Insurance platforms have to simplify before moving towards the shiny new future

Insurance platforms have to simplify before moving towards the shiny new future | Insurance Business

Insurance platforms have to simplify before moving towards the shiny new future

Divesting, or the selling off of distressed assets and businesses, has picked up steam since the 2008 financial crisis, though a recent report shows the drivers pushing companies to divest are no longer mandatory state aid regulations. Instead, companies need to strategically divest in order to remain competitive.

The insurance sector in particular is seeing a lot of divestment as 87% of businesses plan to divest in the coming two years, while 75% plan to do so in the coming 12 months, according to the EY Financial Services’ 2019 Global Corporate Divestment Study, which surveyed more than 1,000 global corporate and private equity executives.

We see the propensity to divest is very much one of simplifying current models, with an eye towards the future and transforming towards future business models,” said David Lambert (pictured), EY’s global insurance transactions leader. “The infrastructure of financial services, and certainly insurance, is so complicated. It’s been built up over decades and it services a whole bunch of legacy products, many of which are no longer really suitable for consumer preferences, so on that basis, you have to simplify heavily before you start moving towards the shiny new future.”

In the world of insurance, companies are making long-term commitments to end customers, which makes transformation that much more difficult.

“When we think about the complexity of infrastructure and the complexity of commitments made that the infrastructure is set up to support, it’s a very unusual business in that to transform, you’ve got to either radically streamline a lot of the business that you’ve done historically, or if that’s too big a diversion of management time, then quite frankly [you’re looking] for areas that are semi-core or non-core and painful as it may be, [divesting] of those businesses,” explained Lambert. “You’ve got to start from as simple a platform as possible in order to refocus your dollars and your management time into building out those areas.”

Read more: SaaS the answer to insurance’s legacy systems shackle

Around 80% of those insurance experts surveyed by EY expect to see a rise in the number of technology-driven divestments over the next year, which specifically relate to the divesting of complex operations that depend on so-called old technology, while putting more capital into future capabilities as well as streamlined and cost-effective systems. For insurance companies, that complexity of legacy systems can be a major barrier to bringing about transformational change in capability and cost effectiveness.

The good news is that the price tag of new systems is much lower today than it was even a few years ago, and the ability to migrate data has improved, according to Lambert. Insurance companies can upgrade legacy systems that were developed in the 1990s and early-2000s, and simplify those systems. Alternatively, if it’s too much work to do so, there are many specialists out in the market who can do this for a company more efficiently.

If a company wants to introduce AI or robotics, it’s better to do so using a platform that’s simplified, which means that making technology divestments can be a critical first step in the transformation journey.

“There’s technology that’s an evolution of where we are currently, and then there’s technology that’s a revolution. In terms of the divestment journey, a lot of insurance groups at the moment are looking at evolving their technology,” said Lambert. “You’re actually in a world now where you can take lots of old systems that have built up over time and you can re-platform them, which is incredibly helpful. You can start fixing some of what’s often described as the spaghetti of financial services.”

Almost half of financial services companies surveyed by EY reported that their most recent key divestment was triggered by an unsolicited approach. The hot M&A market in insurance specifically will likely continue to drive the sale of assets.

“There are a large number of very serious and very well-capitalized consolidation vehicles out there in the market, and, if anything, that number is increasing,” said Lambert, pointing to large private equity firms who are solely focused on taking on legacy systems. “That’s become not just a well-developed market, but actually a market that’s got a lot of very clever tools at its disposal, and that has been built up over the last decade. You’re in a world now where you’ve got specialists who can take these portfolios and do something smart with them and sellers who are aware of that pricing dynamic, and, depending on the asset, they could get quite an attractive deal in terms of offloading legacy business.”