As the final quarter of 2006 begins, many insurance carriers are in the midst of budget plans for 2007. While this traditionally is the time to consider major improvements, Gartner's research vice president, Kimberly Harris-Ferrante, warns the industry needs to focus on two areas that may not be considered exciting but can affect carriers long term: regulatory compliance and the replacement of legacy systems.
"Insurers definitely need to invest better in compliance," says Harris-Ferrante, conceding compliance issues are not sexy. "Companies are more interested in funding new business and invest the bare minimum in compliance. Many companies completely underfund [compliance]."
She cautions insurers not to jeopardize their business by ignoring regulators. "The risk of being noncompliant–the fines and penalties–is one thing, but you have to consider your public image if you have a security breach or if you are under investigation," she says. A tarnished reputation hurts the carrier in dealing with both the consumer and the agent, she points out.
Nevertheless, some carriers still are weighing only the penalty ramifications should they be caught out of compliance, Harris-Ferrante feels, rather than the damage it can cause the business. "We're supposed to be a risk-averse industry," she says. "[Such a view] is almost contradictory to what the industry should be based on."
One other area begging carriers' attention involves legacy systems, Harris-Ferrante contends. Insurers need to be forward looking, she maintains, instead of focusing so heavily on how to make things work today, particularly in regard to legacy systems. "A handful of companies are replacing core systems, but if you are a big company, you may have 10 or 15 old systems, and if you replace one, you still have 14 more alongside it," she says. "Carriers are not replacing all of their systems."
A challenge to the agility of these older systems is those systems never were meant to be changed quickly, she notes. Service-oriented architecture and Web services are available to help insurers make those modifications, but Harris-Ferrante asserts that encourages a myopic view. "I do believe [SOA and Web services] are wonderful technologies, but the longer you keep the legacy systems and add these things around them, the more complexity you add to the system," she says. "There are more systems to maintain and more integration."
It is hard for carriers not to fall in love with SOA, she admits. "You can make the business users think you have state-of-the-art systems when you really are running a 20- or 30-year-old legacy system," says Harris-Ferrante. But carriers can ill afford to invest only in SOA and put off updating the legacy systems. "You can't keep adding and adding," she sums up. "Eventually you are going to have to subtract something from the equation. There is a lot of short-term strategy going on rather than long-term, aggressive plans on how to make your company more agile."
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