In life insurance, on the other hand, the difficulty in converting policies that date back decades has been the biggest reason carriers have kept old administration systems running. “There also is more work to do because of the more siloed administration of acquired and merged operations, and the lines of business, such as insurance and annuities, are less similar,” Hersh adds.

Beyond financial conditions and business realities, part of the reason for the interest in replacement systems is new technology itself. “A lot of companies believe there's a viable new generation of software available today, and they hadn't thought that was the case before,” Grieve says. “The risk of selecting a new vendor was much higher three to five years ago than today because vendors are more mature and have developed track records with an installed base of customers.”

Insurers making a business case for legacy replacement tend to cite reasons that fall into three main categories: lower total cost of ownership; greater business flexibility, including speed to market and support for increased sales; and process improvement leading to better service and reduced expenses.

An insurer may spend up to 80 percent of its budget maintaining IT systems and infrastructure rather than working on new projects. So, to put it another way, sometimes you have to spend money to save money.

“Modern systems allow you to do a bunch of different things. You might be able to get rid of your mainframe that is costing a fortune to maintain or use common programming skills that are easier to acquire or eliminate custom-made interfaces that need to be rewritten every time changes are made,” Hersh indicates.

AXA Equitable is one insurer planning a replacement strategy with lower TCO in mind. “We typically find there's a 20 percent to 25 percent reduction in TCO in legacy technology replacement,” says Kevin Murray, executive vice president and CIO at AXA Equitable.

Proving that reduction can occur may mean showing the business side the hidden costs of legacy systems. “I've had to go through hearing the argument, 'The legacy system doesn't cost us that much,' and I've had to say, 'Yes it does.' If we keep adding new products, distribution, and service code to legacy online and batch systems, we won't be able to bring our systems up until 10 o'clock. Our online response times will adversely affect customer service. We'll need to increase the size of our call centers because we can't push out Web-based thin client screens for customer self-service. And we also increase our costs in online inefficiency–power units, CPU cycles, inefficient use of data,” Murray says.

While AXA Equitable has a fair number of modern systems, there are a host of applications Murray is evaluating for replacement. “I have a spaghetti bowl full of Assembler, Visual Basic, and COBOL code,” he explains. “We are looking to replace those systems [starting] with some of our customer- and sales-facing functions first. Right now, we're in the midst of putting nonproprietary open front ends [on those systems]. Next year, we'll focus on [deploying] new systems for new business. And in 2008, we'll analyze whether to convert in-force life and annuity business or whether to leave it and work hard to ratchet down costs to operate those legacy environments as cheaply as possible,” he says.

Cost was a key driver at Western United Life Assurance Company, where the insurer replaced a COBOL-based administration system running on a VAX mainframe with AdminServer's client/server version of its AdminLife & Annuity product in July 2004.

“Anything we needed to do in the old legacy system took a lot of human resources. It wasn't rules based, it wasn't easy to modify, and we had customized the [previous] software to the extent where we had a difficult time with updates. It also was getting hard to find COBOL developers,” says Diane Brown, application support manager at Western United.

In October 2005, the insurer began converting existing business to the AdminServer system, an effort that will continue throughout this year. While Western United hasn't calculated whether its initial 18-month ROI estimate has been met, it has measured cost-related impacts in several areas.

By being rules based, the AdminServer system allows business analysts, rather than IT, to make many modifications–particularly important since the insurer's IT staff has dropped from 70 to 17 in recent years due to internal reorganization. A GUI interface with drop-down menus and check boxes vs. green screens with fixed character fields has reduced training time from weeks to hours. And new-business processing staff has been reduced from 12 to four employees.

State Auto wanted to make the move from CSC's S3 to the vendor's Exceed platform for billing and claims in part to drive down the cost of supporting the hardware connected with the system. “We were maintaining 700 OS/2 desktops, and we had to support the overhead of client/server with special tools that weren't ubiquitous to the skills we had here,” says Doug Allen, the insurer's vice president and director of information technology.

State Auto originally had deployed S3 to upgrade a previous CSC system in the late 1990s as part of a Y2K remediation project. Migration to the Exceed platform, which also involved replacing the existing mainframe with IBM System z9 Business Class hardware, began in late 2003 and was completed over the Memorial Day weekend of 2006. State Auto chose the “big bang” approach because it didn't want billing and claims staff to have to toggle between old and new systems.

“It was painful,” Allen admits, “but it gave us more flexibility faster, rather than having to support the other system until things rolled off.”

Currently, State Auto is in the process of replacing the OS/2 desktops with Windows-based Dell PCs. “We also were using Citrix in the OS/2 environment to extend Windows [applications] to 700 users, so we can start to scale that back now, as well. In addition, we were limited on certain peripheral devices, such as printers and monitors, with the client/server solution, and we now can use less expensive, more ubiquitous devices,” Allen says.

With the Exceed system still in its first year and with replacement of the desktops still ongoing, State Auto hasn't put a hard dollar yet to any savings. “It was a business necessity,” Allen states. “[The previous system] was hamstringing us in our ability to do things.”

The “inability to do things” leads to the second driver of legacy replacement today. “Flexibility and speed to market are very hard to pull off in a legacy environment,” Grieve maintains.

Consider Loudoun Mutual Insurance Company, which until recently used a custom-built policy and claims administration system that dated back to the late 1970s and was written in RPG and running on an IBM System/36. “Simple things, such as making a rate change, required programming time. Any time we wanted to introduce a new product, it was a major issue,” says Christopher G. Shipe, president and CEO of the Virginia-based home and farm insurer.

“And forget about trying to do download or upload, because nobody knew how to map the data. It was hard to do anything, and it was hard to find people to do anything,” he adds.

The insurer invested $300,000 in Garvin-Allen Solutions' Advanced Insurance System (AIS) and upgraded its desktops from terminals to Windows 2000-based PCs. Installed in 2005 for new business, the insurer since has converted the bulk of its existing business. Windows based with a Borland Interbase data-base, AIS doesn't give Loudoun Mutual rules-based system administration capabilities; however, it's a giant leap forward in flexibility.

“We can put rate changes in the same day, and if underwriting or marketing creates a new rating tier or specialty program, we can do that internally,” says Todd Robertson, CIO. “Technology is not an inhibitor anymore.” The platform also has allowed the insurer to interface with the management system its agents use, a project completed with the assistance of system integration consultant NxTech.

“Before, it cost agents more to do business with us [than other carriers] because they would have to hand-key information into our system they already had entered into their agency management system. In fact, we had one large agency that had dedicated one person just to key data into our system. With download, [that agency] could redeploy this person,” Shipe says. “We've doubled the size of the company in the past four years, as well, and haven't added any people.”

Inflexibility is the number-one reason carriers replace legacy systems, Hersh believes. “If you think about the competitive and regulatory climates today, things change much more at the drop of a hat than they used to. Overnight you might be faced with an opportunity or challenge, and you've got to be able to deal with that more quickly than most legacy systems will allow. If you have to create chunks of COBOL code to deal with your pricing, you're not as flexible as you are if you just have to run some 'what if' scenarios.”

The rules-based nature of Western United's AdminServer system allows the company to make changes quickly and without the involvement of IT. “Recently we set up a new product, and it was done by a person on our actuarial staff,” Brown says.

“In the past, if we had interest rate changes, it would take 12 hours for someone to change those tables,” adds Linda Mason, insurance operations manager. “Now, it can be done in an hour.”

“If you talk to carriers that don't have modern systems, you'll find things have been done the same way for the past 30 years,” Hersh comments. “They say, 'Why change if it's not broken?' What they don't realize is they're saying they can't change the process because their systems won't support it.”

Technology definitely had constrained business processes at Meadowbrook Insurance Group. Prior to installing INSTEC's Quicksolver administration system, a project that substantially was completed this year, the insurer had many different ways of processing its program business, each constrained by the specific policy administration system–or even manual process–that a particular branch office was using.

The company didn't consider choosing one of the existing systems as a consolidation platform, according to Chris Spring, Meadowbrook's senior vice president of business operations. “Most of them were old, unsupported software,” he explains.

The $1.3 million replacement project took two-and-a-half years. Many of the typical business risks, such as user acceptance, of legacy replacement were minimized because of the state of Meadowbrook's previous workflow, Spring notes. “In some situations, it was going from nothing to automation,” he says.

Today, rather than having a distributed set of administration systems, Meadowbrook runs Quicksolver on a pair of application servers in its Michigan headquarters. Field offices and agents make Citrix-based connections to the system.

Having one system and one way to process business has had an “immeasurable” impact, affirms Spring. “The biggest benefit has been allowing Meadowbrook just to be more competitive,” he says. “I can't give you one ROI number, but there has been savings in terms of staff [reduction] and improvements in terms of customer satisfaction. We also have all our data in one central place and consistency from a reporting standpoint.”

Improving the claims process, in particular, can drive legacy replacement decisions, Grieve asserts. “Carriers see that's where service really makes a difference. Changing workflows, dealing with different types of claims, handling simple claims more quickly–those are hard to do in a one-size-fits-all legacy claim environment,” he says.

Workers' compensation insurer Employers Direct targeted its claims process first when it undertook a legacy system migration. When the company was formed in 2002, price was the key component in system selection, so the insurer purchased what even then was an aged COBOL AS/400 system from Data Coordinators.

“Management already was very familiar with the Data Coordinators system and well understood its strengths and limitations at the outset,” says Greg Schueman, CIO at Employers Direct, explaining the platform was more a record-keeping tool than a workflow system. “We had planned to replace the system from the start with one that provided optimal automation once it became clear the company would succeed.”

In mid-2005, the insurer completed installation of ClaimCenter from Guidewire Software to provide Web-based claims administration. “Because ClaimCenter uses a services-based strategy around its architecture, that makes it easier to integrate with other internal applications and support end-to-end claims automation,” says Schueman. With a small IT staff, Employers chose to have an IBM support facility host the application rather than run it in-house.

“Because we're in a growth mode, we're not looking at decreasing our cost of operations. Our increased efficiency is used to avoid the expense of providing the same level of service with more staff,” Schueman indicates. “We saw the number of claims we handle go up nearly 10 times over a one-year period and were able to grow claims staffing much less than that–certainly more slowly than we would have otherwise.” Employers Direct currently is migrating its policy and billing systems to Guidewire's PolicyCenter, a project it expects to complete by late 2007.

In addition, there's the process issue of responding to regulatory change, something that previously had vexed Western United. “If we had a new regulation come in, it took several months to get the system working to make it do what we needed. We would have to make sure we were complying with that regulation by manually tracking it offline,” Mason says. Now, changes can be implemented the same day due to the rules-based nature of the system.

“The system was set up by business analysts who knew the flow of everything and how they could improve processes,” she adds. “For example, we've eliminated data entry and improved accuracy by not moving files from desk to desk and not having multiple users enter data different times.”

Despite the increased pace of legacy replacement, some carriers still are reluctant to retire systems that are clearly past their prime. In part, this is due to bad project experiences of the past–particularly big-bang projects as replacement projects tend to be–and, in part, due to the success of using modern technologies to extend the lives of legacy systems.

But at some point, any “wrap and patch” strategy must end. “You can drive your legacy costs down using tactical moves but only so far,” contends AXA Equitable's Murray.

“For 10 years, people have been saying it, but now is the time [for legacy replacement],” predicts Hersh. And despite the fact the life and health business has lagged P&C, he expects the appetite for system migration to pick up on that side, as well.

“We see life and health are about to hit full-scale legacy replacement mode in the next year or two, particularly as more solutions become available and as solutions that front end legacy systems become more prevalent as a consolidation platform,” he says. “[Replacement] builds its own critical mass, and the last one holding the bag is going to be out.”