Can legacy systems get a fresh lease of life in a digitally driven world made more complex by changing regulatory compliance? Is there a way to offset their obsolescence and minimize the challenges they pose to growth? By focusing on knowledge management and competency development capabilities, insurers can manage their mainframe legacy systems optimally and continue to derive value from yesteryear’s technology investment.
Legacy in insurance industry is a given. By virtue of being one of the early adopters of new technology, the insurance industry has seen the era of monolithic mainframes. Although there have been many technological advances, the insurance industry still remains one of the most intensive and largest users of mainframes and mid-frames.
While mainframes continue to provide significant benefits in terms of reliability, availability, and security, aging legacy systems are plagued with a number of problems:
Each of these factors contribute to making legacy applications unresponsive and rigid, negatively impacting operational efficiency, resource and time utilization, creating cost pressures, and increasing compliance risks for insurance companies. Yet, insurers continue to depend on these legacy applications. It is therefore imperative to identify ways and means of reducing the cost of ownership of these applications, and enhancing their effectiveness and efficiency.
Legacy systems are integrated with new knowledge management and competency development systems to centralize the management, maintenance, and use of information. Knowledge Management (KM) ensures that the complete knowledge of the system embedded in the thought processes of individuals and in the code, is extracted, documented, and institutionalized. Competency Development ensures that the resources maintaining these applications have the requisite levels of technical, functional, and behavioral skills, not just to maintain them, but to also identify and implement performance tuning and productivity enhancement mechanisms.
This thought paper attempts to look beyond the known hindrances insurance companies face owing to their dependence on legacy applications. It also discusses two essential imperatives—knowledge institutionalization and competency development—that can help organizations efficiently manage their legacy applications.
Insurance companies use legacy systems to manage applications that handle:
Market Channel Applications
Legacy applications were mostly used for monitoring the productivity of marketing/field personnel and to estimate the commission payable to them. Since commission calculations are complex and need to be paid for decades in the case of lifetime policies, it was one of the earliest processes to get automated in the insurance world. Thus legacy is common in the channel management portfolio of insurance IT. These applications have interfaces with both external and internal systems (like Point-of-Sale (POS) data entry, commission management, accounting, agency management etc.). Hence, altering these applications may impact all/any of these systems.
Typically, front-end processes like agent communication, illustrations, marketing, and training support within the channel management space have been ported into newer technologies; back-end business processes like agent set up, agency monitoring, and commissions management continue to reside on legacy systems.
Customer Service and Claims Applications
These are the core components of an insurance company’s operations. They are the storehouses of policy and claims data, and the pivots on which the entire insurance organization’s business strategy is developed. The need to maintain this data over an elongated period of time, repetitive data-driven processes, and complex business processing rules that underpin the two sets of applications warrant early adoption of automation. In recent times, the largest part of the aggressive insurance legacy landscape is accounted for by these two sets of applications. They interface with almost all applications (except the actuarial applications) in an insurance company. The competition warrants insurers to offer better and faster services to their customers.
However, insurance companies still need to manage existing legacy applications for as long as the policies issued using such legacy systems are in force and not terminated or ported to other customer service/claims systems.
Actuarial/Reinsurance Management Applications
These applications are one of the most important information assets of an insurance company. Data within these applications is used for designing various products, performing claims analysis, and meeting regulatory requirements. They form the “heart” of the insurance company’s strategy. The valuations and modeling requirements of the actuarial department almost mandated early adoption of automation.
Legacy systems persist because of the expense, effort, and potential risk of business interruption associated with the movement of data and key business processes to more advanced and contemporary technologies. There are numerous reasons why insurance companies persist with their existing systems:
Repositories of Processes, Rules, and Data: Legacy systems have been continuously involved in processing policyholder information, creating repositories of insured data, policy information, and the operational processes in vogue. In many cases, the information pertaining to various processes/ practices that guide the business rules is hard to find—and the data used may not be available anywhere other than in the legacy systems.
This has kept many insurance companies from re-engineering or replacing legacy applications with newer applications built on latest technologies (both hardware and software). The risk of losing information in embedded business logic, business rules, and underlying data is a big deterrent for insurance companies.
Reliability of Applications: Many insurance companies still depend on legacy systems to handle key processes. They are reliable and capable of delivering what they were built to deliver. Hence, many insurance companies are reluctant to undertake any replacements related to these business critical systems.
Poor Knowledge of the Existing System: It is difficult to find complete specifications that mirror the functionality of the entire legacy system. This may be due to unavailability of the original system designers, and insufficient documentation.
In most such instances the available system does not include the details of all the system changes. Replacing a legacy system is dangerous since businesses face the risk of losing vital business knowledge embedded in these systems.
Expensive to Change: Changing from legacy systems to new systems involves huge resource overruns due to the following reasons:
Legacy systems are inherent, inescapable and here to stay. It is, therefore, important to enhance existing applications to correctly reflect the changes in business processes and rules. Reducing maintenance costs of these applications through effective performance management, storage management, and CPU time management is of critical importance to get the best ROI for insurers.
Coforge believes that other than the traditional application value enhancement methods, insurance companies need to strongly focus on knowledge acquisition, knowledge institutionalization and competency development to extract value from investments made on legacy systems.
Knowledge Acquisition
Knowledge exists in embedded business logic, business policies, and rules formed over a period of time from the data extracted from business operations.
Knowledge can be acquired by following the top-down and bottom-up approach. In the top-down approach, knowledge from the original designers of the existing system is documented to provide a complete picture of the legacy system. The bottom-up approach helps in gathering knowledge when original designers have missed out on certain areas or when the original designers are not around and the system documentation is incomplete or has been lost. In the bottom-up approach, tools may be used to extract and document the business logic underlying the various applications.
These created documents, thus, form the basis for future legacy support/ maintenance activities.
Knowledge Institutionalization
Since no system documentation is ever really complete, the previous/ongoing projects, collaborative efforts, and communication carried out during the modification of the legacy system needs to be maintained in an environment where they can be readily accessed. Most importantly, the practice of knowledge management needs to be institutionalized, as the efforts yield rewards over a period of time.
The knowledge institutionalization mechanism should ensure that comprehensive, indexed, and easily accessible knowledge of the system resides in the repository and is periodically updated. It should also have a training management system with an assessment mechanism to ensure that new members have a thorough understanding of applications before embarking on any maintenance activity.
Insurance companies should establish processes to transfer knowledge, so that it is not lost due to resource movement; and new resources are made knowledge-rich within short, predefined short timelines.
Competency Development
Knowledge of applications alone cannot ensure successful operational excellence and cost reduction. To be able to achieve this objective, the maintenance teams need to have a specific set of technical, functional and behavioral competencies. This demands the creation of a competency development framework that details various competencies required by the role holder. The assessment criteria measure and create a development program that generates competencies in staff members across levels.
Only a fully competent team having adequate knowledge of the applications and the underlying processes will be able to continually improve system performance and productivity. To accomplish this, the maintenance teams handling these applications need to have a strong hold on the functional, technical, and process details of the application.
In an environment where the market demands high-speed delivery of products and services, the insurance companies’ legacy systems are slowing them down. Legacy systems are not easily adaptable and hence require extra effort to integrate, upgrade, and test them. The cost of maintaining legacy systems is more than the cost of maintaining new technologies as the latter are far more flexible and user friendly.
However, legacy systems are rich goldmines of knowledge and processes, which are not available anywhere else. Hence, maintenance of legacy systems is an alternative which most insurance companies use, despite the heavy costs involved. Managements believe that the cost of maintaining a legacy system is less than the cost involved in replacing them with state-of-the-art technology due to the risks involved.
Maintenance of legacy systems in the absence of proper documentation and non-availability of resources with requisite fundamental knowledge base is a nightmare.
A robust knowledge acquisition engine, coupled with strong knowledge institutionalization can go a long way in helping the support and maintenance teams to comprehend the business functionality within the legacy applications, enabling them to create a modernized application in a relatively smaller time frame. Maintenance of legacy systems enhances Return on Investment (ROI) made in the hardware and software systems.
By focusing on these aspects, the insurance legacy landscape management team can become more effective and efficient; thereby reducing the Business as Usual (BAU) costs while enhancing system flexibility.