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Modernizing legacy information systems through service-oriented architecture appears to offer many insurers real hope, not just hype.
It remains to be seen, though, how many insurers will maximize SOA's potential by using it to implement broad business goals through a series of manageable, measurable projects, as experts recommend.
"SOA is in its early states of evolution," said Keith Sievers, senior vp and chief information officer with the Jacksonville, Fla.-based Kemper Auto & Home Insurance Co., an affiliate of Chicago-based Unitrin Corp.
"The challenge with SOA is that it is still not a well-defined term," said Brian S. Cohen, president and CEO of Denver-based Clear Technology Co. Inc. If you asked different people in a room, they would each have different definitions, he said.
Experts have their own definitions of SOA, which range from the philosophical to the technical:
"Conceptually, SOA is a great idea, but it is still in its infancy in terms of applying it," Mr. Cohen said.
A service-oriented architecture approach to information technology systems has its basis in deploying enterprise software applications that share logic and data across both legacy and newer IT systems, providing a way for companies to share data across the enterprise, increase business information and make better use of that information.
The interest in SOA is growing among the insurance industry and other industries. "It's a wave and people standing in the water who don't deal with it will be swept away," Mr. Cohen said.
A recent study commissioned by Progress Software Corp. of Bedford, Mass., found that "an SOA-based approach is gaining ground quickly" as a "solution across enterprises to achieve successful end-to-end data management and integration results."
The survey, released in March 2007, tallied the responses of 407 senior IT decision-makers at companies with more than $250 million in annual revenues. The survey found that "while 44% of enterprises use SOA today, 59% of respondents reported that they plan to use SOA for integration efforts over the next two years."
In addition, the study found that 32 of 53 financial services and insurance companies responding to the survey are using SOA as the basis for application and data integration.
The survey also found that about 80% of all respondents still manually make changes to integrate data. Such manual processing increases maintenance costs, respondents said. Manual processing also is troublesome because of its slow speed and "unforeseen breakage of other applications dependent on the same data," respondents said.
The concern about the time and cost associated with manual fixes is one of the main concerns that insurers have with their legacy systems, sources said. Consequently, most experts say the problem insurers face due to legacy systems is "very serious."
The problem posed by legacy systems represents "a huge risk" to the organization, said Judy Johnson, vp and principal solutions architect in the New Brunswick, N.J. office of Patni Computer Systems Inc., which is headquartered in Mumbai, India.
"Insurers can spend between 70% to 85% of their IT budget maintaining legacy systems, which leaves very little for growth and transformational projects," according to an e-mail from Stephen Forte, principal research analyst with Insurance Advisory Service, a unit of Gartner Inc., a Stamford, Conn.-based research and consulting firm.
The problems with legacy systems are many and varied, experts say.
Legacy systems are silos that stand apart, Mr. Labrot said. They can't differentiate customers, or tailor services, products or rates.
They are plagued by operational difficulties including "hard-coded business logic, inflexible systems, lack of rules-driven processes," Mr. Forte said. Legacy systems are driven by policies instead of clients and are slower in getting products to market and adapting to changing market conditions. As a result, an insurer dependent on a legacy system likely is losing market share to its technologically savvy competitors, he said.
Legacy systems were designed for handling processing at a specific point in time and are not responsive enough for the current era when change is constant, said Art Barrios, managing director with PricewaterhouseCoopers L.L.P. in New York. Many legacy systems require manual fixes, but it is increasingly difficult--and expensive--to find staff who understand how to make those changes on mainframe equipment that is decades old, Ms. Johnson said.
Pressure is mounting to improve the IT performance from the business side of insurers' operations because the product is increasingly sold as a commodity, regulators are increasing their reporting demands and customers are demanding better service, Mr. Barrios said. Those pressures are being transmitted to insurers' IT departments and their legacy systems cannot meet those demands, he said.
Despite those problems, most large insurers continue to operate their legacy systems rather than replace them, because the systems can still perform essential functions, such as the batch processing of data.
"The insurance industry has a well-known reluctance to change something that works," Ms. Johnson said. "It's a very thorny issue."
"We know we need to change, but we don't want to do it quickly," Mr. Labrot said.
Despite the high cost of operating mainframes, that equipment will continue to have a role in insurance industry processing over the next five years, in part because it is hard to find equivalent power in a server-based system, some experts say.
In addition, IT systems are both difficult and expensive to install and get working, Mr. Cohen said. A company with $1 billion in annual revenue can expect to spend about $30 million to "rip (out) and replace" a core IT system, and that does not include the cost of the actual system itself, he said. Also, "businesses can get killed by failed strategic IT efforts," he said.
Larger insurers face more problems in trying to modernize IT systems, especially those that have acquired disparate IT systems in past mergers, experts say.
And, they say, midsize insurers are generally considered to be more nimble than larger insurers because of their smaller needs.
Experts have mixed opinions about whether property/casualty insurers face more problems with legacy systems than do their life/health counterparts.
Experts also differ about whether U.S. insurers face more challenges than their non-U.S. counterparts. Most consider European-based insurers, which operate in a less regulated environment, to have more flexible IT capabilities.
Emerging countries with developing insurance markets often are a "green field" opportunity for insurers, Mr. Roller said.
While SOA is the most recent solution for modernizing insurers' legacy systems, both property/casualty and life/health insurers often have tried a variety of other strategies to modernize their legacy systems, experts say.
Some insurers have used "wrapper strategy," in which new technology is added to extend a system's life.
The wrapping approach can be done through technical or functional extensions or migration from one platform to another, Ms. Johnson said.
That solution is best achieved by installing integration hubs that serve as "traffic cops" to route new incoming information. That provides a way for the Web and for servers to communicate with the mainframe, Mr. Roller said.
Some companies also have tried to modernize their legacy systems by outsourcing processes that are hard to handle in-house. For example, some insurers outsource processes like claims handling, application coding and maintenance to places like India, Mr. Labrot said.
Such outsourcing is not without risks, though. "There is a huge danger that the company will forget how those systems work," as happened with an insurer that he declined to identify. After several years, an insurer is faced with having to buy a new system or negotiate with the off-shore service provider, who "will have a gun to your head" because its services are now essential to the insurer's operations, Mr. Labrot said.
An SOA approach can help legacy systems problems or can be used as an alternative to such systems, Mr. Forte said.
"Fortunately, SOA is moving from the purely theoretical stage to a place where SOA can really be used to develop better and more flexible systems," Ms. Johnson said.
The SOA approach has several potential advantages.
"SOA is so powerful" because it includes transparent services that a company can use to augment and improve its existing legacy system, Mr. Cohen said. "You can mix and match," he said.
SOA also can help expedite several processes within a single company, experts say.
It can help insurers' existing legacy systems by improving batch processing and making hard-coded processes more flexible, Mr. Forte said. SOA also can be "a short-term bridge to support front-office requirements while replacing or upgrading legacy systems," he said.
Also, "SOA takes information and processes from systems that aren't able to connect with portal technology and makes them accessible to agents, customers and external users via the portal," he said.
In addition, SOA is "a tool for insurers to (make components of) processes that they can reuse across systems and product lines as well as a tool to support processes that cross multiple back-end systems," Mr. Forte said.
Three key advantages of the SOA approach are consistent service performance, ease of management and remote access, Mr. Roller said.
Adding to SOA's popularity is the fact that it uses cheaper "open standards" rather than the more expensive proprietary ones of the past, Ms. Johnson said. The "World Wide Web Consortium" is developing those standards collaboratively, "in a kind of virtuous cycle--which is the opposite of a vicious circle," she said.
Also, using SOA allows an insurer to replace portions of its systems "on an incremental basis," Mr. Sievers said.
Regardless of the definition of SOA that insurance company managers use, they must do a comprehensive analysis of their company's fundamental needs before embarking on projects to implement it, several experts say.
"The whole solution hinges on management vision," Ms. Johnson said. "If the solution is (only) technically based, it is sure to fail."
"What is becoming critically important is that SOA needs to be something that is positioned as a benefit to the business," Mr. Barrios said. An effective SOA program requires the involvement of skilled and experienced "business architects," who understand both a company's business operation and IT needs.
The managers need to develop measurable, manageable projects that have clearly identifiable goals and provide value to the business, Mr. Barrios said. The goals, for example, could be improving speed to market, providing more in-depth knowledge to the sales force or improving the customer's experience.
Engaging in such projects and evaluating their outcome is the only way to prioritize services and to know the appropriate order in which to implement them to optimize benefits to the company, he said.