Insurers can win the digital battle by overcoming institutional complexities

The insurance industry today is shaped by macroeconomic shifts, technological advancements, and emerging risks such as cyber threats, climate change, and social inflation, necessitating a strategic response that goes beyond traditional approaches if businesses are to survive and thrive in this environment.

Cognizant hosted an event in Hartford, Connecticut, to evaluate the industry’s preparedness for these industry market forces. It served as a platform for more than 150 executives from across the insurance industry to converge and delve into the latest trends and uncover their ambitious plans to navigate the new world. We heard from Ken Solon, Chief Information Office and Head of Digital, Lincoln Financial Group; Mojgan Lefebvre, Chief Technology and Operations Officer, Travelers; Deepa Soni, Chief Information and Operation Officer, The Hartford; Stoyan Konaktchiev, Executive Vice President, Head of North America Digital Engine and Operating Model at Chubb; Satyendra Kumar, Head of Cloud Transformation and Application and Infrastructure Delivery at Lincoln Financial Group; and Chetan Kandhari, Chief Innovation and Digital Officer at Nationwide among others.

The discussion pinpointed best practices, insights, and guidelines, including the focus of insurance leaders on the expense side of the profit equation and embedding business strategy in a legacy modernization agenda—for every nuts-and-bolts technology investment toward modernization, grounding in business priorities and outcomes is essential, and both IT and business should co-own modernization initiatives. Other themes were: Digital for brokers is non-negotiable; insurers’ interest in generative AI is growing, but the risk of exposing GenAI hallucinations to customers is a nightmare scenario—so the focus will be on safe adoption and use cases will be on the products and distribution side; and Culture and institutional inertia toward modernization could be a hurdle in hiring GenZ talent. Since much was discussed at the event, we have synthesized the highlights into three broad points.

Exhibit 1: Leading insurance executives assembled at the Cognizant event to conjure the future and discuss the state of the industry

Source: Cognizant, 2024

Run a lean backend shop through greater collaboration between IT and operations

In breaking down the operational flow and activities of the policy lifecycle, inherent institutional complexities of the industry begin to surface, such as manual and segmented processes, siloed product portfolios, location diversity, and myriad distribution channels. Most carriers are not set up to function at a massively reduced scale; they operate with large product portfolios, multiple brands, and numerous channels. To increase efficiencies and reduce operational complexities, they need to formally integrate technology into operational functions. While there is a long list of technologies touted, insurers must be selective about what works. Instead of placing bets on all emerging technologies to optimize operations, insurers must select those that make sense and demonstrate a strong return on investment (ROI). This requires intense collaboration between IT and operations to build a genuinely technology-driven operational function that will keep a lid on expenses.

We heard from the chief technology and operations officer of a leading North American commercial and P&C insurer about the organization’s decision-making focus on driving down the expense ratio through greater collaboration between technology and operations leaders who now run a lean backend shop. The CTO said, “Combining IT and operations in a way where team members can count on each other and know one another helps fuel innovation in generative AI, operations, and underwriting.”

Legacy is nowhere near dead in insurance

Legacy modernization is a deeper transformation that often embraces cloud-native paradigms such as microservices and serverless computing and involves transforming the infrastructure layer through cloud migration. While core or legacy modernization emerged as a force multiplier to drive enhanced productivity, digital readiness, cost-effectiveness, and customer experience, insurers still believe running on the mainframe is adequate to keep day-to-day operations flowing. Event participants made it clear they were not looking for prognostications but rather realistic business value to move the needle forward for modernization, especially cloud migration. They are worried about the actual implementation process, which takes considerable time, money, and resources. Unless the value at stake for cloud migration is beyond the proverbial low-hanging fruit of IT optimization and impacts business, there will always be skeptics of cloud adoption among insurers.

2/3 of insurers are still running on legacy platforms—I thought the mainframe was dead 24 years ago, but I STILL have a mainframe! 1,000 people working for two years on migration is not for the faint of heart! The cost of migrating to the cloud is too great, and modernization must be incremental. However, unless there are business results, there is not a sufficient business case to go to the cloud.

– Sound bites from panelists at the event

Instead of holding on to the status quo of their legacy systems, even worse, insurers are continuously triaging legacy systems to keep up with changing conditions. Build a strong business case through better alignment of the two groups—business and IT. Minimize the friction between these groups and incentivize core modernization based on business impact.

Another complexity discussed at the event is that insurers relying on old and outdated technology stacks will struggle to attract next-generation talent who are trained in newer technologies. New talent may find it challenging to adjust and will walk away from insurers that are mired in outdated technology, processes, and cultures. If insurers do not adapt, they will lose the talent war before it even starts.

Business and IT must co-own the modernization mandate

In his opening remarks, Sarat Varanasi, Cognizant’s business unit leader for insurance in the Americas, described the current state of the insurance industry as a convergence of economic volatility, social changes, and evolving technologies. “Several things are coming together in what could be a once-in-a-career if not once-in-a-lifetime way,” he said.

Looking ahead, Varanasi emphasized the importance of innovation as a driving force for the industry’s future. He referred to the transition from the “first 30” to the “next 30,” highlighting that this shift will bring about the next 30% of productivity, throughput, and innovation and that the next wave of innovation will be driven by data modernization, digitization, analytics, and AI. This, in turn, creates an “exponential advantage” for Cognizant clients. As in the case of GenAI, Cognizant’s role is in the “last mile,” moving beyond initial awareness and infrastructure creation to operationalizing it in practical and impactful ways while adhering to regulations.

Innovation is real, but the current mood for innovation in the industry based on the HFS Horizons model—an enterprise innovation maturity assessment model (see Exhibit 2)—is very much fenced into upgrading and digitizing individual functions or making small changes under the banner of innovation (78% in Horizon 1) to demonstrate that something is being done. Far less is generally spent on bolder innovations that enable ecosystems (44% in Horizon 3).

This data echoed the frustration in the room as an IT leader vented, “70% of technology spend is used to run IT.” Insurers’ IT departments spend much of their time and money managing and monitoring their technical debt, the implied cost of not modernizing the core.

Exhibit 2: Insurers are hungry for innovation to create new value through adopting ecosystems, but a majority are stuck with incremental digital optimization

Sample: 400 leading insurance executives
Source: HFS Research, 2024

With the increase in rapid technology advancements (as evidenced by generative AI), the business side of insurers tends to struggle with two competing truths. On the one hand, they fully believe that technology will fundamentally transform their future business models, existing products and services, and internal operations. On the other hand, they often struggle to make the necessary investments in their infrastructure, data, applications, and workforce capabilities in a way that would help them adapt to that future. The lack of ownership of the modernization mandate often leads to technical debt sprawl. Instead of letting IT run random acts of modernization, a holistic view of their organization’s systems grounded in the real business context and with participation by both the business side and IT can help avoid the ever-growing technical debt and improve the organization’s ability to innovate.

A great example of a business-owned IT initiative brought forward by executives at the event is developing agile capabilities. Agile is required for businesses to fuel experimentation. This is a hard-to-measure value and isn’t necessarily required to deliver an explicit P&L result. However, the business can take the wins from agile and IT can direct the spend on agile outside of its budgeting cycles, with the business being the sponsor.

The Bottom Line: Polarization between winners and losses in insurers will be determined by those that lead the charge through digital. Organizations that overcome institutional complexities are poised to use digital to their advantage.

At the power-packed event hosted by Cognizant and attended by industry stalwarts, it was revealed that insurers are eager to reinvent themselves. They understand that their core capabilities from yesterday won’t work for them tomorrow. Transforming through digital is a chance to create new and profitable models by harnessing emerging technologies to better serve their customers’ needs. Before that, insurers must overcome institutional complexities such as functional and business unit silos, poor integration between business and IT, and refute the business case for core modernization initiatives with inflated costs and insufficient ROI if they are to achieve better alignment around business impact. Until these issues are resolved, institutional complexities will continue to hamstring insurers in their effort to win the digital battle.