Once the carrier's most trusted ally, mainframe systems/on-prem applications have now become outdated. Their prowess compared with modern technologies such as cloud computing and artificial intelligence (AI) appears bleak at best. They're expensive to maintain. According to a BCG Analysis, global IT spending in the insurance industry was about $210 billion in 2023 and is expected to grow 9% annually through 2027. Plus, evolving customer digital appetite, the competitive landscape, and regulatory complexity put perpetual pressure on traditional insurance businesses to make that ultimate call. Application modernization!
That said, complete legacy rewrites remain too risky and costly. These core systems power mission-critical functions, including underwriting, policy issuance, claims approval, renewals, and compliance. Complete rewrites can lead to the loss of critical business logic, reintroduction of old bugs, and increased security vulnerabilities. Most importantly, rewrites can disrupt operations, affecting existing policyholders' trust, revenue, and regulatory standing.
That's why insurance CIOs today appear to be at a crossroads. How can we accelerate modernization without breaking what works and risking downtime? The key here is moving toward a modern core environment with digital capabilities. In this article, we discuss a strategic, outcome-driven transformation approach that helps CIOs introduce modernization into core insurance processes while increasing customer satisfaction and productivity while cutting costs.
What's Happening in Insurance Businesses Today: The Need to Modernize
For years, insurers have persisted with traditional processes for day-to-day operations that have been heavily reliant on paper-based interactions, on-prem legacy systems, and CRM databases. This means that agents spend more time on administrative tasks and less on risk assessment, actuarial analysis, processing claim submissions or bringing innovation. However, over the last few years, technology has evolved at breakneck speed. Businesses are leveling up innovation by bringing in AI across various functions.
Consumer psychology is also being reshaped with each passing day as AI penetrates different spheres of life. People are using AI/LLM tools to generate content, build apps, get new business ideas, seek therapy, create financial plans, and whatnot. The human brain is being rewired to get personalized information in seconds. And as people get increasingly used to instant gratification, the insurance industry, with its limited customer touchpoints, will find it harder to keep them engaged.
Especially, with legacy systems that have become more prone to downtime as the seasoned professionals who have maintained these are aging or already retired. Even regulations have become an issue, necessitating the need for a robust, modern data security infrastructure.
Lastly, it's also about keeping up with the world. To stay competitive, insurers must adopt cloud and new technologies such as generative AI. And for that, CIOs don't need to face operational disruption, cost overruns, and service degradation. Phased modernization approach can prove to be effective.
Initiating Modernization: How Can CIOs Move Forward
Deciding whether to build custom solutions in-house, upgrade existing systems with modern wrappers, or purchase a ready-made platform is a complex decision. Carriers are contemplating this. In the United States, roughly half of the leading P&C carriers opt to buy and configure systems, while the other half decide to build. Each approach has its merits.
1. Transforming Existing Systems Incrementally
CIOs seeking to revitalize their legacy software systems can choose between less invasive approaches, such as code refactoring and replatforming, and more complex transformation strategies, such as rearchitecting. For less complex applications, former approaches work best. Existing core insurance apps can be moved to modern cloud infrastructure with minor adjustments, improving performance while reducing operational costs. That said, this transition can take months using traditional software development methods. In continuously evolving markets, the cost of waiting is more than what businesses can digest. This often appears as a daunting mountain, making IT leaders abandon the idea altogether. This is where a step-by-step approach, incremental modernization, becomes more effective.
It balances business continuity with technical evolution. It's not about updating one app/core function at a time. Incremental modernization is about identifying modular modernization units: workflows, sub-domains that can evolve independently. That means reshaping the system from within.
2. Using AI Agents as Intelligent Wrappers
CIOs can leverage modern wrappers, such as AI agents and RPA, to improve efficiency. These modern technologies can work alongside your primary heritage applications as digital assistants (modern wrappers) without replacing or changing the system itself. These AI agents interact: observe (read), monitor (listen), and act (share real-time insights) while boosting security and reducing technical debt. This can empower human agents to make more effective decisions as they act on real-time insights, helping boost productivity, increase customer satisfaction, and maximize ROI.
3. Simplifying Workflows with a Unified, Scalable Insurance Software
CIOs can also opt for modern insurance software to facilitate quick deployment, shorten modernization timelines, and meet modern business requirements without heavy customization or a rip-and-replace approach. An AI-enabled insurance management software can streamline an insurance policy lifecycle, including onboarding, underwriting, billing, claims, and servicing. But the main challenge is to select software that can actually become a real growth engine. This is where due diligence counts.
Evaluate the vendor's API capabilities and integration experience. Deduplicate and cleanse data (build a solid data foundation). Run pilot tests and increase stakeholder alignment to facilitate adoption. Include the compliance and information security teams in the evaluation process. These measures can help insurers modernize with greater confidence, reduce execution risk, and move with the agility required in today's insurance landscape.
Alternatively, big insurance firms can benefit more from custom-built software, which offers greater customization to the unique needs of the business.
Conclusion
System modernization is a transformative journey, a meaningful opportunity for insurers to reposition themselves as a modern-day enterprise in the eyes of both the workforce and customers. A business that can skillfully orchestrate complex insurance operations while remaining digitally advanced. And for that, CIOs no longer need to choose between protecting mission-critical core systems or embracing end-to-end digital transformation. Incremental modernization, intelligent wrappers, or a well-evaluated COTS offer a strategic, low-risk path forward.
Don't think of the modernization journey as one that dismantles your most trusted allies, mainframe systems/on-prem applications. Instead, it empowers these systems with modern-day capabilities. It helps consolidate up-to-date data in one place, minimize manual and iterative work, increase customer engagement through personalization, and respond faster to regulatory and market changes.
So, the question is: Are you ready to build a resilient technology foundation that supports sustained, long-term growth and builds a competitive advantage? Those who act now with clarity will gain an advantage tomorrow.
