Did you know that 70-80% of incumbent insurers’ IT budgets are taken up by maintaining legacy systems? In an era where digital transformation is not just a choice but a necessity, this takes precious time and resources away from pursuing insurance innovation. Legacy systems were once the powerhouse of insurance operations, but have become somewhat of an Achilles’ heel, with their rigid structures and outdated technologies. The good news is that insurers can free themselves from these restraints. It’s not easy to just rip up and replace legacy infrastructure, but cloud-based platforms are making it possible to build on top of existing technology and drive innovation. Read on to discover how insurers can pursue business growth with these strategies without losing sight of organisational objectives, customer expectations, and market trends.
Identifying specific areas for innovation
The first step in modernising legacy systems is recognising the inherent need for change. Legacy systems often restrict insurers from embracing new technologies, dulling their competitive edge and denying them first-mover advantages. Legacy tech prevents insurers from using data to drive business decisions, hampers customer service, and restricts the implementation of innovative solutions. Traditional innovation methods, like moving from old mainframes to more modern systems, are time-consuming and make it hard to adapt to rapid market changes. Today, it’s important for insurance companies to build automation into their entire organisation instead of pursuing short-term digital transformation projects. Identifying the shortcomings of existing systems is crucial to delineating a clear, strategic path towards modernisation.
Strategic planning and prioritisation
Strategic planning forms the bedrock of the modernisation process. Integrating new technologies requires a phased approach, focusing on areas that need immediate improvement and aligning them with long-term organisational goals. The plan should be flexible, allowing adjustments based on evolving technological trends, market demands, and internal organisational changes. McKinsey describes 3 operational models in their 2019 article on IT Modernisation in Insurance, that insurers can use to transform their infrastructure:
- Buying a standard software package
- Building a proprietary platform
- Modernising the legacy platform
But what’s the best approach for your company? That choice hinges on various factors such as the current condition and reliability of the legacy system, carrier aspirations, the accessibility of sophisticated standard solutions in the market, IT proficiency, and resource availability.
As per McKinsey, for insurance firms with limited internal IT proficiency, generally acquiring a standard software package is the most cost and resource-efficient option. However, exceptions exist. Certain insurers, particularly those with specialised needs or unique capabilities within their core insurance system, may opt to build their own new platform, utilising existing infrastructure. On the other hand, insurers boasting stable, meticulously managed systems, albeit built on obsolete technologies, may elect to revamp their existing platforms by enhancing aspects like the integration layer to drive the desired business output.
There is no one right answer. Every insurer has unique needs which require unique solutions that can help them maintain a sustainable competitive advantage through digital transformation.
Using technology to drive organisational efficiencies
It’s pivotal to choose technologies that align with organisational objectives and that enhance the existing operational framework. Technologies such as AI, Machine Learning (ML), and blockchain have transformative potential. However, they should be selected based on the specific needs, challenges, and readiness of the organisation. And of course, these technologies should be compatible with existing systems to ensure smooth integration and maximise their utility.
Digitisation and automation of processes help insurers reduce the time to market for new products. This in turn reduces costs and allows the company to quickly respond to changing needs in the marketplace. Product development becomes a well-defined, collaborative process when automation is available to interdepartmental teams.
Digitised portfolios allow for easier analysis, to see where products overlap, and to consolidate coverages that are repeated in multiple products. Insurance companies don’t have to price solutions too high or cut coverages to make up for possible cost miscalculations. Once the company has a system in place that takes out the unknown variables, it is easier to predict costs.
By automating back-office processes, insurers can focus on developing new solutions. This creates a double impact in that the cost savings of back-office operations translate into increased revenues from innovative products and services.
Fostering a culture of innovation
Transforming technical infrastructure is only part of the equation. To thrive in the digital age, insurers must also cultivate a culture of innovation that permeates every facet of the organisation. This culture shift begins with a clear understanding of the “why” behind digitalisation and improved customer experiences.
Leadership support
A critical pillar in this cultural shift is securing robust leadership support. Ensuring executives have experience in leading large-scale tech transformation initiatives can help insurers ensure board buy-in. Putting the right talent in place early on can set insurers up for success long before the transformation process has begun.
Iterative progress
Digital transformation is an ongoing journey. It involves encouraging employees at all levels to adapt to new technologies, embrace evolving dynamics, and actively engage in the modernisation process, recognising that this evolution takes time.
Investment vs. Consequences
While concerns about the costs of digital transformation may surface, it’s important to evaluate these expenses against the potential repercussions of standing still. Neglecting innovation can result in the loss of relevance, customers, and the agility required to meet future demands.
Structured approach
McKinsey suggests adopting a structured approach that encompasses cultural change. This includes the development of agile test-and-learn capabilities, the recruitment of diverse talent such as data scientists and design thinkers, and the revision of organisational structures to encourage collaboration and prioritise digital initiatives.
In essence, modernising legacy systems isn’t just a technical upgrade—it’s a holistic transformation that involves both technology and culture.
Facilitating seamless integration
Achieving a smooth integration of new technologies involves careful planning, thorough testing, and a systematic implementation process. Collaboration is key, with a cross-functional team, including IT experts, operational leaders, and key stakeholders, jointly overseeing the integration to ensure alignment with broader organisational objectives.
Below are a few key steps to avoid common challenges insurers face when first undertaking digital transformation:
Business-centric automation: Prioritise automation as essential to your commercial strategy, not just as an operational improvement. Align automation initiatives with core business strategies and define clear goals and metrics to track progress. The focus should be on enhancing productivity rather than merely minimising administrative tasks.
People-oriented approach: Assess talent gaps and invest in upskilling employees or hiring new talent with the necessary skills. By involving employees in solution design, you ensure technology aligns with business needs while fostering accountability.
Optimize operating models: Streamline your operating model for scalability, agility, and cross-functional collaboration. Focus on shared strategy, modern AI tools, adaptable management systems, and employee capability-building.
Rigorous performance management: Implement a robust performance testing system to measure the impact of technology transformations at all levels of the organisation. Track metrics, KPIs, and identify impediments to facilitate informed decision-making.
Conclusion
Modernising legacy systems is not without its challenges and requires a strategic and holistic approach. But done well, it can set up insurance companies to be resilient, competitive, and ready for whatever the future brings.
About Kanopi
Kanopi is one of the top 50 companies globally, championing embedded insurance and helping insurers every day. We do this by enabling them to overcome the hurdles of legacy infrastructure, integrate with multiple third-party platforms and build seamless user journeys for customers.
Building a strong digital strategy is the first step to success in a highly competitive insurance landscape. Get started with your digital transformation journey, download Kanopi’s FREE guide to building an insurance platform of the future.