According to research by PWC, insurance providers are still heavily dependent on monolithic core systems, spending an average of 70% of their IT budgets on legacy system maintenance. (1) While some companies pursue ambitious digital transformation programmes, entirely replacing their core systems in one go, there is a more evolutionary approach that can blend new and old technology.

Lautaro Mon develops modernisation initiatives at Charles Taylor InsureTech, a global insurance services and technology specialist. Mon explains that long-established core systems are generally robust but inflexible, preventing insurers from innovating and applying new technologies. He says that while digital transformation may be a good strategy for companies with deep pockets and who can commit to longer project times, core replacement projects often fail to meet their objectives and there are always risks when making sweeping changes.

“Depending on the complexity, replacing a core system can cost between USD 5 million and USD 20 million and can take two to five years. In contrast, modernisation programmes typically cost between USD 1 million and USD 5 million and take one to three years. By the time a replacement is completed, and especially if there are overruns, the market may have changed. That means a new core system may already be dated and have integration issues with new and emerging technologies.”  Lautaro Mon, Charles Taylor Group

Modernisation in practice 

So, what exactly does a modernisation programme look like, and why choose selective enhancements over core replacement?

Mon says the aim is to identify the critical limitations of legacy technology, then build complementary technologies around the insurance core to eliminate weaknesses and add value in key areas such as operational efficiency, customer focus and compliance.

“Seamless integration of new technologies is the primary focus,” says Mon. “The ability to integrate advanced technologies, such as artificial intelligence and machine learning, will enable insurers to evolve digitally and remain competitive. And because the pace of digital change is so rapid, it’s vital to have an infrastructure that is always adaptable and flexible.”

Building a middle layer 

The most effective way to achieve such adaptability and flexibility, Mon suggests, is by adopting an ‘API-first’ middle layer. This layer then acts as a bridge between the core system and modern applications.

“The API layer ensures interoperability between internal and external systems,” he says. “And it facilitates the rapid integration of new applications and distribution channels. The result is a framework for insurers to innovate without making significant core system changes that might compromise operational stability.”

According to Mon, an API-based structure enables insurers to swiftly implement new products, update self-service portals, and add mobile applications, and it avoids long development and deployment cycles that add complexity, cost and risk to core replacements. 

“Agility is essential in today’s fast-moving digital economy,” emphasises Mon. “Customers expect seamless and personalised experiences, and insurers must respond swiftly to the latest trends and apply new technologies where they are most needed and will have the quickest return on investment.” Lautaro Mon, Charles Taylor Group

Five focuses for modernisation

Mon identifies five areas where modernisation can make a big impact: legacy system upgrades, data analytics, digital experience, document process management, and process automation.

He says a modernisation framework allows insurers to upgrade legacy systems and evolve without transforming the core, and that in addition to integrating applications with the core system, they can gradually migrate products away from the system and avoid the inconvenience and cost of core transformations.

For data analytics, Mon says, the aim is to simplify connections to existing or new data sources, while integrating machine learning helps insurers make continuous improvements, particularly with regard to fraud detection.

Digital experience modernisation is a top priority, he says. “The clarity and quality of customer interactions is a major performance differentiator. When you improve digital experience, policyholders and producers can interact anytime, anywhere, through digital channels.”

As for document and process management, Mon says the aim is for seamless interactions with any market player, vendor or other third party, while process automation targets enhancements that will achieve near real-time customer services.

Evolution not revolution 

Modernisation is a cost-effective and controlled evolutionary process, stresses Mon. “When the core, middle layer, applications and other components work harmoniously, you have an adaptable infrastructure to meet future challenges. Insurers can innovate without the risks and costs associated with a complete core replacement.”