In old industries built on legacy programs and limited innovation, the digital age hits hard. Consumer demand for personalized and adaptable digital products and services is driving change across the entire market, including in the insurance industry.
Millions of Americans don’t have life insurance - with no immediate plans to change that. The so called “protection gap” now represents billions of dollars in potential insurance policies. The question then becomes this: why are people uninsured and what could make them change their tune?
One can hardly say the insurance industry isn’t innovating and changing. The boom of insurtech, and the immense investments it draws from traditional insurance companies, implies the industry recognizes the need to change and is willing to invest in it. However, some areas are changing faster, and more intelligently, than others.
Policy administration within the life insurance industry is slow and reluctant to change. While other branches of insurance, like P&C, swiftly adopted new technologies in order to change the way policies are bought, sold, and managed, life insurance is yet to see any significant change (the one exception being the almost universal adoption of automated underwriting). Why is that, and what can be done about it?
What makes life insurance so difficult?
Let’s say you’re a traditional life insurance company. You’ve been using the same software system for decades in order to host your policies and customer information, communicate with customers, and control policy rates. Because you’ve purchased a few million policies from other insurance companies, you have multiple software systems managing the policies you’re responsible for. This isn’t a big deal though, because this system worked well for decades and there’s no reason to expect the system’s performance to change. The customer doesn’t see the backend of the life insurance industry, so what’s the big deal if it’s a little messy?
But then the needs of the customer begin to change. Competitors change their prices and begin to offer new, innovative products consumers are loving. You’ve heard of multiple insurtech startups allowing customers to purchase and manage their policy digitally. You go into your policy administration system in order to adjust your rates to be more competitive, communicate more effectively with your customers, or build a product your customers are clambering for. Except there’s no easy way to do this without spending millions of dollars reacting to changing market needs. Even then, you wouldn’t be able to innovate and implement fast enough to keep up with the market pace. Of course you can also migrate to a newer, different system or update your policy administration system entirely.
Let’s say, for argument's sake, you decide that’s what needs to be done. How do you start? What’s it going to cost?
STOP. You’ve hit your roadblock.
According to a recent study by McKinsey, nine out of ten insurance companies identified legacy software and infrastructure as key barriers for digitalization. Not only are many of these systems out of date, but they hold such an immense amount of customer and policy information that migrating all this data to a new, updated system can take years and cost millions to accomplish. There are traditional life insurance companies right now investing hundreds of millions and years, if not decades, to fully migrate and/or update outdated policy administration software.
Granted, these are some of the larger cases. But even a smaller life insurance company looking to migrate or update its legacy system is looking at a minimum of 2-3 year migration path and millions of dollars to accomplish it.
The issue stems from a lack of innovation in policy administration. The traditional software companies who built these legacy systems have no incentive to innovate and make the migration process easier; they’re already making millions just helping insurance companies migrate or update their existing systems. Newer software companies or startups lack the proven track record most life insurance companies want to see before trusting them with the keys to their kingdom (i.e. policy administration systems). Some traditional life insurance companies are even taking matters into their own hands.
“We know of at least three traditional insurance companies building their own systems because there’s no better alternative,” says Geoff Keast, CEO of Montoux, North America. “These aren’t software companies we’re talking about, these are insurance companies responding to a lack of innovation in this space.”
You can hear a bit more from Geoff on this topic by clicking on this link right here.
With the explosion of insurtech and the relatively recent transformation of both retail core banking (bankings version of policy administration), by companies like Mambu and Thought Machine, and P&C insurance, by companies like Guidewire, the problem’s persistence in life insurance seems surprising.
What key elements need to be addressed?
To be completely clear, the issue is not that newer, better systems don’t exist, because they do. One of the main issues lies in migrating all of the information securely and consistently from a legacy system, or even multiple systems, to the new one.
So, if it’s not the systems, what exactly needs to change? Where is this lack of innovation stemming from?
The first issue is how to move data from point A, B, C, D, D.1, and E.5 to its final destination. There currently isn’t a clear process allowing life insurance companies to move policy information in a timely, secure, and cost effective way. For many companies, the time and money cost of migrating is enough to make them put it off for as long as possible. And what do they do about those legacy products with a small number of policies, how are those to be managed on a new platform, and is it even worth it to migrate them?
Those legacy systems haunting the life insurance industry? They’re hosting more than policy info and rates - they control the communication portal between the life insurance company and its customers. In order for life insurance companies to more effectively engage with their policyholders, they need to change the system through which they communicate. With more and more customers demanding flexibility and digital interaction from their insurance providers, this is a big issue.
Another issue with legacy systems in life insurance is their inability to scale. Older systems aren’t designed to take advantage of the cloud, imposing limitations on how much their can grow over time.
Rates that Respond to Market & Consumer Needs
When the rate you’ve set for a policy or product is no longer competitive, you obviously want the flexibility to adjust it as needed. Older systems make changing rates difficult, time consuming, and costly, which discourages life insurance companies from ensuring their rates constantly reflect the most accurate and competitive price possible.
Changes in consumer behavior imply the time for policy administration innovation is already here.
Insurance consumers are not only ready for change, they’re demanding it. A study by Morgan Stanley and BCG found 60 percent of global insurance clients aren’t satisfied with their service providers and many would consider switching to something better suited to their needs. While customers might not see what happens in a company’s policy administration system, they do feel the effects of an outdated system.
The consequences include a lack of adjusted and competitive rates, a lack of digital engagement between the insurance company and policyholders, and the inability to develop products consumers are expressing interest in. While property and casualty insurance and industries like big banking are enjoying an increasingly digital relationship with their customers, life insurance companies are still struggling with consolidating and migrating their immense stores of data onto a more efficient system.
The struggle to improve customer experience and the way policies are managed and priced sparks hundreds of innovative ideas. There’s no shortage of fresh technologies and companies looking to solve the insurance industries problems. What’s more, insurtech companies and legacy insurance companies have already demonstrated an eagerness to work together to address issues.
Montoux’s technology addresses the need for pricing transformation in life insurance, and this is just one example of hundreds of solutions addressing underwriting, policy management, personalization, and more. With all the changes the industry is experiencing, it’s only a matter of time before policy administration within the life insurance industry begins to change. The question is, who’s going to bring it?
Know something we don’t? If you know of a company working on innovating within this space, we’d love to hear about it!
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