Modern Times
There's no time like the present for a legacy modernization project.
Despite the problems in the economy, many insurers believe the time is right to consider modernizing their legacy systems. In a report written for Celent by Catherine Stagg-Macey, a senior analyst in the insurance practice, she predicts investments in this area will continue in 2009 but with more governance in place and a stronger focus on the insurer's business case. "We're not going to see large, multiyear, multimillion-dollar projects," she says. "There will be smaller and more targeted investments."
Insurers need to focus on modernization, Stagg-Macey advises, to be prepared for the good times that inevitably follow slowdowns such as the U.S. and global economy are undergoing today. "As one CIO said to me, he wants to address the problem [now] so as we come out of this cycle, his company will be in position and a couple of steps ahead of its competitors," she says.
Where individual companies stand depends greatly on how each carrier views IT. "Is IT a cost center, or is it a strategic enabler?" asks Stagg-Macey. "If it's the former, [the business] is going to tell IT to cut the baseline cost. If it's the latter, IT will help cut costs from the business."
One of the biggest surprises for Stagg-Macey in researching the report is the industry's continued reliance on older equipment. Although the overwhelming majority (59 percent for large carriers and 63 percent for midtier) are operating on hardware that is less than five years old, many carriers can't say the same. "Ten percent of insurers are on hardware that is more than 15 years old," she says. "That seems like quite a high number to me."
Less surprising to Stagg-Macey is the number of systems written in legacy code, such as COBOL, RPG, and assembler. Sixty-four percent of large carriers and 53 percent of midtiers use the so-called legacy code. "Celent does not propose insurers rip out every line of COBOL code in the organization," says Stagg-Macey. "In fact, legacy code should be measured along certain criteria, such as ease of integration, skill sets, vendor support, and scalability. If the current applications meet these criteria, the time for replacement may not yet have arrived."
Many U.S. insurers have complained about a lack of home-grown programmers skilled in legacy codes. "There are countries such as China that are producing graduates out of their universities with COBOL skills," says Stagg-Macey. "There is an insurer in the U.K. that has set up a captive operation in China, which it uses to maintain some of its COBOL programs in the U.K."
One of the main reasons for carriers to move toward modern systems is to improve speed to market for new products. It is cited by Stagg-Macey as the top business driver, although she has found companies that don't fully understand the importance of speed to market.
"Most insurers are pretty poor at measuring processes or time to market," says Stagg-Macey. "I was in an insurer meeting, and I asked how long it would take to get a new product to market. There were 10 people around the table, and they couldn't actually agree what the number was, but they finally agreed it was between nine and thirteen months. First, that's a long time [to get a product to market], and second, as a business, you don't even know how long it takes to get a product to market?"
Stagg-Macey understands the economic situation in which the industry finds itself today but reminds carriers they can't afford to trail their competitors in modernizing. "There is some reprioritization, but I don't see projects being cut," she says. "Plans that have been slowly evolving over the last two or three years will carry on."
The size of the carrier does not make it free from modernization issues, either. "No matter what size you are, you aren't immune from [problems]," says Stagg-Macey. "Big insurers have made bad decisions, as well."
Robert Regis Hyle
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