Legacy IT holding back insurers

Legacy IT is holding back the European insurance agency. Catherine Stagg-Macey of insurer Celent explains what CIOs can do to update their organisation.

The problems of legacy technology manifests within both business and IT. For the business, it places restrictions on the flexibility and agility required by competitive organisations. For the IT organisation, the cost of keeping up with ever-changing business requirements becomes increasingly difficult to justify.

For insurers, this pain is often felt in the front office - adding new products takes months not weeks and adding new channels is problematic.

Most CIOs and their IT departments are keenly aware of the impact of legacy systems. For many years IT staffs have been making do with existing technology, patching it together with newer systems where possible and responding to businesses' demands as best they can. In Europe, where mergers and acquisitions have been historically more prevalent than in the US, the diversity and age of the technology in use is even more acute.

Inflexible applications so common in legacy IT often result in difficulty adding important functionality, and can result in anything from manual workarounds to simply not providing functionality that employees or customers need. Inflexible data models often cause the same result.

The difficulty and expense of integrating with modern systems can lead insurers to avoid updating systems altogether.

Modern languages such as .NET or Java offer many benefits to the IT department, not least being the availability of individuals with the skills to support these technologies.

That said, the answer is not for insurers to rip out every line of Cobol code in the organisation. In fact, legacy code and applications should be measured along certain criteria such as ease of integration, skill availability, vendor support and scalability. If the current applications, whatever their code base or platform, meet these criteria, the time for replacement may not yet have arrived.

There are several approaches to addressing legacy IT within insurance companies. Each approach has its strengths and weaknesses and should be considered in the context of the specific problem.

The first option is to replace core legacy systems with new systems. In a recent survey by Celent, we found insurers showed an overwhelming preference for this approach.

The second option is to extend the existing system, leveraging current investment where possible. Other options include rewriting or replatforming systems, and outsourcing or consolidating applications. Many companies are likely to choose more than one of these options.

Creating a business case for these projects is the next challenge. As one CIO noted in discussions with Celent, the business case for legacy replacement is unlikely to be exciting to the board. Hard quantifiable benefits will remain out of reach for many insurers who are likely to predicate the case on business agility.

However, in the end, addressing the legacy IT environment will become necessary for insurers to stay in business. Quantifiable benefits for this increased strategic and operational flexibility may be hard to determine but doing nothing is not an option.

With the global economic crisis well underway, insurers need to examine their IT projects against a combination of strategic goals - including getting bigger by growing revenue; getting leaner by reducing expenses and increasing productivity; and getting smarter by making better use of data.

Celent's research shows that the movement to tackle insurer's legacy problem in insurers is underway. The coming years will see continued investment in this area.

How this is done depends on the current IT environment, business pain points and a company's appetite for risk. But the maturity of SOA and modern policy administration solutions make it more possible than ever to make sure insurers don't bring about another generation of legacy IT.

Catherine Stagg-Macey is a senior insurance analyst at Celent UK

This piece is based on the Celent report, The challenge of legacy modernisation, published in November 2008