Spaghetti junction

It is time for life and pension companies to untangle the systems’ spaghetti, says FIS Software business development director William Watling.

Recent years have presented some of the most gruelling challenges that life and pension companies have had to face.

The swathe of new regulatory and legislative requirements, increased competition from market entrants, a sustained period of underperforming equity markets and an increasingly distrusting public have all taken their toll.

With pressure to reduce overheads, companies are looking to cut costs by automating or outsourcing more processes.

Moving away from products whose cashflow is subject to the vagaries of the stockmarket, compliance and legislative change, many have turned back to old-style, straightforward individual risk products such as term insurance and permanent health insurance.

It is also clear that, in terms of technology, it is time for life and pension companies to make a change. Over the past 20 years, as each new opportunity or challenge has arisen, systems have often been bolted together with little regard for long-term strategy. Systems’ integration has often been accomplished on an ad hoc basis or simply has not happened.

This situation is becoming untenable as life and pension companies face the cumulative effect of this haphazard evolution. Today, different systems operate on behalf of different functions across multiple books of new and legacy business. This creates an incredibly complex state of affairs and the results are passed on to intermediaries and customers in the form of below-par service.

A recent survey by FIS shows that IFAs lose 208m a year through poor product provider service and 62 per cent are worried that providers will not be able to support the needs of their high-worth clients in the newly depolarised industry.

It is not just the external facets of business that are suffering. Internally, a great deal of time and money is spent on maintaining outdated and inefficient systems. These platforms also hamper a company’s ability to develop and distribute new products quickly.

If IT systems continue to evolve in this manner, the consequences could be dire. Increased costs will prohibit expansion and the inability to respond to new opportunities will ultimately cost market share.

Without cohesive information at the provider’s fingertips, errors will continue unchecked. Not only will intermediary and customer relationships be damaged but the company will also be exposed to unnecessary compliance risks.

It is time for a change. Life and pension companies need to draw a line under their history of piecemeal investments in IT in favour of a more radical path. They must decide whether to re-engineer, outsource or replace their systems.

Re-engineering involves working with what you have got by adding a modern front end over the top of existing systems. In many cases, this will involve a systems integration exercise. This may be seen as the least painful and cheapest option but it is unlikely to provide a long-term solution.

Trying to integrate so many separate components may create further problems as standards continue to change.It is likely to require the expertise of exp-ensive IT consultants, which may prove costly in the long run.

This option is like papering over the cracks. It may put off the systems’ breaking-point for a little longer but you can guarantee that the underlying cracks will continue to grow.

The second option is to outsource administration to a third party. This is still a controversial concept within the financial services industry. Outsourcing deals typically involve a big initial cost and there are few convincing figures showing returns on investment. Some companies have experimented with the idea of moving older books of business on to an external partner, only to find that managing such a relationship is as big a drain on resources as keeping the business in house.

Outsourcing can also inhibit a provider’s ability to react. Even making simple updates to financial products can add to costs. Given the amount of changes that are made to products each year, this is a key consideration. Relinquishing control over an activity that has a major impact on the front end of a client relationship is also a risky move.

The third option – replacing IT systems – provides the only safe long-term solution. Replacing does not mean wiping away all that has gone before but migrating data to a better, stronger platform that is capable of meeting the needs of the new world.

As part of the migration, a rationalisation of systems and business activity will enable providers to strip away underperforming products and processes.This will act as a pressure-release valve for many providers, enabling them to refocus on more profitable activity.

The current situation provides life and pension companies with a number of options – do nothing and hope that a return to form in the equity markets will continue to hide their inefficiencies, spin the wheel and take a gamble on outsourcing, re-engineer in an attempt to put off the inevitable systems overload for a few more years or bite the bullet and move to new, leaner systems capable of supporting the new rules governing the industry

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