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MINNEAPOLIS--Companies across the insurance industry are wrestling with issues related to legacy information technology systems, but determining just how to solve the problem is an individual decision.
"It's up to you. It's not up to analysts like me. It's not up to the guys up here," said Barry Rabkin, senior research analyst in the insurance practice at Financial Insights, an IDC Co. in Framingham, Mass., and moderator of a panel on legacy system issues last month at the annual conference of the Insurance Accounting & Systems Assn. in Minneapolis.
The core question for insurance companies looking at legacy system issues is what is the fundamental motivation for change, said Marcus Ryu, vp of strategy and new products at Guidewire Software Inc. in San Mateo, Calif.
"Nobody thinks replacing a core system is easy," Mr. Ryu said, but there are reasons why companies have to replace them. One is on the "opportunity side," he said.
"There's a broad consensus among every insurance carrier that there are things that they would like to do that their legacy systems are preventing them from doing," Mr. Ryu said.
The other is on the "danger side," the fact that companies' aging legacy systems are becoming a major enterprise risk in some cases, he said.
"I do believe there is a risk to saying that every problem has to be fixed with automation," said Bill Garvey, information technology director at Jacksonville, Fla.-based Main Street America Group. But, Mr. Garvey said, companies now face various situations that have become so complex they demand automation.
"Underwriting discipline has become incredibly complex," he said, and demand the use of such tools as predictive modeling.
George Grieve, president of CastleBay Consulting Corp. in Austin, Texas, noted that as companies look to replace legacy systems, they have to recognize that the costs go beyond a new system's price tag.
"We all have to understand there is an opportunity cost involved in replacing a major core operating system," Mr. Grieve said. "Because if you're going to do that, there are other things you're not going to be able to do."
"No. 2, not only is there an opportunity cost, you have to be sure there isn't a business opportunity loss, because you have to think of this as changing the engines on an airplane while it's in flight," Mr. Grieve said.
Mr. Ryu said Guidewire has begun asking whether there's a third choice to standing pat or totally replacing a legacy system, examining whether it's possible to bring up a new system in parallel to the existing one. "That doesn't mean you don't have to do some integration," Mr. Ryu said.
"The most obvious trade-off is that you might not get every single report you got before," he said. "The more painful trade-off is you've now got your data in two places."
But, he said the software company is of the view that such an approach is "the only real long-term industry solution" to the legacy system issue.
"The economic model for this...hasn't been built yet for a large organization," Mr. Ryu said, adding that he's not suggesting companies build "an entire parallel universe."
Mr. Garvey, the insurance company IT director, wasn't convinced such a parallel approach could succeed, however.
"I think sometimes we forget that there are people who have to sell policies and have to run the business," Mr. Garvey said. "Their life is dependent on keeping that running." In many companies, the notion of a parallel approach would be tough to sell to top management, he said.
As insurance companies struggle with legacy system issues, Mr. Grieve said he knows of an insurer that has completely replaced its core operating systems.
"There are certainly companies that have implemented new billing systems, new claims systems or some new core policy administration systems and done them successfully," he said. "I don't know anyone who's done all of them."
But Mr. Ryu said it's essential that companies take a strategic view of their IT systems.
"There's a core management responsibility to have a strategy. And it's not acceptable to say the status quo is a strategy," he said. "To not have a strategy for what the core system will look like in five to seven years is actually an abdication of that responsibility."