Michael Rabin |

The ins-and-outs of core modernization

“Standing still is moving backwards,” “Panta rhei – everything flows,” or “If you don't change with the times, the times change you.” These quotes seem fitting when it comes to the debate on the modernization of core systems in the insurance industry. In this article, we’ll explore the current situation, look at the various arguments and perspectives, and explain why core modernization is essential.

The insurance industry has been relying on mainframe systems (based on programming languages such as Cobol and PL1) to manage core insurance business processes since the 1960s. Over the years, insurers have developed and transformed these systems into complex and customized multipurpose solutions.

However, the IT world continues to change and once-groundbreaking innovations no longer have the same edge. Technological progress, customer expectations shaped by experiences in other industries, and price sensitivity caused by inflation, coupled with total price transparency provided by comparison tools and steadily increasing competition (fueled by InsurTech startups and newly founded digital insurers with modern IT structures) are shrinking margins and putting portfolios under pressure.

Generational change & cost pressure

Insurance IT is increasingly unable to meet the challenges associated with the operation and maintenance of mainframe applications. First of all, mainframes are extremely expensive to maintain – costs can quickly add up to the millions, and every option for reducing loads must be examined closely. Secondly, traditional mainframe programming languages such as Cobol and PL1 have not really been updated for years.

With these points in mind, it would seem to make sense to introduce standard software components based on new software architectures (such as Java) assured to be developed further in the future. Maintenance costs are reduced or paid by the manufacturer, and any necessary updates to the software (e.g., regulatory changes) are taken care of during new releases. In addition to providing a breath of fresh air, the cloud and SaaS models of the software providers offer flexible structures when it comes to technology and expenses.

Most legacy systems are still quite robust and have reached a high degree of maturity. Experience shows that they cover all line-specific business transactions and special processes (including niche products) encountered by the field and office workers of companies.

Implications of new market dynamics and climate change

Extreme weather events like the “Bernd” low-pressure zone in Germany have presented insurers with new challenges when it comes to claims. Employees from other lines and departments had to help out at short notice to cope with the sheer volume of claims and quickly provide assistance to policyholders. During this episode, it became crystal clear that traditional systems are rarely up to speed and extremely difficult to operate.

New software has major advantages here. Its interfaces are modern and intuitive, and transactions (such as new business or the creation and processing of claims) are formulated and displayed in the same way for each line of business. Standardized software solutions not only allow for the quick and flexible distribution of workloads, but also meet usability expectations – in particular of the policyholders of new insurers.

For insurance companies, calculating the cost of new insurance products and making them available to end customers is a time-consuming process. It can take weeks, or sometimes even months. Market trends are veering towards the creation of products with greater originality and flexibility. Depending on the situation or inquiry, companies may be required to personalize a product as quickly as possible, or to estimate the price of several versions of an offer in real time.

Furthermore, if you want to incorporate platform providers (e.g., Check24) with partners (e.g., car manufacturers), then interface and service requests, as well as offer calculations, must take place in well under one second to ensure a smooth customer experience.

By design, legacy systems simply cannot provide this speed or flexibility. To survive in today’s competitive market, you need to be quick and agile. Among other things, modern product engines use wizards to guide you through graphic interfaces and come with automated integration testing and new, rapid-deployment solutions. New software can make a big difference by providing innovative components, eliminating manual tasks, and reducing system failures, and despite being standardized, allows for sufficient personalization to help you stand out from other providers.

Customer requirements and IT

Customers have always been loyal and patient with their insurers. You might say they have even been overly accepting and lenient when it comes to the lack of digitization compared to companies such as Amazon. But this is bound to change soon. Since the onset of the COVID pandemic, consumers have quickly discovered which websites and digital services work well from home, and which ones are plagued by long response times, disruptions, and other difficulties.

The outdated software architectures of insurance providers are often no longer up to today’s standards. In order to allow users to do everything on a smartphone, provide current, transparent, and relevant information across all channels, eliminate silos, allow for real-time interactions with customers, and much more, you need harmonized applications and a built-in data warehouse. Finally, from the point of view of the customer, the fact that you have a modernized core system will go a long way (even subconsciously) in their choosing you as their digital insurance provider.

Make or buy

Is modern IT once again a competitive advantage, like it was in the 1960s? Absolutely, provided it is paired with modern products, innovation, and high-quality service. So what’s the best way forward? Update a legacy system, develop a new one, or opt for new, standardized software? Every company is different and should consider these questions carefully. Nevertheless, the trend over the past few years is clearly for modernized core systems with standardized software solutions. You need a solid foundation of core and cross-functional systems to become a digital insurer, to revamp business processes in line with customer expectations, and to leverage the potential of cloud, big data, AI, and real-time components in a scalable fashion. Other countries are much further along in this respect, while Germany (for example) continues to examine costs, project resources, and data protection. Even after these issues are addressed, modernization requires a paradigm shift and the right mindset: insurers must be willing to break new ground, invest, and change.

Do you have any questions or comments? Then please leave us a comment.

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