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Insurance companies are set to be the next wave of financial firms to accelerate their digital transformation but, like retail banks before them, they face an old foe.
The hurdles insurers face result from the decades-old legacy IT systems they use, mainly Cobol-based, according to the latest report from Genpact’s research arm.
The report found that 68% of insurance companies see legacy systems as the biggest obstacle to digital transformation.
Retail banks had, and still have, the same problem, but are further along their digital journey. The nature of retail banking, involving daily interaction with customers, made it impossible to ignore customer demands for user-friendly services, but insurers have been slower to adopt these technologies.
In retail banking today, fintech is a term used throughout financial reports, and no bank worth its salt is without a fintech plan. There are now retail banks that call themselves fintech firms first and foremost, while traditional banks are investing heavily in developing modern, customer-friendly digital services themselves, acquiring fintechs, or financing their development.
The UK fintech sector aims to create 100,000 jobs and $8bn of investment by 2020, according to Innovate Finance, the fintech trade body part-funded by the City of London Corporation and the government-backed British Business Bank.
This appears to make perfect business sense because there is an appetite for technology among customers. The findings of the recent EY study of more than 10,000 digitally active consumers globally found that about 3,000 had used fintech. Among fintech users, 25.2% of 25 to 34-year-olds used two or more fintech services, and this figure is expected to reach 47.8% in the foreseeable future, said EY.
Now insurers are joining the party. According to recent research by analyst house Gartner, 64% of the world’s biggest insurance companies have invested in what it describes as “insurtechs”.
Read more about digital transformation in the insurance industry
- Like the big banks, traditional insurance companies are increasingly working with technology startups focused on their sector, but need to do more to remain competitive.
- The UK insurance industry is making a priority of big data to make more personalised customer offers in 2016, research reveals.
- Wearable and other smart technologies are set to transform the insurance industry in the next three to five years.
- Most insurance companies do not have big data strategies despite the industry’s reliance on access to accurate data.
The insurance industry could be transformed through digital technology, with endless possibilities to engage with customers regularly and sell more policies. Wearable technology can be used in health insurance, with fitness bands monitoring policyholders’ health, while vehicle insurers can embed devices in cars to reward drivers for safe driving.
But this requires systems that are linked from the front, through the middle to the back offices and Genpact’s research showed that 68% of insurance companies see legacy systems as a barrier to this.
Separate research by software quality company Cast that covered 250 applications from 38 organisations in eight countries, involving 174 million lines of code, found that 69% of insurers run legacy Cobol applications.
The report said insurance companies continue to use these applications, which were originally built in the 1970s and 1980s.
“It seems these systems are never really retired, but are run off,” said William McCarter, vice-president, insurance solutions group at CGI. “Because insurance policies on the life insurance side of the industry can be greater than 20 years in term, the systems are preserved to process older policies.
“Insurers are aware that their legacy environments are more costly to operate and maintain than modern systems. However, much of the data stored in these systems is difficult to analyse and migrate to newer environments due to the attrition of staff with knowledge of the legacy systems and data structures of many releases of the software. Migration is costly.”
Scott McConnell, global leader insurance at Genpact, said the insurance industry needs to move beyond just fixing legacy systems. "This remains a critical concern; however, process transformation through the front, middle, and back office is what drives a superior customer experience and sets up a company for growth. Insurers must also take note where channels struggle most, and support the agent network and other indirect channels with resources to enable transformation of the end-to-end customer experience.”
Genpact revealed that the other barriers to digital success are lack of talent (64%), budgets (63%), change management (60%) and risk aversion (58%). Other factors were a lack of corporate vision (45%), inability to work across silos (50%) and cyber security (51%).