Upgrading insurance software: key drivers to change

Sometimes, the only solution is to change the solution.

Changing anything from something you are comfortable with to something new is never an easy process, whether it be upgrading your phone, changing utility provider or maybe something larger like your job. This is because there always seems to be some barriers in place, like not being able to transfer files, closing off old accounts or finding the time to interview. 

But when it is something as large and as critical to an insurance company as the software used within actuarial or finance, then there can be multiple barriers to change – concerns around cost, time, resource, IT compatibility and regulatory compliance all spring to mind. This means that making the decision to change can seem to be completely untenable and potentially impossible, yet many companies do change their software. 

So, what drives them to make this change given the apparent barriers, and is there a tipping point when a company should start to look at alternatives and accept the impact that it could have on the business?

External factors – new regulations, new opportunities

Sometimes all that is needed to drive a desire for software change is one major external factor that sends actuarial shockwaves through the industry – changes in regulation. 

Recent examples include Solvency II and IFRS17, with the likely Solvency UK reforms not far ahead. New regulation invariably means changes to methodology, changes to the granularity, or changes to the reports, that the existing systems or processes may struggle to achieve in the timeframe allotted. 

Large scale regulatory changes only happen every decade or so which means that the software currently in use could potentially cope with a couple of these changes. But ask yourself – can your current software compete with the newer offerings that have the most recent, and usually upcoming, regulations at the heart of their design and architecture? 

Another external factor that can raise questions over the suitability of the systems in place are new market opportunities. For example, most recently there has been an explosion of opportunity around Bulk Purchase Annuities (BPA) in the life insurance space, which brings with it some unique requirements, especially to new market entrants. 

In order to price competitively in the BPA market, your software needs the ability to process multiple policies, or tranches of pensions, as well as aggregate them in several ways. This will require specific calculations and interactions along with particular memory and data requirements. Then, having the policies on your books opens the possibility of utilising the matching adjustment framework, which again requires specifics around the whole asset universe projections and optimisation approaches. 

A similar trend in general insurance around hyper-optimising pricing based on granular data continues to be the holy grail that most companies seek in order to attain better underwriting results. Bringing onboard new systems for new market opportunities can open the door to utilising them for other existing calculations and processes in the business, thereby providing second order benefits and further improving the argument for change.

Internal factors – new people, new ideas

As well as external pressures there can also be an internal drive to alter, improve or enhance the situation. When new people join the company, irrespective of level, they bring with them experience and knowledge that may be unknown to the existing resource. By sharing and listening to the alternatives there can then be an opportunity and a desire to instigate changes to achieve goals previously not thought of as being attainable. 

This does not necessarily have to be a whole system change, but small step changes can make big impacts in the long run too. One initial change could free up one person’s time, which then allows them to implement other improvements, which further creates more time and opportunity, and before you know it change and improvement is happening continually as people see the culture of change having a positive impact which provides motivation to embrace more change.

Over the last 20 years there has been large-scale consolidation across the market, with either whole companies or funds subsumed into other organisations. When this happens the models and systems will usually transfer along with them. This can give the new owners an opportunity to use and investigate alternative systems and approaches to modelling they may have not seen before. 

They then have four scenarios to choose from: moving the new to the old, the old to the new, running parallel tools, or sometimes, when there are so many systems in place, it can also make sense to take a step back and do a full analysis of what’s in-house and what’s available in the market, given the potential amount of re-working required. A key point to note is that it can be very easy to fall into the trap of not looking at the benefits of the new tools you now have access to, and instead dismissing them out of hand, as a decision to move everything to the existing tool had been set years ago without a process to re-visit.

Vendors – new products, new options

Lastly, we have the impacts of the vendors on the insurance company, who have the ability to either push a company away or entice a company in and encourage them to look at alternatives. 

One scenario is when the vendor no longer provides the level of service expected by the clients for the monies paid. They may not be as quick to respond to queries or requests for functionality, or they may increase prices to levels that aren’t viewed to be commensurate to the client expectations or usage of the system. Due to perceived barriers to change, clients will pay the increased prices, as implementing a replacement doesn’t appear cost or time effective. This may continue in the short term, but it can breed discontent and a refusal to listen to positive developments, which can then permeate away from the company via the employees’ network and out into the wider market. 

Price increases are always expected along the way, for example due to inflation or the recouping of development costs for new features, but they must be justified by providing long-term benefits - if the cost of total ownership is more than the potential cost of implementing a new system, this may be reason enough to look for new vendors.

Another situation is when a vendor struggles to keep up with technological advancements. Sometimes it can be quite tricky for them to take advantage of new technology, especially when the solution is built on, or has embedded within it, older technology. But the issue vendors face is that there will always be a new entrant looking to utilise new advancements and demonstrate how much simpler, faster and more efficient their new offering is, whilst still providing all the requirements. 

For example, we saw that throughout Covid many companies accelerated their remote and cloud strategies and any technology not compatible would be replaced promptly so as not to hold them back. Some software is easier to switch out but no matter how ingrained you think a solution is there is always a way to replace and improve the situation.

Summary

So, is there an easily defined tipping point at which a company should start looking at alternative software? In my opinion, no, as I believe companies should always be looking at alternatives. 

The only way to ensure a company is certain that what they have in place is fit for purpose, provides the best value for money, and provides policyholders with the suitable protection they need, is by knowing what is available in the market, what new advancements have been made, and what alternative approaches there are. 

Then, by also understanding how the external, internal, and vendor factors described above are affecting them, they can decide if taking that next step - investigating in more detail and determining what to replace, what that replacement should be and how to implement it - is worthwhile. But what the answers are to those questions is for another instalment I’m afraid.

I appreciate that finding out information on the alternatives can be time consuming, so if you have any questions about what is available and what the latest developments are in the market, along with an agnostic view of both, then please do contact us for a conversation as we have done the work already.