Legacy vs. Next-Gen Tech: The Past Catches Up with Escalating Business Challenges for Insurer Executives

Over the last 10-15 years, we have seen a major shift in core systems, both in terms of technology and business capabilities within many modernization and transformation programs.  However, many of these programs were painful and expensive. They often ran over many years and cost tens to hundreds of millions of dollars due to the high level of customization, and their on-premise implementation. In spite of the large investment, most of these core systems now make it difficult and expensive to bring new products to market, adapt to market changes or upgrade. Furthermore, many never completed the transformation — keeping legacy systems running alongside the new — adding cost and overhead and creating further operational complexity. 

With retirements increasing and the loss of institutional knowledge and skills, coupled with a new generation of employees who will not work with legacy technology, legacy debt is becoming a significant operational risk. Even worse, patchwork legacy solutions struggle to leverage the data they hold to provide meaningful, actionable insights. At the same time, they struggle to ingest new data sources to improve decision-making.

In a survey by AND Digital[DG1] , over a quarter (26%) of CEOs feel they’re in a race against time to replace legacy systems ahead of competitors, and they acknowledge that’s putting their organization at risk. In fact, 64% admit to investing in tech in order to feel like they aren’t being left behind, but with no clear understanding of how they’ll achieve ROI or real business value.    

Kicking the can down the road is no longer an option.  The business impact:

Just like Greek mythology with Icarus’ wings that failed because they could not meet the demands of flying – either too low to the water or too high near the sun, the cost and impact of legacy debt is destined to fail under the pressure of a modern era of insurance, pulling insurance business operations down, creating operational and strategic risk for insurers. 

The Case for Business Change

We are in the midst of a business model and technology-driven change. Decades-old operational models and technology foundations no longer meet the challenges, demands, and opportunities of a fast-changing world. Just consider these every day operational struggles: time-consuming and manual workflows, inconsistent customer experiences, increased litigation risks, competition for talent attraction and retention, lack of operational insights, and increased operational costs. Together they are straining financial results and impacting product pricing, underwriting, customer satisfaction, and market competitiveness.

The result:  The industry is at a crossroads demanding a rethink of their strategies and priorities to compete in the fast-approaching next decade. Traditional thinking will not keep pace with market, customer, risk, and technology changes. Consider these key areas on the case for business change. 

• Customer-First and Business-First Focus
  
  Unfortunately, many insurers are woefully unprepared to meet the demands and expectations of shifting customer demands. While insurance’s traditional products and servicing have always been pivotal in creating peace of mind — new and expanding risks, market dynamics, and evolving needs and expectations of insurance buyers require new ideas and approaches. 
  
  Insurers hoping to capture a new generation of customers while keeping their current ones (who also are shifting their expectations) must give serious thought to rethinking their business and technology models to deliver value that todays and tomorrow’s insurance customers expect and demand.
  
  The pressures and challenges for insurers – from macroeconomic factors and operating performance to increased risks and technology advancements – compel insurers to improve, both operationally and innovatively, creating immediate and long-term value with a customer and the business-first focus.
  
• Legacy Systems Slowly Poison and Overwhelm the Business
  
  The old adage of “If it’s not broken, why fix it?” may sound logical but it is deceiving and it overlooks the slow degradation of legacy systems that are poisoning the business.  
  
  Legacy systems often hide their issues. But fault lines gradually appear and expand, creating underlying foundational problems that are costly, may be unfixable, and can devastate the business. Older systems become expensive to maintain. It becomes increasingly challenging to find technologists who can maintain the system. Consider systems with Assembler or Cobol.  Today’s technologists have no experience in these languages and no desire or compelling reason to learn. A CIO article on the costs of not upgrading outlines how, every five years, companies end up spending more on maintenance than they did on the initial software purchase.
  
  On the other hand, the great thing about modern systems available today is that they are extremely flexible. The technology that goes into these systems is, in many respects, timeless. Upgrading and maintaining these systems can be far less expensive and time-consuming than previous systems.
  
  The cost and impact of legacy debt is poisoning and pulling organizations down. With increasing retirements and loss of institutional knowledge and skills, the difficulty to leverage the data for insights, decreased operational productivity due to manual work arounds, lack of speed to market for new products, and the inability to use new technologies like GenAI to drive operational optimization, legacy debt creates a significant operational risk.   
  
  Modernization and transformation of legacy systems is a necessity for businesses to be competitive.
  
• Technology Shifts Required for Innovation and Operational Optimization
  
  Old legacy and even new legacy technology solutions (on-premise modern highly customized), and their legacy business models can only maintain the way we have done business in the past. They are an unstable foundation, negatively impacting operational efficiencies, cost ratios and profitability as well as constraining talent and limiting access to data. They are barriers to adoption of new technologies like GenAI. They are barriers to being competitive.
  
  Competing in today’s marketplace requires speed to market for new products, channels, and experiences; a decrease in operational costs and total cost of ownership of technology; continuous innovation; and seamless and quick technology upgrades to keep the business at the leading edge and take advantage of first mover status.
  
  First movers respond by strengthening business fundamentals and foundations, while meeting the challenges of a changing market. They are reallocating resources to change how business is done, developing new business models, and replacing legacy core systems to create a new operational and technology foundation that can achieve real optimization and drive innovation.
  
  Highlighting this is the AM Best report published May 2, 2024, with a very telling financial assessment of insurers that had highly correlated innovation assessment scores. These insurers had significantly higher net premium written growth, lower expense ratios and greater efficiencies.

The Case for a Next-Gen Intelligent Foundation

A comprehensive strategic response that balances today’s business demands and what is needed to compete in a modern era of insurance is crucially needed by insurers. The underpinnings of the legacy debt and architecture, like Icarus’, are an unstable foundation for the business to survive, let alone succeed. 

Elevating insurers’ business operation with a next-gen, intelligent technology foundation built on a robust next-gen architecture is now a must-have to compete and meet the digital demands of both today and tomorrow. It is a paradigm that signifies a groundbreaking leap in software design, fueled by the pillars of modern innovation: cloud-native, API-first, microservices and containerization, headless, and embedded analytics.

• Cloud-Native Architecture: Leverage the full potential of cloud computing to enable scalable and containerized application creation and deployment. Experience enhanced scalability, elasticity, and automation, empowering your business to adapt swiftly to changing demands.
• Open API Standards Compliance: Seamlessly integrate with third-party services using adherence to Open API standards, ensuring superior interoperability and easy collaboration.
• Fully Headless Architecture: Embrace a completely headless approach for enhanced flexibility and adaptability. Respond swiftly to evolving market demands and user preferences, staying ahead of the competition.
• Microservices and Containerization: Benefit from isolated and portable application encapsulation, seamless scalability with microservices, enhanced resource efficiency, rapid deployment and rollbacks, DevOps enablement, infrastructure agnosticism, and improved security through reduced attack surfaces. Drive innovation, efficiency, and competitiveness in today’s fast-paced digital landscape.
• Embedded Analytics in Core: Integrated advanced analytics, including business intelligence, AI/ML models, and Generative AI create an intelligent core that propels insurers into the future of insurance innovation and customer-centric experiences with an ability to launch new products, value-added services, personalized experiences, and innovative channels.

First movers keep a constant sharp focus on both operations and strategy. They are forward-thinking leaders who identify the areas that intersect with the core business operational model and technology foundation that can drive optimization, growth, and long-term business innovation.

Your Next Step: Re-Balance Investments from Legacy to Accelerate Business Transformation and Value

Expecting value out of legacy and doing nothing is not an option. Profitability and operational costs are the top two top-of-mind issues for insurers. To compete today and in the future, they must be recognized and dealt with. Insurers stuck on legacy or on-premise modern core systems are boxed in, limiting their potential. Furthermore, business leaders must aggressively seek operational effectiveness options that allow them to capture and transfer the intellectual knowledge and operational expertise from their retiring employees to their new employees.  

The fix requires a rebalancing of investments into a new operating model and technology foundation to achieve real optimization, business results, and innovation in order to drive growth. It requires the right investment and allocation of resources.

It’s not easy to balance legacy with modern technology – the stakes for getting it right are so high. Investing the time early to ensure the focus is on both a new operational model and technology, rather than bringing forward legacy operations is crucial to achieve the greatest business value. It can bend the cost curve that drives profitable growth and efficiency, empowers innovation and creates competitive differentiation that can unlock growth and operational superiority.

This necessitates elevating the business operation with a next-gen, intelligent technology foundation built on a robust cloud-native architecture as a must-have to compete in today’s marketplace.

With the constant market shifts and the fast-paced changing world of risk, next-gen technology paired with advanced data and analytics creates a new foundation for operational optimization and innovation that can readily adapt as change continues its relentless path forward.

Decisions are being made that will determine how insurers will prevail over the next three to five years. Leaders are nimble, creative – and bold. They flex to the pace of change in markets, technology, risks, and customer trends in order to remain competitive, relevant, profitable, and growing.

Even more importantly, bold leaders will be prepared for the next major shift, because their foundation will rapidly adapt and enable them to leap further ahead of the competition.

To read about more what your peers are doing and how you compare to leaders, be sure to download, Strategic Priorities 2025:  A Modern Era of Insurance Comes into Focus today.