Core System Conundrum
Insurance Networking News, February 1, 2009
Aside from life insurers with large investment losses, few carriers are delaying or canceling core systems replacements. In fact, the market for policy admin systems in 2008-2009 has shown virtually no net slowdown from 2007 to 2008, which was the strongest year on record for core systems sales. In an industry with a history of cutting IT in lockstep with a down market, what's different this time? The answer falls into three categories: differences in attitudes toward IT, differences in the available core systems solutions and differences in the competitive landscape.
Chad Hersh
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As packaged core systems solutions, including policy admin systems in particular, have been modernized, so has their value proposition. Once viewed as tremendously risky projects, as the vendors have turned increasingly to a model of configuration rather than customization, average implementation times have been cut in half or more. This has reduced not only the financial risk, but the project risk as well. In addition, vendors have begun to put truly scalable solutions onto lower cost platforms, such as clusters of Linux or Windows servers or even Linux on the mainframe.
As the majority of solutions move toward maintenance using rules and tools, the overall total cost of ownership of systems has nose-dived. Finally, the flexibility of the best systems means having a single solution that can evolve to support additional products or lines of business on a single system, with far less integration hassle than in the past.
COMPETITIVE LANDSCAPE
Another major change from down markets past is the competitive landscape. While in the past a down economy was often tied to a soft market, in the current economic slowdown, all indications are that the property/casualty markets are starting to harden. With projections of an economic recovery in mid- to late 2009, carriers don't want to miss a potentially excellent opportunity, but one that will require systems in place that enable a carrier to compete on pricing, service, etc.
Though these factors don't necessarily have a parallel effect on the life/health side (pricing is less cyclical and the economic recovery can't entirely offset the investment losses or eroded consumer confidence), that market is faced with a challenge also found on the P&C side: product commoditization. With term life, personal auto and, to a lesser extent, homeowners and business owner's insurance facing significant downward competitive pricing pressure, carriers must learn to automate the sale of these products from start to finish in order to drive out costs and improve profitability.
Finally, there is an element of rationally "keeping up with the Joneses." If it's easier to do business with a carrier's competitors, they provide better service or correctly tier and rate customers in the most profitable way possible, then that carrier has little choice but to catch up from a technology perspective in order to stay competitive.
Much has changed in the core systems space in the last few years. With all of these changes, it is less difficult to see why carriers are making the seemingly difficult decision to invest - in some cases - millions of dollars on projects that were, until recently, viewed as risky and expensive even in the good times. Indeed, when all of the facts are laid out, it suddenly seems as though the more difficult decision would be to not replace core systems in the near future.
Chad Hersh is a principal in the insurance practice at New York-based Novarica. He can be contacted at chersh@
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