The core systems replacement cycle is speeding up. Twenty years ago, you might have to go through the implementation of a new core system once, maybe twice. Technology — and the speed of business that it enables — is changing that.
Related: The internet of insurance things
Technology is advancing at an exponential rate, and Moore's Law predicts that processing power will double every two years. In 1997, 1 GB of memory would set you back about $100. Ten years later, the price had dropped to less than 50 cents per GB.
Ten years is a critical number in insurance technology. In 2007, new insurance core systems didn't have a variety of capabilities that are necessary to deal with today's challenges. Mobile and policyholder collaboration is a mandate. Advanced use of data and analytics is a basic requirement.
Insurers now need to handle a wide variety of specialized lines of business such as cyber as well as shared economy elements like hybrid products to provide coverage for UberX and Lyft drivers. Consequently, more insurers expect that a new core system implemented today will be up for replacement in less than 10 years. In 2011, 9 out of 10 insurers anticipated a new policy administration system would last for more than a decade. Today, only 6 out of 10 insurers agree.
This is a tremendous shift in the market's perceptions among P&C insurers. It reflects the accelerating pace of change and the exponential advances in technology. Insurers looking to the future are unsure that an older core system will be able to face the challenges brought by digital and greenfield insurers as well as other InsurTech advances. At a minimum, today's core systems must continue to improve in upgradability to keep up with the advancing capabilities insurers need to match the pace of market changes.
Shorter lifespans mean insurers are rethinking how they allocate resources for core systems modernization. When faced with obsolescence in less than 10 years, insurers are more attracted to options that require less up-front planning and capital. This has translated into a greater number of cloud-based core systems as well as a shift toward more subscription-based pricing models.
The speedy implementations and quick time to value possible with cloud-based core systems appeal to insurers for the same reasons. Quick time to value is essential for insurers to take advantage of new market opportunities, and implementations that take months rather than years can increase insurers' adaptability. These buying trend changes aren't displacing insurers' purchases and implementations of larger, enterprise-wide core systems. In fact, they often occur simultaneously — giving insurers the quick wins they need while they continue to advance enterprise-wide core systems modernization projects.
When we look at how quickly our world is changing, 10 years doesn't seem so long. It reminds me of a prescient quote from Bill Gates: "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10." And he wrote that more than 20 years ago.
Related: The future of work in insurance
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