May 17, 2024
4 min read
Insurance companies are all-in on digital transformation. Across all subspecialities, the field’s overall technology spend is expected to increase by 25% over the next few years, and industry sources indicate technology has been slowly claiming a larger share of overall premiums – increasing from 3.7% in 2021 to 5% in 2024.
It’s a great opportunity for the industry to implement the smart digital experiences and fast claims processing customers demand, but there’s another concern. As Gartner notes in a 2024 report, companies are spending 90% of their IT budgets just maintaining current software. With only 10% allocated toward digital innovation, even insurers with healthy transformation budgets might struggle to find appropriate funding.
Here are three common digital transformation challenges and how to overcome them.
The insurance industry’s push for digital transformation accelerated during the 2020 pandemic, and organizations with a strong existing digital infrastructure found it easier to adapt and change.
“Companies with high levels of tech in their business models fared well,” writes Joanna England in “Digital transformation and the legacy of insurance.” “But the insurance industry, the vast majority of which was still traditionally modelled using legacy systems, struggled to adapt.”
The problem? Bringing about major technical change in any industry with deeply embedded software is rarely as easy as ripping and replacing.
Systems within an insurance company’s software portfolio come with interdependencies that can make change difficult, procedurally disruptive, or prohibitively expensive. The discussion is often framed in terms of upfront costs versus ongoing spend, but it’s really more about the disruptive ripple effect that often occurs when companies change technology.
Large software vendors often achieve their revenue goals by locking customers into their ecosystems. Their practices, including end-of-support (EOS) dates and enterprise license agreement (ELA) terms, reflect that. In many cases, the technology that allegedly holds back digital transformation plans would be perfectly viable for use alongside newer solutions if the insurance company had ongoing maintenance, interoperability solutions, and cybersecurity services for legacy products.
Moving away from on-premises technology isn’t a guarantee of better security. To the contrary, upgrading to a new version or moving to the cloud just changes the types of risks insurance companies encounter. Cloud-based solutions can introduce new vulnerabilities that encourage data breaches, unauthorized access, or denial-of-service attacks.
However, in terms of existing software, EOS policies from vendors force insurers toward upgrading on security grounds when they might not actually need to. When a software version’s support ends, the vendor will no longer provide security patches. Because risk mitigation is crucial, letting any system, including stable and high-performing on-premises solutions, go without robust security is unacceptable, so insurers are forced to upgrade believing they have no other choice.
Considering the tactics vendors use, it’s important to remember that security patches are only one means of securing legacy software estates. Software hardening, a practice which favors added layers of protection and monitoring, can reduce the attack surface and increase the resilience of on-premises technology without compromising functionality or performance even with unsupported systems. By implementing product hardening strategies and practices like encryption, firewall configuration, and access control, insurers can mitigate the cybersecurity risks associated with end of support and extend the lifespan of their current software.
Analysts claim the insurance industry is set to lose approximately 400,000 workers by the end of 2026. It’s not the most encouraging news considering the field’s ongoing troubles attracting talent. Add in a widespread, multi-industry IT skills gap that is only expected to grow worse, and it’s easy to see how technology skills will be particularly challenging for insurers to affordably acquire in the coming years.
As of 2024, eight out of ten of the industry’s largest insurance companies still lean on mainframes. But despite the mainframe’s lasting presence across the field, the skills to support mainframes and other reliable software systems have become increasingly difficult to find as baby boomers retire. In this way, the ongoing IT talent shortage can force insurance companies to consider moving away from highly stable, long-trusted software solutions, simply because there’s a lack of support. Even if moving away poses a significant, highly risky technical and financial lift.
It’s the same story for every high-performing, legacy software product insurance companies rely on, and one that will continue to pose a major challenge as the IT skills gap rolls on.
Fortunately, vendor maintenance is not the only option for insurers looking for talent to support their on-premises software. Expect third-party software maintenance (TPSM) providers, which offer ultra-responsive support at up to 50% less than IBM® Subscription and Service renewal costs, to play a growing role in the insurance industry’s digital transformation.
A viable TPSM provider will also offer software hardening help, licensing support, and interoperability advice that helps your company keep using trusted software past the EOS date.
Legacy software is often presented as a blocker to insurance digital transformation issues, but the reality is most of the issues insurers face stem from vendor policies, not the software itself. Taking time to understand the third-party software support market and its many strengths, relative to the setbacks and issues vendors toss in the way, can yield highly productive results.
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