Insurance core systems in transition

The insurance industry is increasingly facing the challenge of transforming its core systems to meet requirements such as rising customer expectations for personalised services, seamless interaction with internal and external service providers and the increasing digitalisation of business models. We surveyed 41 insurers from the DACH region to analyse the progress and goals of their core system strategy.

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This survey covers the DACH region without going into the specific characteristics of individual countries. It should therefore be noted that Swiss insurers have specific needs compared to those in Germany and Austria. The Swiss insurance landscape is characterised by strictly regulated products such as occupational pensions, accident and supplementary health insurance. Due to Switzerland’s geographical location and its role as an international financial centre, there are also specific requirements for the security and data integrity of insurance systems.

Swiss insurers must comply with the strict requirements of the supervisory authorities and ensure that their core systems are robust and protected in accordance with local requirements. Standardised insurance software often doesn’t fully meet these needs, making it difficult to introduce or modernise a core system.

A modern core system is crucial for Swiss insurers to increase profitability and efficiency. By optimising processes, using real-time data and improving customer service, insurers can strengthen their competitiveness, reduce costs and open up new business opportunities.

Our survey has shown that the participating insurance companies can be categorised into five types based on their transformation strategies: new system users (5%), legacy users (20%), modernisers (22%), replacers (24%) and mixed strategists (29%).

Legacy users are predominantly small companies that rely on long-established IT systems. Modernisers are characterised by low-risk and incremental further development of their systems and consist of smaller organisations as well as medium-sized companies. Replacers, on the other hand, can be found in all size classes. Their main aim is to operate standard systems. The group of mixed strategists includes an above-average proportion of medium-sized and large companies. Many of them minimise implementation risks by continuing to operate legacy systems. New system users are in turn small to medium-sized companies that often have a high degree of customisation in their systems.

IT und business must grow together

A key insight from our survey is that close collaboration between IT and the business units is a basic prerequisite for successfully transforming core systems. This is because many of the legacy systems that have grown over the years now have a high degree of customisation and therefore also increased complexity. Migrating such systems is challenging and can negatively impact the efficiency of the entire organisation if problems arise. For this reason, both perspectives – business and IT – are essential for change.

Cloud and hybrid cloud models are the preferred operating model for new system users, mixed strategists and replacers. Key criteria when selecting core systems include information security, data protection, functional scope and process handling times. This also shows that IT and business requirements must be well aligned.

Most companies cited the lack of automation potential as the biggest challenge. This in turn leads to the most important goal for transforming many core systems: increasing the degree of automation. 84% prioritised this in the survey. But increasing the level of integration is just as important for many companies – followed by the goal of increasing customer and partner orientation.

IT operating costs are stable, investments are on the rise

The average IT cost ratio of the survey participants is 2.74%. There are significant deviations both upwards and downwards. The ongoing IT operating costs (run costs) are 1.62% on average. Apart from the modernisers (1.47%), the average for the other groups ranges from 0.90% to 1.07%. The change costs, i.e. investments in digital transformation, average at 1.12%. While legacy users have the lowest IT cost ratio of all five groups with an average of 2.34%, the ratio is highest among modernisers at 3.21%. In times of rising premium income, the run share of the IT cost ratio tends to remain constant; the expectations of rising and falling run costs balance each other out. A significant proportion of the companies surveyed are expected to maintain the same proportion of change. However, more than half of the companies surveyed anticipate an increase in change budgets.

Manageable IT teams with experienced specialists in action

Almost a third (29%) of insurance companies employ fewer than 50 IT staff. More than half (55%) employ up to 200 IT specialists. The figures indicate that even smaller teams have been able to overcome most of the IT challenges in insurance companies. The average age of the IT workforce across all groups is around 45, indicating that companies need to focus on nurturing young talent in this area in order to avoid long-term staff shortages and maintain their innovative strength.

85% of the survey participants work exclusively internally with local IT staff – only using service providers mainly to bridge bottlenecks. Especially in small insurance companies, the proportion of external staff is low at 6%. With increasing premium income, however, this proportion can rise to 25%.

The aim of the survey is to provide an in-depth insight into the current landscape and transformation plans for insurance core systems and, in particular, to shed light on their significance for the overall organisation. To this end, we surveyed 41 primary insurance companies from the non-life and/or life insurance sectors on the transformation of their core systems. A total of 30 of the companies are based in Germany, 5 are from Switzerland and 6 from Austria. Together, they cover around 40% of premium income in the DACH region. Within the insurance companies, managers from IT, operations and strategy were interviewed. The data was collected in the form of structured interviews and questionnaires.