The hidden cost of legacy systems for commercial insurance

Commercial insurers are currently stuck between a rock and a hard place.

With so many insurance products running on extremely thin margins, it is difficult to justify the cost of a brand new system. Yet the costs of running a legacy system grow higher every year. In almost every case, a new and more automated system will end up costing you less in the long-run.

  1. Upfront and maintenance costs

The upfront cost of a new system can be substantial. However, compared to maintenance costs, it’s negligible. Gartner has estimated that implementation costs are only 8% of the total cost of running a system.

If you spend $1M on a new system, you can expect to spend an average of $766,000 per year over its 15-year life cycle. If you don’t buy a new system, those maintenance costs are likely to be even higher.

PriceWaterhouseCoopers has found that on average, around 70% of an insurer’s IT budget goes on maintaining their legacy system.

The older a system gets, the more it costs to maintain–but the biggest costs to Insurers are the often the lost opportunities and the higher manual processing costs.

  1. Upfront and maintenance costs

The upfront cost of a new system can be substantial. However, compared to maintenance costs, it’s negligible. Gartner has estimated that implementation costs are only 8% of the total cost of running a system.

If you spend $1M on a new system, you can expect to spend an average of $766,000 per year over its 15-year life cycle. If you don’t buy a new system, those maintenance costs are likely to be even higher.

PriceWaterhouseCoopers has found that on average, around 70% of an insurer’s IT budget goes on maintaining their legacy system.

The older a system gets, the more it costs to maintain–but the biggest costs to Insurers are the often the lost opportunities and the higher manual processing costs.

Direct system costs

Knowledge

The knowledge required to maintain an older system becomes scarcer and more costly over time. Finding a COBOL programmer is harder than hiring someone who knows Java. McKinsey estimates that IT costs per policy can be 41% lower for companies with modern IT systems.

Design

Designing and implementing add-ons to an existing system isn’t cheap. On average, it costs between $US400,000 and $US900,000. Integrate new features now essential such as customer self-service and telephony integration to legacy systems will be complex and expensive.

Support

A system that has been added onto countless times as new products are created or new functionality is bolted-on won’t be easy to support. It’s highly likely a lot of the past changes were done by teams that did not really understand the core systems or were constrained by budgets and so cut a lot of corners to meet deadlines. The end result is a likely to be a maze of systems that the current team will struggle to more than minor tinkering with.

Manual resourcing

Legacy systems require data to be entered manually. This requires extra staff and greater opportunity for error, so insurers also need to build in substantial quality control procedures around data entry. On some of our projects our clients have been able to reduce data entry by as much as 75%.

Direct system costs

Knowledge

The knowledge required to maintain an older system becomes scarcer and more costly over time. Finding a COBOL programmer is harder than hiring someone who knows Java. McKinsey estimates that IT costs per policy can be 41% lower for companies with modern IT systems.

Design

Designing and implementing add-ons to an existing system isn’t cheap. On average, it costs between $US400,000 and $US900,000. Integrate new features now essential such as customer self-service and telephony integration to legacy systems will be complex and expensive.

Support

A system that has been added onto countless times as new products are created or new functionality is bolted-on won’t be easy to support. It’s highly likely a lot of the past changes were done by teams that did not really understand the core systems or were constrained by budgets and so cut a lot of corners to meet deadlines. The end result is a likely to be a maze of systems that the current team will struggle to more than minor tinkering with.

Manual resourcing

Legacy systems require data to be entered manually. This requires extra staff and greater opportunity for error, so insurers also need to build in substantial quality control procedures around data entry. On some of our projects our clients have been able to reduce data entry by as much as 75%.

Indirect costs

Those are just the tangible costs. The reality is that if your system is outdated and inefficient, you are incurring additional hidden costs every day. You might:

Indirect costs

Those are just the tangible costs. The reality is that if your system is outdated and inefficient, you are incurring additional hidden costs every day. You might:

Lose sales

Without even realising it, you might lose revenue every day because you lack the data and insights to market the right products to the right customers.

Lose sales

Without even realising it, you might lose revenue every day because you lack the data and insights to market the right products to the right customers.

Lose profits

With access to good data analysis on a real-time basis you are running blind. You may not realise that portfolio you thought was going gang-busters has been losing you money from day one.

Lose profits

With access to good data analysis on a real-time basis you are running blind. You may not realise that portfolio you thought was going gang-busters has been losing you money from day one.

Increase wage costs

Because it’s hard to persuade programmers to work on old legacy systems you may have to pay more for programming talent.

Increase wage costs

Because it’s hard to persuade programmers to work on old legacy systems you may have to pay more for programming talent.

Invest in the wrong areas

To make key strategic decisions like what channels to sell through, what products to invest in and where to focus your marketing and sales campaigns you need lots of accurate and complete data. Without it risk investing in the wrong areas.

Invest in the wrong areas

To make key strategic decisions like what channels to sell through, what products to invest in and where to focus your marketing and sales campaigns you need lots of accurate and complete data. Without it risk investing in the wrong areas.

Risk non-compliance

APRA has signalled that it will be focusing on insurers with ageing legacy systems, which it sees as a roadblock to reform.

Risk non-compliance

APRA has signalled that it will be focusing on insurers with ageing legacy systems, which it sees as a roadblock to reform.

Lose customers

If people become frustrated with a hard-to-use system that doesn’t offer omni channel functionality or 24/7 responsiveness they may look to your competitors for options.

Lose customers

If people become frustrated with a hard-to-use system that doesn’t offer omni channel functionality or 24/7 responsiveness they may look to your competitors for options.

Work inefficiently

Those insurers who were able to quickly adapt to the COVID-19 pandemic without loss of productivity are in a stronger position going forward. Some now are reaping permanent benefits from having most staff work from home.

Work inefficiently

Those insurers who were able to quickly adapt to the COVID-19 pandemic without loss of productivity are in a stronger position going forward. Some now are reaping permanent benefits from having most staff work from home.

2. Customer experience

Businesses spend, on average, five times as much on acquiring a new customer as they do on retaining an existing one. For insurers, it’s even more: between seven and nine times as much.

It is therefore critical that you retain your existing customers. To do so, you need to build trust through great customer experience. Without the following features, your customers are more likely to become dissatisfied and switch to a different insurer.

2. Customer experience

Businesses spend, on average, five times as much on acquiring a new customer as they do on retaining an existing one. For insurers, it’s even more: between seven and nine times as much.

It is therefore critical that you retain your existing customers. To do so, you need to build trust through great customer experience. Without the following features, your customers are more likely to become dissatisfied and switch to a different insurer.

Personalisation

Legacy systems limit what you know about your customers. Without a digital system, you lack valuable insight into the buying patterns of your existing customers which would allow you to target them when they’re most likely to buy (for example before their renewal is due) or identify areas where they’re missing cover. In fact McKinsey estimates that personalised marketing can cut customer acquisition costs by as much as 50 percent.

Personalisation

Legacy systems limit what you know about your customers. Without a digital system, you lack valuable insight into the buying patterns of your existing customers which would allow you to target them when they’re most likely to buy (for example before their renewal is due) or identify areas where they’re missing cover. In fact McKinsey estimates that personalised marketing can cut customer acquisition costs by as much as 50 percent.

Seamless experience

Today’s customers expect seamless digital experiences that allow them to move through the process smoothly. To do this effectively, insurers need to do more than bolt on a front-end user interface. Legacy infrastructure lacks the architecture to synchronise customer data in real time because they typically store and update customer data in multiple databases across multiple systems.

Seamless experience

Today’s customers expect seamless digital experiences that allow them to move through the process smoothly. To do this effectively, insurers need to do more than bolt on a front-end user interface. Legacy infrastructure lacks the architecture to synchronise customer data in real time because they typically store and update customer data in multiple databases across multiple systems.

Automated claims management

The faster and easier it is to go through the claims process, the happier your customer will be at the end. Manual processes using paper-based forms can slow down the process considerably. Legacy systems often can’t share data across departments, leading to delays in claim approvals. Compare that to a digital model which allows customers to lodge a claim from anywhere, upload photographs or details of the damage from their smartphone and uses automated underwriting to process and approve the claim almost immediately. With 87% of policyholders saying that the ease of the claims process impacts their decision to stay with insurers, legacy systems may cost insurers more in lost customers than you realise.

Automated claims management

The faster and easier it is to go through the claims process, the happier your customer will be at the end. Manual processes using paper-based forms can slow down the process considerably. Legacy systems often can’t share data across departments, leading to delays in claim approvals. Compare that to a digital model which allows customers to lodge a claim from anywhere, upload photographs or details of the damage from their smartphone and uses automated underwriting to process and approve the claim almost immediately. With 87% of policyholders saying that the ease of the claims process impacts their decision to stay with insurers, legacy systems may cost insurers more in lost customers than you realise.

3. Employee satisfaction

Your customers aren’t the only group who want a seamless experience. If you’re requiring your employees to put up with an outdated legacy system, you risk losing your best people to your competitors.

Legacy systems require manual input, which is tedious and prone to human error. Introducing automation and redesigning business processes can reduce operational costs by up to 20%, with additional benefits for employee morale.

Different products are often siloed and don’t share data, making it harder for claims adjusters to spot patterns indicative of fraud. The Insurance Fraud Bureau of Australia detected fraud of around $280 million in 2017, but estimates the true cost to insurers to be closer to $2.2 billion. Investing in technology that helps spot fraud earlier both improves the experience for your employees, thus reducing overheads to insurers, and helps keep premium costs down.

Customers who are frustrated with slow and inefficient processes may take out their irritation on your employees.

Each of these eat away at an employee’s engagement with their role and the organisation. Lack of engagement is estimated to cost companies a third of the disengaged employee’s salary per year. If they leave, that’s an additional cost: the Australian HR Institute reports that onboarding a new employee can cost between $11,000 and $25,000 during the transition period which is on top of the cost of hiring them.

3. Employee satisfaction

Your customers aren’t the only group who want a seamless experience. If you’re requiring your employees to put up with an outdated legacy system, you risk losing your best people to your competitors.

Legacy systems require manual input, which is tedious and prone to human error. Introducing automation and redesigning business processes can reduce operational costs by up to 20%, with additional benefits for employee morale.

Different products are often siloed and don’t share data, making it harder for claims adjusters to spot patterns indicative of fraud. The Insurance Fraud Bureau of Australia detected fraud of around $280 million in 2017, but estimates the true cost to insurers to be closer to $2.2 billion. Investing in technology that helps spot fraud earlier both improves the experience for your employees, thus reducing overheads to insurers, and helps keep premium costs down.

Customers who are frustrated with slow and inefficient processes may take out their irritation on your employees.

Each of these eat away at an employee’s engagement with their role and the organisation. Lack of engagement is estimated to cost companies a third of the disengaged employee’s salary per year. If they leave, that’s an additional cost: the Australian HR Institute reports that onboarding a new employee can cost between $11,000 and $25,000 during the transition period which is on top of the cost of hiring them.

4. Remote Productivity

With the COVID-19 pandemic affecting the way we all work and live, it’s more important than ever that your employees are able to work efficiently from home. In most countries, up to 90% of insurance employees are now working from home.

If your system is unable to support remote connectivity systems and connected hardware, your staff won’t be working at full productivity. Insurers who are already digitally optimised have found the shift much easier and the impact on processing times limited.

All the indications are there to suggest that working from home will become a long-term feature of workforces globally. If your systems are not already optimised for remote work, it’s worth the investment going into the future.

For commercial insurers to survive in an increasingly digital marketplace, change is essential. When you’re considering the costs of a new system, don’t forget the hidden costs of keeping your legacy system. Looked at through that lens, the real question is likely to be “can you afford not to modernise?”.

4. Remote Productivity

With the COVID-19 pandemic affecting the way we all work and live, it’s more important than ever that your employees are able to work efficiently from home. In most countries, up to 90% of insurance employees are now working from home.

If your system is unable to support remote connectivity systems and connected hardware, your staff won’t be working at full productivity. Insurers who are already digitally optimised have found the shift much easier and the impact on processing times limited.

All the indications are there to suggest that working from home will become a long-term feature of workforces globally. If your systems are not already optimised for remote work, it’s worth the investment going into the future.

For commercial insurers to survive in an increasingly digital marketplace, change is essential. When you’re considering the costs of a new system, don’t forget the hidden costs of keeping your legacy system. Looked at through that lens, the real question is likely to be “can you afford not to modernise?”.

Rethink, don’t reboot your commercial insurance systems

With tight margins and rapidly changing markets it is difficult to justify the costs and the management time needed to move to a brand new system.

But you know you can’t kick the can down the road forever. There will never be a better time to start the move.