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IT modernisation in insurance: Three things that will set you apart

By Deon Thomas, CEO, Eblocks Software

Johannesburg, 30 May 2024
Insurers must evolve their IT capabilities.
Insurers must evolve their IT capabilities.

Insurance companies can achieve significant gains by modernising their core IT systems, but the best approach depends on various factors.

The importance of IT in insurance

In today's insurance landscape, digital technology is crucial for developing products, processing claims and delivering a superior customer experience. As IT becomes a fundamental production factor, the insurtech boom showcases the potential of cutting-edge digital technologies. To stay competitive, insurers must evolve their IT capabilities, driving down costs, optimising application development and positioning IT as a strategic partner.

The challenge of outdated systems

Despite the importance of digital transformation, many insurers still need to rely on updated technologies. Consolidation efforts have left many with redundant systems, increasing maintenance costs and complicating new feature development. More than just focusing on front-end improvements is required. True digitalisation requires real-time data access and agile feature development in core systems. Overhauling core IT systems is essential, and insurers can choose from three main approaches:

  • Modernising an existing legacy platform.
  • Building a new proprietary platform.
  • Buying a standard software package.

The right choice, determined by a cost-benefit analysis, is crucial for successful IT modernisation. Each approach has its pros and cons.

Value to gain from IT modernisation

Transforming core IT systems offers several key benefits:

  • Increased gross written premiums and reduced churn: Digitised product systems enable faster product innovation and market entry, enhancing customer experience and reducing churn.
  • Enhanced operational productivity: Introducing a new core system often leads to overhauling operations and improving workflow, resulting in greater productivity. Modernised IT systems help insurers achieve significantly higher policy numbers per full-time equivalent.
  • Reduced IT costs: Modern IT systems, running on commodity hardware, can reduce IT core system costs by 41% compared to legacy systems. However, realising these savings requires effectively decommissioning old systems and avoiding overly complex configurations.

The risks and rewards of modernisation

IT modernisation also reduces loss-adjustment expenses through automation and improved claims handling accuracy. Modernisation's success depends on a starting position, effective product rationalisation and organisational changes. Insurers who treat IT transformations as business transformations rather than IT projects are more likely to succeed. Integrated transformation approaches, focusing on simplicity, lead to measurable efficiency, customer satisfaction and sustainability improvements.

Three approaches to modernisation

1. Modernising the legacy platform

For insurers with functionally adequate but technologically outdated systems, "refactoring" can modernise internal structures without changing functionality. However, this can be costly and complex, and future changes will remain difficult. Another approach, "blackboxing", involves exposing core functionalities as services while slowly modernising back-end systems suitable for well-maintained and stable legacy systems.

2. Building a proprietary platform

Some insurers choose to build new proprietary platforms tailored to their unique requirements. This approach can reduce administrative costs and enable new capabilities but involves higher costs, longer timelines and significant risks. It requires creative and skilled internal talent and robust project delivery capabilities.

3. Buying a standard software package

Standard software packages offer ready-made functionalities and faster, less risky implementations. They provide best-practice features, regular upgrades and cost benefits from shared development. However, insurers must adopt rather than adapt to these systems, requiring a cultural shift towards simplicity and potentially leading to dependency on external vendors.

Choosing the right path

Selecting the best modernisation path involves evaluating the state of existing systems, transformation preferences, capabilities and business objectives. Insurers must consider their current core system health, investment capacity, digital ambitions and strategic goals to make an informed decision.

Transforming core IT systems is essential for insurers to leverage digital advancements fully. Combining core and business transformation through a thoughtful approach can unlock significant benefits in IT modernisation.