While componentization, middleware, and a host of creativetechnological approaches have helped insurers keep ailing systemson life support, more and more companies have been willing to pullthe plug on legacy applications. “The landscape has changed overthe last couple of years,” says George Grieve, president ofCastleBay Consulting. “We see a lot more companies committing toreplacement than we had previously.”

That observation is supported by the findings of a study titled“Legacy and Mainframe Migration: An Insurance Imperative,” byCelent, published this year. “The reluctance to replace legacysystems is fading,” attests Chad Hersh, senior analyst and authorof the report.

On the P&C side, “we're seeing an unbelievable number ofcarriers looking to replace core legacy systems,” Hersh continues.“On the life and health side, it's like looking at the glaciers inAlaska toward the beginning of summer: Big chunks start to falloff, and you have a sense the whole thing is about to go.”

The differences in appetites for replacement are due to severalfactors, Hersh says. “On the P&C side, we're seeing what couldbe described as an avalanche of replacement projects–the 'keep upwith the Joneses' effect. If a company's competitors have a Webpresence, have fresh products to bring to market, and can deal withtheir agents in a way that attracts and retains them, what choicedoes a carrier have?” Improved bottom lines also have made P&Cinsurers more willing to spend on replacement projects.

In life insurance, on the other hand, the difficulty inconverting policies that date back decades has been the biggestreason carriers have kept old administration systems running.“There also is more work to do because of the more siloedadministration of acquired and merged operations, and the lines ofbusiness, such as insurance and annuities, are less similar,” Hershadds.

Beyond financial conditions and business realities, part of thereason for the interest in replacement systems is new technologyitself. “A lot of companies believe there's a viable new generationof software available today, and they hadn't thought that was thecase before,” Grieve says. “The risk of selecting a new vendor wasmuch higher three to five years ago than today because vendors aremore mature and have developed track records with an installed baseof customers.”

Insurers making a business case for legacy replacement tend tocite reasons that fall into three main categories: lower total costof ownership; greater business flexibility, including speed tomarket and support for increased sales; and process improvementleading to better service and reduced expenses.

An insurer may spend up to 80 percent of its budget maintainingIT systems and infrastructure rather than working on new projects.So, to put it another way, sometimes you have to spend money tosave money.

“Modern systems allow you to do a bunch of different things. Youmight be able to get rid of your mainframe that is costing afortune to maintain or use common programming skills that areeasier to acquire or eliminate custom-made interfaces that need tobe rewritten every time changes are made,” Hersh indicates.

AXA Equitable is one insurer planning a replacement strategywith lower TCO in mind. “We typically find there's a 20 percent to25 percent reduction in TCO in legacy technology replacement,” saysKevin Murray, executive vice president and CIO at AXAEquitable.

Proving that reduction can occur may mean showing the businessside the hidden costs of legacy systems. “I've had to go throughhearing the argument, 'The legacy system doesn't cost us thatmuch,' and I've had to say, 'Yes it does.' If we keep adding newproducts, distribution, and service code to legacy online and batchsystems, we won't be able to bring our systems up until 10 o'clock.Our online response times will adversely affect customer service.We'll need to increase the size of our call centers because wecan't push out Web-based thin client screens for customerself-service. And we also increase our costs in onlineinefficiency–power units, CPU cycles, inefficient use of data,”Murray says.

While AXA Equitable has a fair number of modern systems, thereare a host of applications Murray is evaluating for replacement. “Ihave a spaghetti bowl full of Assembler, Visual Basic, and COBOLcode,” he explains. “We are looking to replace those systems[starting] with some of our customer- and sales-facing functionsfirst. Right now, we're in the midst of putting nonproprietary openfront ends [on those systems]. Next year, we'll focus on[deploying] new systems for new business. And in 2008, we'llanalyze whether to convert in-force life and annuity business orwhether to leave it and work hard to ratchet down costs to operatethose legacy environments as cheaply as possible,” he says.

Cost was a key driver at Western United Life Assurance Company,where the insurer replaced a COBOL-based administration systemrunning on a VAX mainframe with AdminServer's client/server versionof its AdminLife & Annuity product in July 2004.

“Anything we needed to do in the old legacy system took a lot ofhuman resources. It wasn't rules based, it wasn't easy to modify,and we had customized the [previous] software to the extent wherewe had a difficult time with updates. It also was getting hard tofind COBOL developers,” says Diane Brown, application supportmanager at Western United.

In October 2005, the insurer began converting existing businessto the AdminServer system, an effort that will continue throughoutthis year. While Western United hasn't calculated whether itsinitial 18-month ROI estimate has been met, it has measuredcost-related impacts in several areas.

By being rules based, the AdminServer system allows businessanalysts, rather than IT, to make many modifications–particularlyimportant since the insurer's IT staff has dropped from 70 to 17 inrecent years due to internal reorganization. A GUI interface withdrop-down menus and check boxes vs. green screens with fixedcharacter fields has reduced training time from weeks to hours. Andnew-business processing staff has been reduced from 12 to fouremployees.

State Auto wanted to make the move from CSC's S3 to the vendor'sExceed platform for billing and claims in part to drive down thecost of supporting the hardware connected with the system. “We weremaintaining 700 OS/2 desktops, and we had to support the overheadof client/server with special tools that weren't ubiquitous to theskills we had here,” says Doug Allen, the insurer's vice presidentand director of information technology.

State Auto originally had deployed S3 to upgrade a previous CSCsystem in the late 1990s as part of a Y2K remediation project.Migration to the Exceed platform, which also involved replacing theexisting mainframe with IBM System z9 Business Class hardware,began in late 2003 and was completed over the Memorial Day weekendof 2006. State Auto chose the “big bang” approach because it didn'twant billing and claims staff to have to toggle between old and newsystems.

“It was painful,” Allen admits, “but it gave us more flexibilityfaster, rather than having to support the other system until thingsrolled off.”

Currently, State Auto is in the process of replacing the OS/2desktops with Windows-based Dell PCs. “We also were using Citrix inthe OS/2 environment to extend Windows [applications] to 700 users,so we can start to scale that back now, as well. In addition, wewere limited on certain peripheral devices, such as printers andmonitors, with the client/server solution, and we now can use lessexpensive, more ubiquitous devices,” Allen says.

With the Exceed system still in its first year and withreplacement of the desktops still ongoing, State Auto hasn't put ahard dollar yet to any savings. “It was a business necessity,”Allen states. “[The previous system] was hamstringing us in ourability to do things.”

The “inability to do things” leads to the second driver oflegacy replacement today. “Flexibility and speed to market are veryhard to pull off in a legacy environment,” Grieve maintains.

Consider Loudoun Mutual Insurance Company, which until recentlyused a custom-built policy and claims administration system thatdated back to the late 1970s and was written in RPG and running onan IBM System/36. “Simple things, such as making a rate change,required programming time. Any time we wanted to introduce a newproduct, it was a major issue,” says Christopher G. Shipe,president and CEO of the Virginia-based home and farm insurer.

“And forget about trying to do download or upload, becausenobody knew how to map the data. It was hard to do anything, and itwas hard to find people to do anything,” he adds.

The insurer invested $300,000 in Garvin-Allen Solutions'Advanced Insurance System (AIS) and upgraded its desktops fromterminals to Windows 2000-based PCs. Installed in 2005 for newbusiness, the insurer since has converted the bulk of its existingbusiness. Windows based with a Borland Interbase data-base, AISdoesn't give Loudoun Mutual rules-based system administrationcapabilities; however, it's a giant leap forward inflexibility.

“We can put rate changes in the same day, and if underwriting ormarketing creates a new rating tier or specialty program, we can dothat internally,” says Todd Robertson, CIO. “Technology is not aninhibitor anymore.” The platform also has allowed the insurer tointerface with the management system its agents use, a projectcompleted with the assistance of system integration consultantNxTech.

“Before, it cost agents more to do business with us [than othercarriers] because they would have to hand-key information into oursystem they already had entered into their agency managementsystem. In fact, we had one large agency that had dedicated oneperson just to key data into our system. With download, [thatagency] could redeploy this person,” Shipe says. “We've doubled thesize of the company in the past four years, as well, and haven'tadded any people.”

Inflexibility is the number-one reason carriers replace legacysystems, Hersh believes. “If you think about the competitive andregulatory climates today, things change much more at the drop of ahat than they used to. Overnight you might be faced with anopportunity or challenge, and you've got to be able to deal withthat more quickly than most legacy systems will allow. If you haveto create chunks of COBOL code to deal with your pricing, you'renot as flexible as you are if you just have to run some 'what if'scenarios.”

The rules-based nature of Western United's AdminServer systemallows the company to make changes quickly and without theinvolvement of IT. “Recently we set up a new product, and it wasdone by a person on our actuarial staff,” Brown says.

“In the past, if we had interest rate changes, it would take 12hours for someone to change those tables,” adds Linda Mason,insurance operations manager. “Now, it can be done in an hour.”

“If you talk to carriers that don't have modern systems, you'llfind things have been done the same way for the past 30 years,”Hersh comments. “They say, 'Why change if it's not broken?' Whatthey don't realize is they're saying they can't change the processbecause their systems won't support it.”

Technology definitely had constrained business processes atMeadowbrook Insurance Group. Prior to installing INSTEC'sQuicksolver administration system, a project that substantially wascompleted this year, the insurer had many different ways ofprocessing its program business, each constrained by the specificpolicy administration system–or even manual process–that aparticular branch office was using.

The company didn't consider choosing one of the existing systemsas a consolidation platform, according to Chris Spring,Meadowbrook's senior vice president of business operations. “Mostof them were old, unsupported software,” he explains.

The $1.3 million replacement project took two-and-a-half years.Many of the typical business risks, such as user acceptance, oflegacy replacement were minimized because of the state ofMeadowbrook's previous workflow, Spring notes. “In some situations,it was going from nothing to automation,” he says.

Today, rather than having a distributed set of administrationsystems, Meadowbrook runs Quicksolver on a pair of applicationservers in its Michigan headquarters. Field offices and agents makeCitrix-based connections to the system.

Having one system and one way to process business has had an“immeasurable” impact, affirms Spring. “The biggest benefit hasbeen allowing Meadowbrook just to be more competitive,” he says. “Ican't give you one ROI number, but there has been savings in termsof staff [reduction] and improvements in terms of customersatisfaction. We also have all our data in one central place andconsistency from a reporting standpoint.”

Improving the claims process, in particular, can drive legacyreplacement decisions, Grieve asserts. “Carriers see that's whereservice really makes a difference. Changing workflows, dealing withdifferent types of claims, handling simple claims morequickly–those are hard to do in a one-size-fits-all legacy claimenvironment,” he says.

Workers' compensation insurer Employers Direct targeted itsclaims process first when it undertook a legacy system migration.When the company was formed in 2002, price was the key component insystem selection, so the insurer purchased what even then was anaged COBOL AS/400 system from Data Coordinators.

“Management already was very familiar with the Data Coordinatorssystem and well understood its strengths and limitations at theoutset,” says Greg Schueman, CIO at Employers Direct, explainingthe platform was more a record-keeping tool than a workflow system.“We had planned to replace the system from the start with one thatprovided optimal automation once it became clear the company wouldsucceed.”

In mid-2005, the insurer completed installation of ClaimCenterfrom Guidewire Software to provide Web-based claims administration.“Because ClaimCenter uses a services-based strategy around itsarchitecture, that makes it easier to integrate with other internalapplications and support end-to-end claims automation,” saysSchueman. With a small IT staff, Employers chose to have an IBMsupport facility host the application rather than run itin-house.

“Because we're in a growth mode, we're not looking at decreasingour cost of operations. Our increased efficiency is used to avoidthe expense of providing the same level of service with morestaff,” Schueman indicates. “We saw the number of claims we handlego up nearly 10 times over a one-year period and were able to growclaims staffing much less than that–certainly more slowly than wewould have otherwise.” Employers Direct currently is migrating itspolicy and billing systems to Guidewire's PolicyCenter, a projectit expects to complete by late 2007.

In addition, there's the process issue of responding toregulatory change, something that previously had vexed WesternUnited. “If we had a new regulation come in, it took several monthsto get the system working to make it do what we needed. We wouldhave to make sure we were complying with that regulation bymanually tracking it offline,” Mason says. Now, changes can beimplemented the same day due to the rules-based nature of thesystem.

“The system was set up by business analysts who knew the flow ofeverything and how they could improve processes,” she adds. “Forexample, we've eliminated data entry and improved accuracy by notmoving files from desk to desk and not having multiple users enterdata different times.”

Despite the increased pace of legacy replacement, some carriersstill are reluctant to retire systems that are clearly past theirprime. In part, this is due to bad project experiences of thepast–particularly big-bang projects as replacement projects tend tobe–and, in part, due to the success of using modern technologies toextend the lives of legacy systems.

But at some point, any “wrap and patch” strategy must end. “Youcan drive your legacy costs down using tactical moves but only sofar,” contends AXA Equitable's Murray.

“For 10 years, people have been saying it, but now is the time[for legacy replacement],” predicts Hersh. And despite the fact thelife and health business has lagged P&C, he expects theappetite for system migration to pick up on that side, as well.

“We see life and health are about to hit full-scale legacyreplacement mode in the next year or two, particularly as moresolutions become available and as solutions that front end legacysystems become more prevalent as a consolidation platform,” hesays. “[Replacement] builds its own critical mass, and the last oneholding the bag is going to be out.”