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Core Systems Replacement Activity Increases; Driving Up Budgets and Raising Cautionary Flags

Analysts are suggesting that  2012 will see significant activity in P&C Core systems replacements.  While this is good news for many who have been living with the constraints of aging technology, a leading  consultant warns that the proliferation of vendors in this space may cause buyers to by-pass due diligence, and put themselves at substantial risk.

Matt Josefowicz, partner and managing director of Novarica, summarizing a recent survey of insurers, sees P&C insurers increasing budgets in 2012 in spite of economic concerns.  Josefowicz, quoted in a recent article in Insurance  & Technology notes that a primary driver is core systems replacement.

“I don’t think we’ve ever seen this level of activity”, Josefowicz says. “The need is becoming acute. If you want speed to market, distributor service, business intelligence and analytics capabilities, you can dance around the core systems in most places for a long time, but it does come down to what’s happening there.”

According to Josefowicz, one-third of survey respondents are either in the middle of a core policy administration system replacement or planning one for 2012.   (A quick look at the Insurance-Canada.ca P&C Policy Management Systems page shows some of this activity.)  According to Josefowicz, there is similar, albeit slightly lower activity for Claims and Billing systems.

This interest is drawing new solutions to the market.  Recently, Catherine Stagg-Macey, Senior Vice President with Celent’s Insurance group authored a report which indicated that there were a growing number of technology suppliers in the Policy Administration market.   In spite of some M&A activity in the space, Stagg-Macey noted, “There is no 800-pound gorilla in this sector,” adding,  “the market is fragmented, with small players all chasing a limited number of deals. This increases the cost of sale for the vendors, and makes decision making more complicated for buyers.”

Bill Garvey, principal at Eastern Shores Consulting, notes that in spite of the urgent nature of the need,  the temptation to cut corners on a search for replacement systems is risky given the number of options available.  Writing in Insurance & Technology, Garvey says, “Given the number of core system vendors on the market, it may be unrealistic to examine all of them in any detail. However, limiting your software to only a few vendors introduces unnecessary risk into the selection process. If you don’t want to read a lot of RFP’s, consider this: you are embarking on perhaps the most important and expensive decision your company faces this decade.”

While analyst reports can assist the process, Garvey insists these are no substitute for individual action by the customer:  “The fact is, for various reasons, analyst reports are not all-inclusive. Some vendors with solid offerings won’t make the cut because they haven’t landed a sufficient number of clients. Others have simply not paid the fee to be considered.”

Such diligence will provide rewards during later project stages, according to Garvey.  Beyond technical and user requirements considerations, there are soft elements involving corporate values and culture.  “Challenges will arise during implementation and production, so knowing that you can trust the people behind the software is invaluable. You’re not going to find this important criterion measured in any analyst report.”

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