Outdated legacy systems have plagued insurers for years. These systems, built by programmers throughout the ’80s and ’90s yet maintained into the new century, already create issues for insurers who wish to shift to newer technology, as well as those who want to make more services available online for customers and employees. However, the compliancy requirements of Solvency II are now forcing an upgrade, and many insurers are far from ready.
That said, newer companies tend to be in a slightly better position because their systems are already more modern but many older companies face numerous challenges, one of those being an aging workforce. As workers who are adept at working with these older mainframes and COBOL programs retire, skills gaps are created and it can become even more difficult to attract younger replacements as they would prefer to work on newer systems.
Besides the need to merely be in compliance with Solvency II, insurers face another danger. Older systems can make the required data for that compliance more difficult to access, leading to less accuracy in calculations regarding available capital. Less accurate calculations may result in a company that is less competitive all around because they may be required to reserve capital in the absence of more precise information. This leads to less financial flexibility and adaptability.
With Solvency II set to go into effect on January 1, 2016, this gives insurers some time to overhaul their systems in order to remain compliant, but is it enough? Particularly as some insurers are still using tools like spreadsheets, revamping their systems is going to take an enormous amount of time and money.
It is possible that Solvency II is something of a red herring as roughly half of insurers acknowledge that they are operating with obsolete code, and if this is the case, these companies need to upgrade no matter what. Even systems that are only a decade or so old, are now considered out of date because the industry has changed so much due to the financial crisis and technological advances. With or without Solvency II, the fact is that the insurance industry faces a significant shift in how they do business and this goes far beyond just upgrading software.
With a number of difficulties to overcome, one decision insurers will need to make is whether they want to keep all operations in-house or outsource some of them. Some experts feel that outsourcing could be one solution because it will allow insurers to focus on their particular strengths whilst outside firms look after aspects such as technological upgrades.
Another concern is that many insurers are simply not aware of what they need to do, and their options may shrink if they continue to delay.
The limitations of current software solutions present another obstacle. Some companies are working with upgraded software that runs with legacy systems but in general, this software can address some areas but not others. Some areas of risk such as operational and expense still lack the comprehensive and sophisticated tools needed for updates.
Another potential solution is a complete system overhaul, but this can be taxing on resources. It may be difficult to persuade some companies of the necessity for an entirely new system, and furthermore, an upgrade now doesn’t mean further upgrades in the future aren’t required. It is still possible that within a few years’ time, the new system will be obsolete as well.
One unique challenge presented by Solvency II is simply the cost of running calculations. Companies are faced with a choice between the running costs for the hardware needed to perform these calculations versus the costs of using cloud operations. Cloud operations may appear cheaper initially, but this may not necessarily be the case. Because so few insurers use the cloud extensively at present, it is difficult to estimate what the costs may be and whether companies may tend to routinely have issues with heavy usage or capacity.
Solvency II is only one part of an overall change in the industry that will force insurers to change not just how their technology works but how they do business. Insurers face a sea-change that goes far beyond how they estimate costs or process claims. New regulations, plus consumer expectations, are demanding the revamp of legacy systems and a sleeker, more streamlined and modern approach to global insurance.