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Legacy systems and modernizationCore systems strategy for policyadministration systems

Jim GaugerManaging Director, Insurance Technology,Deloitte Consulting LLPMary M. ArtSenior Research Director, LIMRAEric SondergeldCorporate Vice President, LIMRA 2017, LL Global, Inc. All rights reserved.This publication is a benefit of LIMRA membership.No part may be shared with other organizations or reproduced in any form without Deloitte’s and LL Global’s written permission.0159-0317 (50700-10-410-24506)

Brochure / report title goes here Section title goes here ContentsExecutive summary1Why modernize?2Selecting an approach for moving forward4Where are companies on the journey?6How are companies making the journey?8Benefits: Realizing benefits takes a long time12Keys to success14Methodology162

Brochure / report title goes here Section title goes here Tables and figuresFigure 1. PAS Systems: How influential were each of the followingbusiness drivers with regard to your company’s CST strategy?3Figure 2. Considerations when making a CST target solution decision4Figure 3. Individual life insurance sales trends5Table 1. How many policy administration system (PAS) solutionsare in your ecosystem?6Figure 4. Status of legacy PAS systems7Figure 5. CST modernization approaches8Table 2. Approaches chosen and considered by companiesto achieve CST objectives9Figure 6. Estimated payback period for the benefits on CST solution:Companies with current and completed transformations12Figure 7. Have companies realized expected benefits?133

Legacy systems and modernization Core systems strategy for policy administration systemsExecutive summaryWhen faced with the economic downturnof 2008, companies focused on costcutting measures and many significantlyreduced strategic investment intechnology. As the markets and economyimproved and companies achieved bettermargins and returns on their investments,they were able to build their reserves.During the past two to three years, theseimproved economic conditions made itpossible for many life and annuity (L&A)insurers to renew their interest in strategicinvestments. As a result, modernizing andreplacing legacy systems has surfacedas a top priority for many L&A insurers.The focal point of the modernizations hasbeen the policy administration system(PAS) and the immediately surroundinginterfaces to the insurance ecosystem,like new business and underwriting, policyservices, compensations, billing andcollections, and claims.In mid-2016, Deloitte and LIMRA coauthored a survey to investigate the stateof modernization efforts by L&A insurersin the US and Canada. The goal was togain understanding and perspective ontheir efforts to simplify environments andmodernize the PAS ecosystem.This report addresses the followinginsights on core systems transformation(CST) as part of an insurance systemmodernization initiative: What are the primary business driversbehind CST initiatives? What are the key factors affecting thesolution decision criteria? How big is the legacy PAS problemand where is your organization in themodernization journey? What approaches are insurersemploying to modernize systems? How can insurer success be achieved?The insurance systems modernizationjourney can be a long and challengingendeavor. Many organizations are nowseeing the benefits of their labors. With thesharing of information comes knowledgeand the rewards of others’ experiences. Itis hoped that the best practices provided inthis report contribute to the success of yourmodernization efforts.Key points Ensure business strategy and objectivesalignment with the modernizationinitiative. Develop the business case formodernization early and socialize itoften to gain buy-in from stakeholders. Choose vendors and partners based onknowledge and experience. Have a backup plan for risk mitigation. Start small and simple and increaseprogram scope and velocity after initialsuccess. Assess the business and technologyvalue and leverage insight before makingrecommendations on the approach tomodernization. Rigorously pursue benefits to achieveexpected results: Manage to the“outcomes.” Select a strong leader with experienceand courage.1

Legacy systems and modernization Core systems strategy for policy administration systemsWhy modernize?To succeed in the long term, each projectis associated with a compelling set ofbusiness events or imperatives. Projectsas large as replacing a PAS require a strongbusiness case, socialization with keystakeholders, and alignment to the overallbusiness strategy. Ultimately, businessand technology leaders will likely commitsignificant financial and human capital to aneffort that could span several fiscal yearsand may pledge multiples of the “businessas usual” budget in a single year. The stakesare high if you fail—so why do it?Our survey canvassed L&A providers tolearn more about the primary businessdrivers for a PAS modernization (Figure1). Forty-two of the nearly 60 surveyparticipants (71 percent) are in the processof or have already completed performinga PAS modernization. Clearly, this confirmsthe focus on this business issue.Those companies currently modernizingwere subsequently asked about theinfluential business drivers impacting thedecision to begin the transformation. Wemade the following observations based onsurvey results for insurers selecting very orextremely influential business drivers:2The highest rated business driver wasproduct strategy and objectives. Eightysix percent of the respondents are lookingto bring products to market rapidlywhile simultaneously modifying productattributes as they refine the offering. Thishas been an industry focus for at least thepast decade, but now product has becomea strategic advantage. Two-thirds of the responses indicatedtechnological relevance as the secondmost selected business driver. Legacysolutions lack flexibility and carry asignificant technology debt due to datedlanguages, databases, architectures, anda limited supply of aging baby-boomerprogrammers. This liability preventsmany organizations from advancingand supporting analytics, real-timetransactions, and a digital experience. The third most selected businessdriver among respondents wasservice enablement. Digitizinginsurance operations into a paperless,automated enterprise is a focus formany organizations. Many insurers areaspiring to automate the insuranceinteractions from initial applicationcapture, underwriting, policy issue, andultimately providing a completely digitalexperience. When asked which factor was the singlemost influential business driver, one infive respondents chose product speed tomarket/policy volume growth.We also asked companies how theyexpected to “pay” for the modernization.The alignment of the business caselevers to the above business drivers wasconsistent. As to the question of benefitstargeted, the responding companiesconfirmed that product capabilities/speed to market, an improved customerexperience, and quality and access todata were essential to the growth of thebusiness in support of the business case.Each insurance company situationis different. One key is to initiate amodernization program so thebusiness strategies andobjectives align with and drivethe direction of plannedinitiatives. Modernizationprograms are not exclusivelytechnology based activities.

Legacy systems and modernization Core systems strategy for policy administration systemsFigure 1. PAS systems: How influential were each of the following business drivers with regard to yourcompany’s CST strategy?N 42, 4086%Product strategy and objectives—speed to market, distribution driven20%76%Technological relevance/risk—requiredto access enabling technologiesService enablement—digitizing services(enhanced user experience)15%69%2%52%Growth (policy/contract volumes, new markets,new distribution model, new geographies)20%52%Expense reduction13%52%Quality of systems—improveservice levels and standards13%Human capital risk—availabilityof intellectual capital13%Compliance/regulatory requirementsDivestiture, merger, or acquisitionVery or extremely influential52%50%3%7%0%Most influentialSource: LIMRA and Deloitte, 2017From an expense perspective, respondents favored three keyexpense reductions: 1) fewer operations resources (28 percent); 2)hardware/software costs (20 percent); and 3) quality improvements(20 percent). The less important need to reduce IT resourcesrepresented only 12 percent of the replies. As expected, theresource expense reduction issue has additional emotional/social implications that influence some organizations’ decision toexclude it from the business case. Concerns that businesses may beoutsourcing too much and are running operations on a shoestringbudget forsaking experience and knowledge for a low costalternative are growing. Quality improvements can be difficult toquantify if your organization does not actively measure and managequality. Ultimately, decision makers may need to be challenged,motivated, and incented to “commit” to the savings.Activities for developing the modernization businesscase should commence at the start of the project.Defining benefits in economic terms will require as muchtime as determining what to do. The business case shouldbe developed in parallel with the approach. Engage yourstakeholders early in the process. Further, socializing thebusiness case and getting buy-in with affected executiveswho will sign up for the benefits is as important as ahardened economics proposal.3

Legacy systems and modernization Core systems strategy for policy administration systemsSelecting an approach for moving forwardWhen considering the options to modernize the PAS solution,surveyed insurers nearly universally (95 percent of respondents)replied that product and servicing fit were crucial requirements(Figure 2). As the most popular requirement identified from a groupof nine options, more than half of the respondents indicated thatproduct and servicing fit was the most important selection criteriawhen looking for a PAS replacement solution. This response was notsurprising given the importance placed on product as a businessdriver for the CST initiative.Figure 2. Considerations when making a CST target solution decisionN 42, 40Insurance product/serving fit95%54%Cost of ownership83%15%Technology currency73%8%Time to implement71%13%Vendor risk68%0%59%Related capabilities—integrationwith other solutions5%37%Licensing costs0%Third-party recommendationsGlobal capabilitiesVery or extremely influentialSource: LIMRA and Deloitte, 2017427%0%10%5%Most influential