Many traditional insurance companies have reached a technology tipping point. They realize that maintaining their legacy systems—which they once did to save money and avoid the operational risk of a core transformation—has become too expensive and a competitive liability. Global IT spending in the industry was about $210 billion¹ 1 BCG analysis based on Gartner’s IT Key Metrics Data 2023, December 8, 2022. Notes: 1 BCG analysis based on Gartner’s IT Key Metrics Data 2023, December 8, 2022. in 2023, and we project it will grow 9% annually to 2027, with investments in transformation increasing from 13% to 16% of that total.

The value at stake is enormous in terms of revenue and cost savings. We estimate that a modern core platform with digital capabilities—such as greater process automation and the ability to manage real-time information across channels—can improve efficiencies and the customer experience, boost revenue by 25%, and accelerate new-product time to market by a factor of three to four.

Insurance transformation is not only an IT topic but a journey for both the business and IT. This requires companies to rethink their business proposition, distribution model, product offerings, processes, and, eventually, underlying IT platforms. In analyzing large international insurance groups (Tier 1 insurers) embarking on a core transformation, we have observed three main strategic approaches: centralized, federal, and a hybrid strategy that combines a federal plan with elements of a regional approach. We have also identified seven best practices to improve the outcome of any transformation strategy.

A New Imperative to Invest

For years, traditional insurance companies underinvested in new technology and did their best to keep old systems up and running. In an industry with so few customer touch points, insurers had little incentive to digitize customer journeys. And given their strong market position, companies felt limited pressure to improve efficiencies. They were instead biased to preserve the status quo to avoid the operational risk associated with technology transformation.

But times are changing. Companies’ creaky legacy systems have become more prone to downtime—hurting productivity—and the internal expertise to maintain these systems is aging. Even regulations have become an issue. In Europe, for example, authorities are pushing insurers to build digital channels to enhance customer access and service; and, through laws such as the Digital Operational Resilience Act, regulators are requiring the industry to improve risk controls.

Moreover, modernizing the core has become a competitive imperative. Among traditional insurers, some first movers have already begun building digital channels and direct businesses. And pure digital players are launching innovative business and operating models incorporating the cloud and newer technologies such as generative AI. Other traditional insurers need to move fast to harness the full potential of digital. In Europe, the Middle East, and Africa (EMEA) and in North America (NAMR), for example, we expect that insurers will spend about $6.5 billion and 10.5 billion, respectively, on core IT modernization from 2024 to 2026.

Common Challenges to Core Modernization

While there is urgency to act, the obstacles that lie ahead are daunting. Even with a commitment from leadership and an adequate budget, re-platforming core systems is a difficult journey, and the learning curve can be costly. The potential for failure is all too real.

Some cautionary examples: a central European group gave up on a large cross-country platforming project after eight years, with a write-off of more than $500 million; a carrier in southern Europe completed its claims-platforming program but did so 500% over budget; and another central European insurer failed to internally develop a new software platform to support a direct business. At the root of these failures are some or all of the following challenges commonly encountered during a core modernization.

Too Big to Manage. Core insurance system (CIS) modernizations are large-scale programs, impacting multiple countries and stakeholders. Managing them as a project with a waterfall approach can create enormous complexity beset by a dizzying array of competing interests.

Misalignment Between IT and the Business. Shifting to digital platforms means moving to a digital standard (such as no-frills products or one-touch processes). Doing so while trying to maintain legacy business complexity quickly creates delays and costs—and can undermine the long-term stability of the solution.

A Lack of Common Interests. Given the extended replacement cycle, selecting a standard software for the core system implies choosing partners for the next 30 years. The mid- and long-term objectives of the insurer, software vendor, and system integrator must align tightly from the start, or the partnership won’t be sustainable.

A Shortage of Internal Capabilities. When an insurer selects a standard software platform, it should not completely outsource the core system modernization. Internal IT is crucial for prioritizing business needs. And giving so much responsibility to the vendor can easily lead to conflicts of interest, frequent misalignments, and rework.

Tech Stack Obsolescence. The pace of technology evolution is accelerating (for example, from monolith software to microservices and from microservices to serverless solutions), so insurers should avoid significantly customizing off-the-shelf platforms. While a heavily customized platform might work well at first, it can’t be automatically or regularly upgraded by the vendor, hastening its obsolescence.

Different Paths to Modernization

Core platform transformations began with Tier 2 and Tier 3 insurers several years ago because these companies were the first to feel the pressure on costs and margins. Most of them adopted off-the-shelf solutions, with external application management and cloud-based infrastructure.

More recently, Tier 1s have started their CIS transformations. Given the thorny challenges described above and the history of failure, insurance companies must carefully choose their CIS transformation strategies. We have observed three main approaches in the Tier 1 group, depending on the specifics of the insurer’s business model. 

Centralized. Companies pursuing this strategy use vertical, bespoke components to underpin the IT platform. They leverage internal resources and competencies to deploy the bespoke solutions over time and across multiple entities or countries. A centralized IT services provisioning unit (a shared service center, for example) often lends support. A centralized platform is subdivided into three distinct layers, each serving a specific purpose:

• The core layer encompasses standardized core business logic and provides a foundation for the entire system’s operations.
• The country layer is tailored to each country where the insurer operates, to accommodate and comply with different regulatory requirements.
• The line-of-business layer manages the diverse array of products and services offered, ensuring flexibility and adaptability across lines of business.

Federal. Insurers taking this approach leverage both off-the-shelf packages and bespoke solutions for the new core platform. At the group level, the standard software is chosen with an eye toward improving the cost base, but the implementation occurs at the individual-country level with the help of system integration partners. In addition, when necessary, local insurers build bespoke platforms to serve larger and more complex business units, to ensure a perfect fit with business products and maintain market differentiation.

Hybrid. This strategy combines the federal approach with a regional plan. Relatively autonomous large countries, with the help of system integrators, develop and operate their own IT platforms under the federal approach. Meanwhile, the global insurer uses a regional approach for similar small and midsize countries—making choices at the group level to standardize the business model so that the same core platform, processes, and products are used throughout the region.

The small countries can develop some bespoke elements—often leveraging modules within the market solution (product engines, for example) to accelerate development—but they must do so according to group-level guidelines. BCG recently worked with a large regional European insurer that used this hybrid strategy to deploy a CIS transformation across several countries in less than two years.

Seven Best Practices

No matter which of the three strategies an insurer chooses to pursue, seven best practices will improve the odds of completing a successful transformation:

• Slice the elephant. Divide large programs into digestible items to reduce complexity and create momentum within the organization.
• Implement strong program management and risk control. Leverage strong internal capabilities and/or an independent, objective partner with proven experience.
• Immerse the organization in innovation. Continually analyze digital best practices to help both the business and IT to think outside the box and reinvent the business model.
• Use zero-based design. Take a greenfield approach for product and process redesign to kill the legacy and develop a new way of doing business.
• Offer common incentives. Align incentives for the business, IT, software vendors, and system integrators to create a diverse but united team.
• Inject new capabilities. Leverage partnerships with vendors and system integrators to introduce different capabilities into the organization and accelerate technology learning.
• Decouple the tech stack. Build new internally managed platforms, decoupling layers to avoid dependencies on the vendor technology stack.

The large global insurance groups embarking on a core transformation need to choose their strategies and deploy their resources carefully—recognizing that core modernization is not only an IT topic but a journey for both the business and IT. And they need to move fast or risk falling dangerously behind the first movers and pure digital players. But with the right strategy and attention to the seven best practices, these companies can ensure their own success.