Weighing the Options
When it comes time to update a policy administration system, insurers are finding that both replacement and modernization have merit.
Insurance Networking News, 11/01/2010
As the core platforms insurers depend on for basic transaction processing and a host of other business processes, it's hard to overstate the importance of policy administration systems. Indeed, in a research survey of the insurance industry released earlier this year by consulting firm Accenture North America, 92% of respondents indicated that their policy administration systems played a critical or important role in helping their organization reach its overall business performance.
Yet, it's no secret that among many insurers, legacy policy administration systems are a bit like the horse that has yet to be put out to pasture-it'll get you there, sure, but it lacks speed and agility, and still costs plenty in hay to keep.
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"These legacy systems are not allowing insurers to be more flexible in responding to the insurance market," observes John Vale, senior executive in charge of the policy offering for Accenture. "The vast majority of insurers-84%-see modernization of policy administration systems as a key priority over the next three years," he adds.
Among the eye-opening findings of the survey was that 81% of insurers believed their current systems were inadequate to support current and anticipated growth needs. "For a number of insurers we talked to, the issue was how to get variations of new products out the door and the channels that support their delivery," adds Vale. "We work with insurers whose legacy systems-when originally designed-were very robust, but now the customer wants the ability to do price comparisons, and they're demanding more capabilities online."
So what's the answer? Out with the old and in with the new? Not so fast, many insurers say. While their current so-called legacy systems may be expensive to maintain and lack speed and flexibility, many are reluctant to initiate a wholesale "big bang" changeover.
While they recognize the need to modernize, insurers generally are reluctant to make a wholesale switch to new systems due to the business risk they incur in the process. "This is the revenue-generating arm of the company. If you mess with it, is it going to impact your revenue generation?" Vale asks, adding replacement also entails customer service risks. "These systems are live-and you don't want to hurt the customer."
Complicating matters, Vale says, is the relative paucity of solutions in the marketplace that can readily suit a particular insurance firm without major customizing to fit that company's specific business needs, processes and methods. "There are not a lot of solutions in the marketplace, and there is no silver bullet package system out there," he adds. "There's no off-the-shelf solution that will suit your business. It's really daunting and problematic for the larger-tier companies."
As a result, rather than completely replacing a legacy system with a new system and incurring the process upheaval as well as the potential business continuity risk, many insurers choose instead to modify their existing systems. The idea is to strike a balance between the old and the new while ensuring total business continuity in the process.
An unusual burden
Shelton, Conn.-based Prudential Annuities, which depends largely on its workhorse older platform to handle all the policy administration heavy lifting, as well as to launch new products, opted to update rather than to replace its policy admin system. "We're doing a lot of modernization on our core platform," says Steven Marenakos, VP of Operations & Systems at the annuity division of the life insurance firm. "For us, business continuity is a big deal, and investing in our platform does a lot for your business continuity."
Prudential Annuities' core platform carries a somewhat unusual burden in that the company recalculates the balances of all of its 1.2 million annuity contracts nightly, while most insurers with an annuity product line do so quarterly, or in some instances, biannually. "These are variable annuity products with $80 billion in equities tied to these contracts," Marenakos says. "We consolidate all the transactions for the day and revalue all those contracts overnight."
Another reason Prudential Annuities is modernizing its systems is that the annuities business is growing industrywide. Since the financial crisis of 2008-2009, in which 401(k) balances took a beating, many investors have elected to reinvest some of their assets in income-producing alternatives such as annuities. Adds Marenakos, "We are doing a lot of investing in our platform to add more capacity."
As is typical of many large companies and many insurance firms, Prudential Annuity's core administration platform started life as a software package in the mid-1990s, but has since been heavily customized to reflect the company's business rules and processes. Prudential has taken the approach of constantly upgrading and modernizing the system to make it more responsive, more flexible and less costly to operate.
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