Tag Archives: core systems

Cloud Computing Wins in COVID-19 World

Through the countless discussions that have occurred these past two weeks with many insurers, there have been winning strategies that have shone through as insurers have been executing their business continuity plans. And there have been certain challenges on the other side. Were you a company that needed the support of people to be in the office to “load the tapes,” making sure all those batch jobs on the mainframe computer kept running? Did you have challenges making applications available to your now-remote workforce? Were your call centers still able to fully support agents and policyholders?

One of the greatest successes in this market has been the performance of cloud computing. I remember, back in 2012, discussing the advantages of cloud computing. As an industry, there was just experimental acceptance of this capability – usually relegated to sandbox environments and testing. Jump forward to 2020 – and we see that 84% of all core system buying transactions were cloud-based. Not only have we leapt forward in our use of cloud, but we are now in mainstream acceptance that core systems – some of the most critical systems in the enterprise – are being commonly deployed in the cloud.

Let’s consider for a moment some of the advantages of systems that are deployed in the cloud – just to name a few that have been experienced over the past two weeks:

  • Cloud provides a virtual computing environment that also enables virtualized managed services.
  • New environments can be created to dynamically test changes.  
  • Access is available – for all that need to use the applications regardless of physical location.
  • Cloud decreases the need for “onsite” resources – elimination of tape loads, etc.

Investments that insurers continue to make to transform their organizations are bearing fruit today (even though we do not want to have to go through a pandemic to realize this truth). The digitally enabled experiences that insurers are providing to their customers and distribution partners are critical. Never before has it been more important to provide full transparency to the customer. For some, you are experiencing the world as it was before COVID-19 – a world of transformation that was moving forward, understanding the importance of the digital experience, and looking at ways to provide these capabilities. Today we are in a state where these digital experiences are a reality.

See also: Will COVID-19 Disrupt Insurtech?  

If the events of the past few weeks find you considering cloud deployment for your applications moving forward, refer to our recent research report, Cloud and Core Systems: Top 10 Strategic Considerations, for insights on buying cloud-deployed software solutions. Cloud will be one of the levers that insurers can use to meet the digital mandate that is no longer for the future – but is here today.

Core Systems: Starting a Whole New Game?

Of all the software sold within the insurance industry, core systems continue to be the dominant purchase for hundreds of insurers. And just when you think the trend might slow – that every last insurer has bought the system that it will need to support its business – we see another cycle of buying begin. 2016 was a low point in core systems buying, with the lowest number of policy, billing and claims systems purchased in several years. Questions started to arise. Was the market finally saturated? Were these needs now filled? Would insurers start to move on to other projects?

As of this writing – and from looking at the insurer and MGA buying trends over the past two years – we see that this could not be further from the truth. Buying has been on the upswing since 2016, increasing by 13% in 2017 and 11% in 2018. And I have been asked a myriad of questions: What is hot? What is not? Are more suites being purchased than components? Or are we entering a new era of component buying? What lines of business are insurers looking to support with core systems? Will insurers really buy systems that are operating in a cloud environment?

See also: Security for Core Systems in the Cloud  

At the same time these questions crop up, we see an industry that has embraced the transformation journey. Many are looking to change their business models, create products that respond to new and changing risks and transform their organizations for the workforce of the future. As insurers look at their business needs and the technology that is required to support these needs, they find themselves looking at aging systems – not constructed for the technology era in which we now operate.

The fact is that we are living in changing times. The technology that supported us through the Y2K world is not necessarily the software that will sustain us in a world where transformational technologies such as AI, serverless computing, microservices and APIs are becoming more and more prevalent – and where software that operates in the cloud is a mandate.

This new era of computing is making its impact throughout the insurance ecosystem. All must respond – insurers and vendors alike. As we look at our latest research report, P&C Core System Purchasing Trends: Foundational Technology to Fuel the Transformation Journey, we see an industry in the beginning phases of the change.

See also: 6 Pitfalls to Avoid With Core Systems  

A few years ago, I wrote a blog at the beginning of the baseball season. I said that I believed we were in the seventh inning of a ball game. But we were already getting the idea that maybe there was a new game starting. From the trends we are observing today, we believe that a new game has begun, and we are just in the early innings. The new digital era we are living in, with the capabilities provided through the new era of computing, has changed the game. So, ask yourselves: Which game are you in? What systems are you buying to support it? Are they from the game that is just finishing? Or are they solutions that will support you in the new digital game that is beginning?

Why ‘Modern’ Is No Longer Enough

Insurers, I have some good news and some bad news. Insurers have made tremendous progress in core modernization, purchasing and implementing new core systems and beginning to adapt their businesses to take full advantage of modern core systems’ capabilities. This is genuine cause for celebration – insurers that have made or are making these efforts are advancing their companies and our industry in general.

As insurers were engaged in these core modernization efforts, though, the personal lines market and technology itself have kept moving forward. A core system that was top of the line in 2013 may be showing its age unless it has been continually upgraded to serve the capabilities needed in 2018 and beyond. This may not be the most welcome news for those still thinking about core systems with an average lifespan of 10 years or more, but this is our new reality.

This is especially true for personal lines insurers, which are typically the first to catch the core modernization wave. They have also tended to be the leaders regarding new computing capabilities. It was true for mainframe systems, client servers, web-based applications. Now, heading into the new era of computing, it is true with computing trends like microservices and serverless computing coming to the fore. This is not technology for technology’s sake – insurers need to be able to handle an increasing number of transactions, including multi-threaded calls, and that increase is approaching an infinite number.

See also: 2018’s Top Projects in Personal Lines  

Further pressure comes from the insurtech startups active in the personal lines market. The original, widely known insurtech startups in P&C insurance were focused on personal lines. As the insurtech movement has matured, startups’ focus has widened to commercial lines and workers’ comp as well as crossing product lines. However, startups have been active in personal lines the longest, and those insurtechs that have thrived have gained market experience and are beginning to focus on organizational maturity. That means that for incumbent personal lines insurers, their insurtech counterparts tend to be comparatively robust and mature when compared with the commercial lines insurtechs I discussed in my earlier blog.

A key characteristic of insurtechs is that they are digitally native companies. That means that they are natively fluent, with enormous quantities of data and digital interactions, and their technology is geared toward this.

Core systems that can be described as “digitally native” have an edge in the digital market going into the future. Even though digital has been a crucial focus area for years, the insurance industry is still learning what a truly digital business entails – and what technology is needed to support it. Insurtech startups have given the insurance industry new examples of how to operate in the digital world.

Few core systems are built with the digitally native characteristics, but the core systems marketplace is beginning to adapt. Continued evolution toward open APIs and new data sources will provide insurers with the opportunity to interoperate with the new distribution channels and directly with the customer.

Whether you are a large insurer that is trying to support new digital brands and new product models (on-demand, telematics and others dependent on high amounts of data) or a small regional insurer trying to power consumer service portals, the key question is data availability and digital connectivity with the consumer and agent.

So, for insurers asking themselves: “Do we really need to think about modernizing our modern core systems?” the better question may be this: “Are your modern core systems digitally native?”

How Not to Transform P&C Core Systems

The insurance industry continues to invest heavily in transforming their legacy policy, billing and claims applications. But are carriers actually realizing what was promised to the business? Core transformation can be so much more than a legacy technology
replacement.

In our experience, many projects fail to fully realize their potential benefits due to three common oversights:

  • Digitization without differentiation – Projects that simply upgrade their core systems but fail to change the customer
    engagement.
  • Limited focus on information data – Too much focus on transactional data elements and not using a comprehensive informational data approach.
  • Failure to foster innovation – Modernizing applications but failing to leverage these tools to support continuous improvement and innovation.

In fact, 67% of insurance respondents to PwC’s 2017 CEO survey see digitalization and innovation as very important to their organizations. Specific to the insurance industry, CEOs noted that the area they would most like to strengthen to capitalize on growth opportunities is digital and technological capabilities, followed by customer experience (reflecting the connections between the two).

Insurers are looking for more than just modernization of core systems. They expect a successful digital, analytics and organizational transformation that can enable them to unlock the full potential that a core transformation has provided to them. Carriers should be asking themselves the following questions to determine if they’re achieving the full benefits of expanding beyond core. Is the organization:

  • Leveraging the new platform to change the customer engagement model?
  • Leveraging analytics-based insights with a clear vision and plan to translate that into value based capabilities?
  • Promoting continuing innovation – both internally and to customers?

Key opportunities beyond core

  • Digital differentiation: Putting the customer at the center of the business is a driving success factor for any core transformation effort. With the maturation of customer portals and digital platforms, insurers can now focus on customizing the digital layer while retaining the back-end core systems as out of the box as possible.
  • Data and analytics: As the volume of data has grown, insurers have implemented new big data technologies and reporting structures. The challenge remains to translate data into insight,
    and we have seen an emerging trend of establishing a chief digital officer and corresponding analytics business units that can span across the various data silos and business units.
  • Innovation: Within the context of innovation, a significant majority of carriers dedicate 1% to 5% of their IT budgets to research and development (R&D). We believe carriers should pursue a two-pronged approach to innovation that leverages both internally generated innovation as well as strategic partnering with emerging insurtech companies.
  • Insurtech: Carriers should think beyond their internal businesses to identify and collaborate with an increasingly robust insurtech community of startups. This will allow carriers to implement innovative technologies through a combination of partnering strategies.

See also: Insurtech in P&C: It’s Not About the Tech  

Digital differentiation

We have seen a significant maturation of portal and digital platform offerings in the market in the past two years. This shifts the balance for carriers that now have the ability to leverage commercially
available offerings that previously required custom builds in-house or through extension of the core policy, billing and claims products.

What this means for carriers is that digital strategy can now complement the core transformation journey. Carriers are now pursuing a “digital first” strategy that places the customer value proposition first when prioritizing project work. In this model, the core application’s UI / UX is kept nearly out of the box, with the focus of UI / UX customization performed on the digital layer.

We believe this approach results in the best of both worlds, resulting in a highly conforming set of core systems and a carrier-unique digital experience delivered through the custom digital layer. To achieve these goals, projects should:

  • Leverage commercially available digital products as the foundation for your digital layer;
  • Implement APIs between the back-end core applications and the digital layer;
  • Leverage the enterprise digital layer for all external-facing interactions, including intermediaries and customers.

Insurers are placing greater emphasis on their digital offerings as a key customer differentiator, shifting customization from the core applications to the digital layer.

Data and analytics

Big data implementations have hit a critical mass, with nearly all carriers either pursuing a data lake-style implementation or planning one. Carriers that have implemented big data implementations have benefited from faster enterprise-level deployments, but at a cost of retraining the data and analytics business units. In some cases, these projects have shifted the reporting development to the respective business units, which must up-skill to support this previously IT-led work.

We have also observed a growing trend of the chief digital officer (CDO) and the creation of a specific analytics business unit within organizations. This reflects the belief that data is no longer the domain of individual siloed business units, and carriers must now use data cross-business to achieve true customer insights.

Finally, carriers are now looking at new monetization opportunities as a result of their data stewardship. For example, one international carrier is now investigating how to monetize their supply chain data for automobile repair networks. Other possibilities include data provider relationships with original equipment manufacturers and even competitors who may use the carrier’s repair cost history to better price risks in the local market.

Trends in data and analytics include the introduction of new big data tools and techniques, new business units to leverage data across the enterprise and a renewed focus on monetization of insurers’ data.

Innovation

We make a distinction between “invention,” which represents the creation of a capability versus “innovation,” which is the application of that invention to the marketplace. For insurers, invention is rare and generally coincides with a change to both the technology and regulatory landscape (e.g., credit scoring).

Insurers should focus on innovation and how to leverage emerging technologies and evolving customer expectations into your business. Insurers that lead in innovation exhibit the following traits:

  • A mechanism to capture innovative ideas across the enterprise (e.g. innovation workshops, targeted interviews from front-line employees, etc.);
  • A project funding and prioritization structure that links new ideas to internal capital budgeting and executive priorities;
  • A willingness to fail early and often. For example, Google X (Google’s innovation arm) gives employees incentives to end a project early if it makes sense to do so.

The good news is an emerging insurtech ecosystem is growing, which allows insurers access to a pool of experimental projects and partners. Insurers should look to implement a two-pronged innovation model that includes internally derived innovation as well as a partnership model with leading insurtech vendors.

Insurtech

The exponential growth of insurtech funding and company formation reflects the belief that the insurance space is ready for transformation. Because the insurtech ecosystem is still evolving, it will remain unclear who will ultimately become
leaders within the space. As a result, insurers should look to a combination of partnering models to hedge against an uncertain future.

Some models we have observed include:

  • Joint venture – The insurer and insurtech company form an exclusive joint venture. The insurer provides seed capital and is able to influence the insurtech more greatly than in other models.
  • Strategic partnership – The insurer takes a leadership role in partnering with the insurtech, usually at favorable economic terms with the goal of growing the partnership over a longer period.
  • Acquisition – The insurer makes a strategic acquisition. This is a less common model due to the capital required and concern about the effect a merger may have on the acquired company
  • Service provider – The insurtech is considered a provider and works on a pre-defined contract term. This model may be pursued for smaller proofs-of-concept or for new products the insurer is experimenting with

Regardless of the partnering model, we have seen both life and P&C carriers successfully work with emerging insurtech companies
to roll out innovative products and features. In the life space, the use of health-tracker-style devices, apps and policy discounts have helped move insurers to a health-monitoring and lifestyle adviser.

See also: P&C: Back-End Systems Unite!  

Insurers should look to leverage insurtech opportunities to continue
to broaden their customer value proposition, both through increased customer touch points and risk management features.

Implications

  • Digital experiences, not the back-end core application, are the true customer differentiator. As a result, insurers should look to establish a customizable digital platform that interacts with a nearly out-of-the-box set of back-end core applications.
  • Data and analytics will both increase in volume and frequency, requiring carriers to look across individual business units and data silos to form truly actionable customer insights.
  • Innovation will originate internally within the company, but also from an emerging insurtech ecosystem of companies.
  • Insurtech is still evolving ,and picking winners will be difficult. Insurers should look to a combination of partnering models to ensure the best trade-off of engagement and risk.

Security for Core Systems in the Cloud

As more insurers consider moving some of their core systems to the cloud, many want to know how secure their data and applications will be.

There are four major security considerations for cloud-based core systems: application risks, data risks, intellectual property risks and physical risks.

See also: Why the Cloud Makes It All Happen  

There are two basic models for how an insurer can use core systems in the cloud.

  • Model One: An insurer licenses core systems from a core system vendor, and then the insurer or an integration partner deploys and uses those core systems in the cloud.
  • Model Two: A core system vendor deploys its core systems in the cloud, and then makes those core systems available to an insurer on a subscription basis.

Leading cloud providers create and maintain a set of services and capabilities to provide security for infrastructure and platform cloud elements. The breadth and depth of these tools and capabilities are generally equal to, and often better than, those utilized by individual insurers that deploy core systems on their own premises.

When properly addressed, security considerations should not be a barrier to an insurer using and realizing the benefits of cloud-based core systems.

See also: How Can Insurers Leverage the Cloud?  

For access to the full report, please click here.