Global IT spending in the insurance industry reached approximately $210 billion in 2023, and it is projected to grow by 9% annually through 2027. Many traditional insurers have reached a critical technology crossroads. They now recognize that continuing to maintain their legacy systems—once a cost-saving measure to avoid the risks of core transformation—has become both costly and a competitive disadvantage. 

Replacing or upgrading these systems demands substantial financial investment, often exceeding $5 million for large insurers. In an era of relentless digital transformation, the insurance industry faces a fundamental challenge: core modernization. This sweeping process, involving everything from business process reengineering to overhauling data management, is essential for insurers to maintain efficiency, agility, and competitiveness. Yet, a considerable number of organizations are hesitant to dive into this critical transformation. What’s holding them back? 

The Fear Factor: Disruption and Costs 

One of the primary barriers to core modernization is fear—of disruption, high costs, and the potential loss of legacy system expertise. Over the decades, insurers have made substantial investments in systems, often relying on robust yet outdated frameworks like COBOL, RPG, and ADABAS. These legacy systems underpin core functions, from policy administration to claims processing, forming a comfort zone that’s difficult to leave behind. Many insurers face the paradox of wanting the benefits of modernization without the risks associated with transitioning to entirely new systems, which they fear may disrupt business continuity, strain resources, and unsettle their established workflows.

Legacy Systems and the Skills Gap 

As a millennial, I can confidently say that many younger professionals lack familiarity with legacy systems and similar outdated programming languages. This gap presents a significant risk for the insurance industry, as it raises questions about the availability of skilled technicians who can maintain or transition these systems. Insurers must consider how to bridge this gap, ensuring that there are qualified personnel to support modernization efforts. 

Legacy Systems and the Generational Skills Gap 

Legacy technology creates another daunting obstacle: the skills gap. Older programming languages are foundational in legacy systems, but proficiency in these technologies is dwindling among younger professionals. For insurers, this generational gap presents a pressing risk. As experienced COBOL technicians retire, finding personnel skilled enough to maintain these legacy systems—let alone lead the transition to new frameworks—has become increasingly difficult. The lack of continuity between legacy and modern skill sets puts insurers in a precarious position, often relying on a handful of experienced technicians to bridge the past and the future of their operations. 

The Critical Importance of Core Modernization 

Despite these challenges, core modernization is indispensable for insurers looking to succeed in a digitally-driven landscape. Here’s why: 

• Operational Efficiency and Agility 
  Modern systems streamline processes, automate repetitive tasks, and reduce redundancies, ultimately improving productivity. By reengineering outdated workflows, insurers can become more agile, enabling faster responses to changing market conditions and customer demands. This operational agility is critical in a highly competitive and dynamic industry. 

• Enhanced Data Management and Real-Time Insights 
  Modern systems provide powerful data management capabilities, transforming raw data into actionable insights. With the rise of predictive analytics, insurers can now anticipate customer needs, identify risk trends, and make more informed decisions, offering them a clear competitive advantage. Core modernization enables insurers to harness these capabilities to their fullest, making data-driven strategies an integral part of their operations. 

• Regulatory Compliance and Risk Mitigation 
  In a sector where regulations are constantly evolving, having a modern, adaptable system is essential for compliance. Outdated systems not only complicate regulatory updates but also expose insurers to heightened risk. Modernization simplifies compliance by allowing insurers to implement new regulations quickly and uniformly across their systems, reducing the risk of costly penalties and reputational damage. 

• Meeting and Exceeding Customer Expectations 
  Customers today expect seamless, fast, and personalized interactions, which legacy systems struggle to deliver. Modernized systems offer the infrastructure necessary for responsive, user-friendly digital experiences that build customer loyalty and satisfaction. A customer-centric approach, powered by agile technology, enables insurers to stay relevant and competitive in a marketplace where customer experience is paramount. 

Overcoming the Obstacles: Solutions for a Smoother Transition 

The journey to core modernization is undoubtedly complex, but insurers can take proactive steps to mitigate these challenges and pave the way for a successful transformation:

• Bridging the Skills Gap with Cross-Generational Training 
  Insurers must invest in comprehensive training programs to bridge the gap between legacy knowledge and modern technical skills. Mentorship programs pairing seasoned programmers with younger professionals skilled in modern technologies can facilitate knowledge transfer. Encouraging continuous learning and providing resources for certifications in new technologies can also prepare the workforce for a seamless transition. 

• Adopting Phased Modernization Strategies 
  Rather than attempting an all-at-once overhaul, insurers may consider a phased approach to modernization. By prioritizing critical systems and gradually transitioning to newer technologies, insurers can minimize disruption and better manage costs. This incremental approach allows insurers to adapt at their own pace while experiencing the benefits of modernization in key areas early in the process. 

• Investing in Robust Change Management 
  Modernization impacts not only technology but also workflows and corporate culture. Change management plays a crucial role in preparing employees, communicating the benefits of modernization, and addressing concerns throughout the transition. By involving employees early and providing continuous support, insurers can foster a culture of adaptability, making modernization less daunting and more collaborative. 

• Leveraging Cloud Technology for Greater Flexibility 
  Cloud-based systems are becoming a preferred solution for insurers undertaking core modernization. The cloud offers scalability, cost-effectiveness, and flexibility, making it easier to integrate new technologies and respond to market demands. With cloud-based core systems, insurers can also reduce their dependency on legacy infrastructure, making it easier to adopt new applications and functionalities as they emerge. 

The Future of Insurance: A Modernized Core for Sustained Growth 

Core modernization isn’t simply about surviving today’s challenges; it’s about future-proofing for tomorrow. As the industry moves towards digital-first operations, insurers equipped with modern core systems will be better positioned to harness emerging technologies, explore new revenue models, and respond to evolving customer expectations. By breaking free from the constraints of legacy systems, insurers can shift their focus to innovation and customer-centricity, essential elements for long-term profitability and resilience. 

Core modernization is no longer a matter of "if" but "when" for the insurance industry. It represents a powerful opportunity to create a solid foundation for growth in a constantly evolving landscape. By addressing the obstacles head-on—whether it’s the fear of change, the skills gap, or regulatory complexities—and embracing modern, agile solutions, insurers can achieve the operational efficiency, data-driven insights, and customer loyalty that are key to their future success. 

Ultimately, core modernization is more than a technological upgrade; it’s a transformative journey. Insurers who prioritize it will find themselves better equipped, more competitive, and fully prepared to meet the demands of an increasingly digital world.