from new low-cost entrants and big players solidifying their bases.
- Price is emerging as king. Product differentiation is increasingly difficult.
- The customer demographic is changing. Tech-savvy consumers are becoming the mainstream, and traditional customers are retiring and cutting household expenditures.
- New channels are emerging. The web and social networks are becoming the preferred medium for product information, referrals and buying.
Q. How are major insurers approaching application modernization?
A. While every insurer needs to customize an approach to meet its specific needs, there are common themes in how companies are facing transformation:
- They need to modernize legacy core systems such as policy administration and claims. These mainframe-based systems are big, complex and difficult to modify. As such, they hinder product innovation, slow down time to market, and drive up operational costs.
- Typically, insurance companies take a phased approach, modernizing in waves – rather than a “big bang.”
- They can select one or combine multiple modernization approaches, depending on the scope and timeframe involved. Each approach has different costs, benefits and risks:
- Re-hosting off the mainframe to an open-system server platform.
- Re-architecting to a component-based SOA-type architecture.
- Replacing core apps with COTS software packages.
Q. What are the benefits of application transformation and modernization to insurance companies?
A. The benefits are broad and compelling. As one exec at a top 3 insurer recently told us, modernization is “a cost of staying in the game, a matter of survival.” Benefits include:
- Agility: the ability to innovate products and roll them out to market quickly.
- Growth: improved competitiveness for new customers via new channels.
- Cost: reduction in system support/maintenance costs for modifying systems.
Q. What specific challenges do insurers face today and how can they overcome them?
A. There are a handful of challenges that all insurers face, and some emerging best practices for how to effectively deal with them:
- Figuring out where to start: It’s important to really think things through. The journey should start with a formal assessment to define the Who, What, Why, Where, When and How of modernizing. A starting point also helps to align interests around a program.
- Scope creep: Core systems are tightly integrated together, propagating changes upstream and downstream. It’s critical to prioritize and do what is necessary first, then revisit the “nice to haves.”
- Change management: Transformational change requires a robust change management capability with strong leadership, clear vision, goal and incentive alignment, etc.
Stay tuned for similar posts on application transformation for financial services companies in banking and capital markets. And check out HP’s application transformation and rationalization solutions to learn more.
What are you doing to transform your applications? What challenges have you faced and how did you overcome them?