For Carriers, Platform Consolidation Necessary
Insurance Networking News, October 2007
To get a countervailing view, one could visit Erie, Pa., where Erie Family Life Insurance Co., a member of Erie Insurance Group, is undergoing a platform consolidation of its policy administration systems.
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The company is also reducing the number of servers it uses, says Jeff Stempora, senior vice president and division officer IT, Erie Insurance Group, "We're toward the end of it at this point and really fine tuning," he says. "We started out with 500 servers, and we've been able to consolidate that down to 400."
Stempora says virtualization software played a key role in the consolidation. "The great thing about virtualization products is you get your server utilization to be very high," he says. "Most people only realize about an 18% utilization, a lot of the box goes to waste. So when you consolidate, you get utilization up to 90%, close to 100%.
Is the experience of a carrier such as Erie indicative of the industry as a whole?
"The majority of carriers still do their own thing," says David Pedersen, senior vice president with Hartford, Conn.-based applications provider, Insurity. "There is still a much higher spend on internal build and maintenance than buying outsourced solutions."
The average age for carriers' core systems hovers around 20 years, notes Marcus Ryu, vice president strategy and new products for San Mateo, Calif.-based Guidewire Software. "This doesn't mean they don't have newer systems," Ryu says. "But the core transactional systems, the 'mothership' that ultimately holds the mission-critical data tend to be COBOL-based mainframes."
It is not only the systems themselves that are showing their age. The industry is facing a demographic time bomb as the people who understand how the systems work approach retirement en masse. "This is a major point of enterprise risk because once they leave, who will know how the systems work," Ryu says.
COSTS MOUNT, FEARS LINGER
Another unfortunate legacy of these legacy systems is cost. "Some of these old systems cost an arm-and-a-leg to run," says Chad Hersh, senior analyst for the insurance practice of Boston-based Celent LLC. "You have to run them on outdated equipment that you can't get parts for. You have to maintain code that nobody graduating college in the last 30 years has learned."
So, why are some carriers seemingly sticking with costly systems teetering on the brink of obsolescence and taking their time in consolidating? One reason is risk. Policy administration systems are the core parts of a carrier's business. If consolidation doesn't go well, it can put the whole business at risk.
"Many carriers out there don't have an appetite for risk," Pedersen says. "They continue to inch along with what they have. When you look at policy administration systems, you can't afford to get it wrong. You're jumping across a river, and if you don't jump far enough, you're in trouble."
Additionally, many carriers, conscious of big IT projects that promised big things and delivered considerably less, have all the more reason for caution.
SEPARATE LINES, CONTINENTS
Risks notwithstanding, the pace of platform consolidation is picking up, especially for P&C insurers, Hersh says. "On the P&C side, it is full-tilt now. There's a widespread attempt not only to replace systems but to consolidate."
The nature of P&C policies, which usually renew annually or semi-annually, makes consolidating platforms simpler for a P&C insurer than for a life insurer.
"Converting the data is much less of a challenge. If they're going to convert data, at most it's going to be a few years of historical data for the purposes of adjudicating a claim," Hersh says. "A life insurer, on the other hand, has to move decades worth of data, some of which nobody has looked at in years. So they really don't know what rules comprise that policy. What are the rates that were used? What types of trailing commissions? So it's a much more complicated initiative for them, that's why you see a lot less of it. That being said, the value is for a lot higher a life insurer."
A recent survey by Bermuda-based Accenture confirms that life insurers, too, see the value in platform consolidation. The survey of carriers in North America, Europe and Asia found 63% have consolidated platforms or were in the process of doing so. Of those that had consolidated, the primary benefits achieved were reduced business operation costs, more automation of manual functions and elimination of obsolete technologies. The survey also found that European and Asian carriers were consolidating policy administration systems at a faster rate than their North American counterparts.
MERGERS AND REGULATIONS
Pierre-Louis Seguin, North America managing director of Accenture's life insurance solutions group, says that a decade of mergers and acquisitions among European carriers has stoked a need for platform consolidation. In the merger and acquisition of a life insurance company, he notes, IT consolidation is 70% to 90% of the economies of scale.
Today, Seguin says two types of carriers primarily populate the European landscape. The first group comprises big carriers that consolidated as they merged with other companies and, now, possess a maximum of five platforms. The second group also went through mergers and acquisitions but didn't consolidate and now carry 10 to 20 platforms. As a result, those companies are now struggling with cost.
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