'Componentization' Can Help Insurers Struggling To Replace Legacy Systems

While speed-to-market is critical, advanced risk segmentation and pricing is also required to achieve and maintain underwriting profitability. Insurers simply must do a better job of differentiating their products and services, improving the ease with which customers can do business with them, and addressing new market opportunities as they arise.

These and other factors–including the need to expand the customer base without proportionally increasing headcount–are causing insurers to take a new look at their legacy systems.

It is tempting for insurers dealing with legacy systems to adopt one of two fundamental approaches: wholesale replacement or incremental migration. When we look at policy administration systems as an example, we see neither approach is totally satisfactory.

Insurers seeking to replace a core policy admin system soon find that there are few, if any, reliable and comprehensive vendor-provided policy solutions to support wholesale replacement across multiple lines of business.

In addition to the significant financial investment and the lengthy delivery timetable for replacement solutions, insurers also find that most policy solutions do not support desired new product and underwriting capabilities across their products.

Also, vendor solutions often lead to a "shift in power" from the insurer to the vendor once the policy solution goes live, requiring regular version updates and heavy reliance on the vendor for future enhancements. Thus the challenge of integrating the end-to-end business process remains formidable as well, even in a wholesale replacement approach.

Incremental migration poses its own set of problems. Many insurers want to adopt a
"best of breed" approach by acquiring individual vendor packages to support product development, underwriting, or rating and issuance. However, they struggle with the significant complexity of rules extraction or the substantial integration required to make these packages interoperable.

They soon discover, as well, that most vendor packages do not support an incremental approach based on priority or front-end-growth capabilities, and ultimately insurers are left with an even more complex environment now consisting of both legacy and newer vendor packages.

There is, however, a third approach, one we call "componentization."

Although a cumbersome term, it simply implies breaking the legacy problem into manageable components with distinct capabilities–and an architecture to facilitate integration up and down the line–which can shorten delivery cycles and create a faster return on investment for major IT initiatives.

In the componentized approach, business objectives guide the improvement of specific capabilities–typically those that have the potential to improve revenue generation. Once developed, these components provide immediate benefit and interoperability with other parts of the system, and are designed to be "once and done"–such that once they achieve production, insurers no longer need to re-visit these components as they replace or renew other portions of their system.

In terms of policy admin replacement, if speed-to-market and customer service is the focus, one way to accomplish this is by first componentizing around products; then rate, quote and new business flows; and then as appropriate working through core administration including endorsement and renewal processing.

Rollouts will eventually work all the way back through the policy admin stack, but along the way insurers will gain the advantage of externalizing legacy functions using current technology, including the movement of processing to lower cost platforms. This flexible implementation and deployment model offers a phased approach, with early "wins" helping to fund later component upgrades.

Componentization offers advantages over wholesale replacement or incremental migration. If replacing legacy systems were easy, every insurer would have done so by now. For a successful implementation, no matter what approach is taken, business and IT leadership must work together to determine business expectations.

Input from independent agents and/or the field sales force is absolutely essential. Without it, even the most technologically sophisticated implementation will fail.

Another key element–all too often overlooked in the search for the right "package"–is project governance. Disciplined, structured processes, with clear priorities and well-designed schedules, are needed to keep program streams on track and prevent holdups in one area from pulling any other area behind schedule as well.

Establishing a pattern of success to build momentum and generate support is an important element of good governance. Throughout the component replacement process, management must work diligently to communicate the scope and scale of work, along with the expected benefits.

A true partnership between business and technology leaders, with a comprehensive approach to design and implementation, can generate tremendous results in legacy system replacement.

Through componentization, for example, we have seen insurers drastically reduce product development turns, leverage direct response and the Internet, achieve value chain efficiencies, and lower IT and operations costs by as much as 40 percent, all while maintaining ongoing business activities and customer service.

With the right approach to legacy system replacement, insurers can reap the benefits of innovative processes and technologies without the expense, difficulty and disruption of "installing a new roof in a hurricane."

Michael A. Costonis is the executive director of Accenture's North American Insurance Industry Program. He is based in Philadelphia and can be reached at Michael.A.Costonis@accenture.com.