Insurance Legacy System Transformation With API Integration: A Guide

Insurers’ success has always hinged on their ability to analyze data effectively to price and underwrite policies accurately. While this analytical capability remains essential, outdated legacy systems hinder insurers from competing in a rapidly changing market. 

According to McKinsey, modernizing legacy systems can reduce IT costs per policy by 41%, increase operations productivity by 40%, improve claim accuracy, increase gross written premiums, and reduce churn. Let’s explore how insurance legacy system transformation using APIs can help insurers enhance business operations. 

Legacy Systems in the Insurance Industry

Legacy systems in the insurance industry typically include older technology platforms and software that have been used for many years. Most large insurers heavily depend on complex legacy systems. According to one estimate, only one in ten insurers have less than 50% legacy infrastructure.

Legacy infrastructure has long been valued for its high-volume transaction processing. However, with industry requirements steadily changing, IT infrastructure must evolve to help stay competitive. 

Here are some common examples of legacy systems in the insurance industry:

Insurance Legacy Systems	Key Function	Pros	Cons
Policy Administration Systems (PAS), Claims, and Billing Systems	Manage policies from issuance to renewal and cancellation, maintaining accurate and accessible policy data.	Robust and reliable. Handle large volumes of transactions. Foundational for policy creation, claims processing, billing.	Manual and batch-oriented. Struggle with real-time processing demands. Difficult to modify to meet new business requirements.
	Manage billing, calculate premiums, and ensure timely payment processing.	Hold crucial business data. Reliable for daily operations.	Outdated and expensive to maintain. Difficult to integrate with modern IT infrastructure.
Customer Relationship Management (CRM) Systems	Provide custom, reliable solutions in languages like COBOL and assembly language for complex data processing.	Support customer interactions. Handle customer information.	Limited analytics. Require significant manual data entry. Lack of integration with newer digital communication tools. Fragmented data.
Business Intelligence (BI) Systems	Support large-scale data processing, handling high-volume data.	Support reporting and decision-making. Handle large volumes of data.	Cannot handle real-time data analytics. Difficulty in integrating with new data sources.
Underwriting Systems	Centralizing customer data.	Support risk assessment and pricing. Handle underwriting rules and guidelines.	Require manual application of rules. Difficult to update with new underwriting rules.

 Are Legacy Systems Holding Insurers Back? 

Current customer sentiment clearly shows a desire for affordable products and a hassle-free experience with prompt service delivery.

However, many insurers need help to meet these expectations due to their legacy systems and infrastructure limitations. Established insurers seek faster and cheaper ways to create products and services to stay relevant in the market. They aim to compete with digital-native challengers not burdened by legacy systems.

However, insurers often adopt the attitude of “if it ain’t broke, don’t fix it” when replacing legacy systems.

The risks, uncertainties, and potential disruption of replacing a stable policy administration system sometimes outweigh the benefits of a new one. But at the same time, continuing to operate a legacy system exposes insurers to increased risk over time.

 

The Biggest Drivers behind Insurance Legacy System Transformation – Deloitte 

Compliance and Regulatory Risks

In 2024, HIPAA non-compliance cost organizations an average of $1,45 million per incident. Insurers face increasing regulations and compliance requirements from regional and global regulators. Due to numerous policy changes, legacy data and platforms don’t conform to industry-standard data schemas.

One way to define a suitable data model is to use the insurance standards of ACORD (Association for Cooperative Operations Research and Development) or the Financial Services Logical Data Model.

Additionally, these rules must be customized to match each insurer’s unique products, clients, and financial data domains. To make insurance legacy system transformation easier and faster, some insurers can adopt the data schema the target platform provides rather than an industry standard. However, this can create issues if the target platform schema is unsuitable for integration or enterprise-wide standards such as data lakes or warehouses.

Security

According to Statista, more than 50% of surveyed companies list increasing security as their biggest reason for modernizing legacy applications and data in 2023. The sophisticated security features required to repel modern cyber assaults are frequently absent from older systems. Since insurers manage sensitive client data, they are popular targets for hackers.

Companies and their policyholders can be exposed to expensive data breaches and reputational harm if they rely on antiquated security methods.  For example, Anthem, Inc., a major U.S. insurer, paid regulators a $16 million fine for a data breach in 2017. Additionally, they had to implement substantial corrective actions and faced prolonged regulatory scrutiny. 

Operational Costs

Maintaining legacy systems consumes 70% of an organization’s IT budget. Global insurers spent almost $232 billion on IT in 2021, which is going to increase by 7.5% year over year. 

This cost will only continue to rise as legacy systems age. Insurers’ ability to support these decades-old systems with highly customized applications diminishes as the knowledge required to operate them becomes scarcer and more expensive.

System Maintenance

Relying on a shrinking pool of legacy IT personnel will continue to raise insurers’ operating costs. Major businesses relying on programs developed in COBOL need more technicians due to the rise of modern coding languages like Java.

Deloitte 

The archaic nature of legacy systems also makes them vulnerable to interruption and even failure. Infrequent maintenance and lack of backups can lead to data losses, breakdowns, and prolonged business downtime, incurring substantial costs and potentially damaging reputational damage.

An example is the 2012 Royal Bank of Scotland (RBS) system crash, which froze 12 million customer accounts and impacted customers making online payments. RBS officials later disclosed that the system failure resulted from decades-old systems that had been poorly maintained, costing RBS £175 million and damaging its reputation as a financial services provider. 

How Does Insurance Legacy System Transformation Help Insurers?

Insurance legacy system transformation can unlock significant value across various business functions, enabling insurers to integrate advanced technologies, enhance data capabilities, and leverage digital channels.

Improved Integration Capabilities

Legacy systems often operate in silos, meaning they don’t communicate or share data. Lack of integration can lead to inefficiencies, as the same data gets saved multiple times in different systems. It can also lead to inconsistencies, as changes in one system may not appear in others. 

On the other hand, modern insurance systems focus on integration. They often use APIs to enable communication between different systems, meaning data can be entered once and shared across multiple systems, improving efficiency. This also ensures consistency, as changes in one system are automatically reflected in others. 

Similarly, digitally enabled integration capabilities can facilitate a more satisfying user experience and support for agency and broker sales processes, which are key sales drivers.  According to McKinsey, faster processes and enhanced customer experiences can help insurers increase premiums from 0.5% to 1.0%. 

APIs can support the development of a partnership ecosystem by making it easier for an insurance company to integrate with partners. 

Example: A modern insurance system might integrate with a CRM (Customer Relationship Management) system, allowing customer data to be entered once into the CRM system and shared with the insurance system. 

Integrated Service Platforms

Legacy systems often provide a disjointed user experience, as each system may have a different interface and require different login credentials. This bad experience can frustrate users and lead to lower productivity. 

On the other hand, modern systems can deliver an integrated service platform with a single interface that provides access to multiple systems. It can provide a consistent user experience and simplify accessing different systems. 

Example: An insurance company might provide an integrated service platform that gives insurance agents access to the policy administration, claims management, and customer service systems from a single interface. This could improve the agents’ productivity, as they would not need to switch between different systems and interfaces. 

Automated Operations

Legacy systems often involve manual processes, which can be time-consuming and error-prone. Modernizing insurance legacy operations through automated workflows can accelerate routine tasks and reduce data entry and processing errors, allowing insurers to speed up response times.  

The productivity benefits of insurance legacy system transformation extend beyond IT itself. Introducing a new core system often motivates a complete overhaul of operations and workflow mechanisms, improving work organization.

Insurers with modernized IT are substantially more productive than their peers with legacy systems, achieving more than 40% higher total policies per full-time equivalent. 

Example: An insurance company might use an API to automatically pull data from a CRM system into their policy administration system, eliminating the need for manual data entry. This speeds up the process and reduces the potential for human error. 

Enhanced Digital Portfolio of Products and Services

Legacy systems often have rigid product structures and need more ability to offer value-added services. Modern systems can offer fully digital products with dynamic pricing and modular structures, enabling real-time customization.

APIs allow rapid development and deployment of new products and services. Additionally, modern systems can integrate with partners to offer value-added services. 

Transforming core IT systems to be more flexible and digitized enables a revamped product innovation process. This often results in faster time-to-market for rate changes and new products. 

Example: An insurance company might use APIs to integrate with third-party services, such as roadside assistance or home security monitoring. This helps the insurance company offer such value-added services to their customers, enhancing their product offerings. 

 McKinsey 

 

An Omnichannel Customer Experience

Legacy systems cannot often interact with customers across multiple channels. Modern systems provide a seamless omnichannel experience, integrating all touchpoints (website, mobile app, call center, etc.) to offer a more consistent and individualzied customer experience. APIs can provide an omnichannel customer experience by integrating various digital channels.  

Example: A customer might start a claim process on the web and continue it on their mobile app. The system would recognize the customer and provide a seamless transition between devices, improving user experience significantly.

Advanced Analytics

Legacy systems often lack the ability to effectively use data for insights. Modern systems can leverage advanced data analytics to identify customer needs, prevent high-cost cases, identify market micro-segments, and enable interactive and customized underwriting.  

Example: An insurance company might use an API to feed data from its policy administration system into a predictive analytics tool. This tool could then identify patterns, providing valuable insights that can improve underwriting decisions, pricing strategies, and more.

The Impact of Insurance Legacy System Transformation 

What Are the Different Strategies to Transform Legacy Insurance Systems? 

• API Integration/Encapsulation: This technique enhances and extends application features quickly without modifying the core application. It exposes legacy functions as modern services but is limited by the existing application’s capabilities and architecture. 

• Rehost: Moves stable applications to a more cost-effective or performant infrastructure without code changes. It offers quick results and reduced operational costs but needs to improve the application itself. 

• Replatform: Improves performance or lowers operational costs by shifting to a new runtime platform with minimal code changes. It may require adjustments to the application configuration. 

• Refactor: Optimizes applications with technical debt or performance issues to improve maintainability and efficiency. It can take time and requires a thorough understanding of the existing code. 

• Rearchitect: Modernizes applications requiring significant architectural changes to leverage modern technologies and capabilities. It offers improved scalability, performance, and long-term flexibility but involves high complexity and risk. 

• Rebuild: Redesigns outdated applications to meet new requirements and technological advancements. It results in a brand-new application with modern technologies but is the most expensive and time-consuming approach. 

• Replace: Replaces old applications that no longer meet business needs with new solutions that provide better value. It offers modern functionality and innovation potential but requires significant change management effort. 

Why Use API Integration to Transform Legacy Insurance Systems?

Encapsulation through API integration is a method of insurance legacy system transformation. It involves wrapping existing functionality in a new API layer, enabling interaction with modern systems without altering the core legacy code.

API-Driven Insurance Legacy System Transformation 

This approach is particularly suitable for legacy insurance systems due to the critical need for stability, data integrity, and incremental modernization. The key reasons and benefits of choosing encapsulation through API integration for insurance legacy system transformation are here.

Preservation of Core Functionality

Legacy insurance systems often contain complex and critical business logic refined over decades. Encapsulation preserves this core functionality while enabling new capabilities. By using APIs, teams can ensure that the robust, time-tested processes remain intact, reducing the risk of introducing errors arising from rewriting or extensively modifying the system.

For instance, insurers can introduce new features like mobile claims submission without altering the underlying system by encapsulating a legacy claims processing system with APIs. This maintains the reliability of core processes while enhancing customer service.

Cost-Effectiveness

Insurance legacy system transformation through encapsulation is often more cost-effective than a complete system overhaul. Developing an API layer is less resource-intensive than rewriting or replacing the entire system. This approach allows incremental updates and improvements, spreading costs over time rather than requiring a significant upfront investment. 

According to McKinsey, the top 20 to 30 insurance processes are responsible for 80% to 90% of customer interactions and contribute to up to 40% of total costs. Digitizing these processes can reduce human service costs by 30% to 50% and significantly enhance the customer experience. 

For example, instead of replacing an entire policy administration system, insurers can incrementally modernize it by developing APIs for specific functions like policy issuance or renewal, thereby managing costs more effectively. 

How to Transform Insurance Legacy Core Systems Using APIs 

Improved Interoperability

APIs enable legacy systems to interact with modern applications, services, and platforms, facilitating seamless data exchange and integration with third-party solutions. This is crucial for insurance companies looking to offer innovative products and services.

For instance, a legacy system can integrate with cloud-based services, mobile applications, and other digital channels through APIs, which can help insurers enhance customer experiences by offering insurance services on multiple platforms and devices.

Scalability and Flexibility

Encapsulation through APIs allows legacy insurance systems to scale and adapt to changing business needs without overhauling the system. APIs can be designed to accommodate new features, products, and services as required. This approach provides the flexibility to implement modern technologies which can enhance underwriting, claims processing, and customer service.

For example, insurers can enhance claims processing capabilities without disrupting the existing system by integrating AI-based fraud detection through APIs. . 

Minimized Disruption

Insurance operations hinge on precise data processing, customer engagement, and regulatory adherence. According to Deloitte, legacy modernization in insurance is often time-consuming, with some initiatives spanning a decade. If modernization causes downtime, it directly leads to business losses, customer dissatisfaction, and potential regulatory penalties.

However, insurance companies can modernize without disrupting service delivery by adopting API encapsulation. API encapsulation offers seamless integration of legacy systems with modern applications, bridging old and new technologies without requiring a complete system overhaul.

This integration minimizes downtime and ensures continuous business operations. In the insurance sector, policyholders and agents can access information and services without delay, maintaining customer satisfaction and operational efficiency.

Another advantage of APIs in modernizing legacy systems is the incremental implementation of updates. APIs enable insurance companies to modernize their systems step by step, reducing errors and service interruptions.

Companies can test and deploy new functionalities in a controlled manner, ensuring stability with each update. This enhances system reliability and allows companies to adapt to changes without straining their IT resources. This approach enables insurance companies to remain competitive in a rapidly evolving market while preserving customer trust and loyalty.

 Enhanced Security and Compliance

APIs can enhance the security posture of legacy systems by implementing modern security protocols and standards. These protocols are essential for compliance with regulations such as GDPR and HIPAA, which are critical in the insurance industry. Encapsulation allows for introducing advanced security measures, such as encryption and access control, without modifying the underlying legacy system.

For example, implementing APIs with built-in encryption and access control can enhance data security and ensure compliance with regulatory standards.

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Best Practices to Transform Legacy Systems Via API Integration

Transforming legacy systems via API integration requires careful planning, implementation, and management to ensure a seamless, secure, and efficient experience:

Thorough Assessment and Planning

• Assessment: Perform a thorough assessment to comprehend the legacy system’s architecture, dependencies, and limitations. Based on business needs and technical feasibility, identify and prioritize which components suit API integration. 

• Planning: Develop a detailed integration plan, including scope, objectives, timelines, and resource allocation. Ensure the plan aligns with the insurance organization’s business strategy and goals. 

Define Clear API Strategies and Standards

• API Strategy: Outline the purpose of each API, its target audience, and how it will support business objectives. Include considerations for API lifecycle management. 

• Standards: Establish standards for naming conventions, versioning, documentation, and data formats (e.g., JSON, XML) to ensure consistency and maintainability. 

Security and Compliance

• Authentication and Authorization: Implement OAuth, Bearer Token, API keys, and other mechanisms to secure access to the APIs, ensuring only authorized users and applications can access sensitive data. 

• Data Protection: Encrypt data transmitted via APIs using HTTPS/TLS to protect sensitive information. 

• Compliance: Ensure compliance with relevant industry regulations like GDPR, HIPAA, and PCI-DSS. 

Design for Scalability and Performance

• Scalability: Design APIs to handle varying loads and scale horizontally, accommodating increased traffic without performance degradation. 

• Performance Optimization: Optimize API performance through efficient coding practices, minimizing payload sizes, and implementing caching mechanisms. 

Comprehensive API Documentation

• Documentation: Provide detailed documentation, including API endpoints, request/response formats, authentication methods, error codes, and usage examples. 

• Automated Documentation: Use tools that offer automated API documentation. 

Implement Robust Monitoring and Analytics

• Monitoring: Track API usage, performance metrics, and errors to identify and resolve issues proactively. 

• Analytics: Use analytics to gain insights into API usage patterns, detect anomalies, and make data-driven decisions for future enhancements. 

Ensure High Availability and Reliability

• Redundancy: Implement redundancy and failover mechanisms to ensure high availability, including multiple instances and load balancers. 

• Error Handling: Design robust error handling and logging mechanisms to provide meaningful error messages and logs. 

Foster Collaboration and Communication

• Cross-functional teams: Encourage collaboration between IT, business units, and third-party vendors to ensure a clear understanding of integration goals and requirements. 

• Regular Updates: Maintain open communication channels and provide regular updates on integration project progress. 

Incremental Approach

• Phased Implementation: Implement API integration in phases to reduce risk and allow for iterative testing and refinement. Start with high-priority areas before expanding. 

• Feedback Loops: During each phase, gather input from users and developers and use this feedback to make necessary adjustments. 

Continuous Improvement and Maintenance

• Iterative Improvements: Continuously improve APIs based on feedback and changing business requirements. Update APIs regularly to add new features, fix bugs, and improve performance. 

• Maintenance: Establish a maintenance plan for regular monitoring, updates, and support, ensuring APIs are up-to-date with the latest security patches and enhancements. 

Modernizing legacy insurance systems through API integration offers a strategic and efficient way to enhance functionality, reduce costs, and improve customer experiences. With this approach, insurers can preserve the core functionality of legacy systems while introducing new capabilities and ensuring seamless integration with modern technologies. 

How to Perform API-First Insurance Legacy System Transformation within Minutes

Insurance companies rely on legacy endpoints not designed with modern API standards in mind. Adapting to these endpoints requires: 

• Multiple API Layers: Insurers may need multiple API layers to simplify interfaces and ensure compatibility with existing systems. These layers can abstract the complexity of legacy systems and present a more streamlined interface for modern applications. 

• Managing Dependencies: Legacy systems often have numerous dependencies that must be carefully managed. Identifying and handling these dependencies is crucial to preventing disruptions and ensuring seamless integration with new APIs. 

• Defining Logical Boundaries: Establishing clear, logical boundaries within the system is essential for a successful transition. This involves segmenting the system into manageable units that can be independently developed and deployed. 

• Maintaining a Clear Architectural Framework: A clear and well-defined architectural framework is necessary to avoid creating a maze of interdependent services. Without this framework, the system can become overly complex and difficult to manage, negating the benefits of a microservices approach. 

Addressing these challenges requires robust tools and methodologies. An API-first approach to legacy modernization offers a structured way to enhance system capabilities while minimizing disruptions. However, this process can still be difficult without the right platform, leading to potential downtime, regulatory penalties, and lost customer trust.

Transform Your Legacy Systems With Astera

This is where Astera comes into play. Astera API Management is a solution designed to streamline the API-first transformation of legacy systems for insurance companies. It offers a suite of features that make the modernization process more manageable and efficient: 

• Code-Free API Design and Implementation, Preview Centric Designing: Enables visual API creation with live data previews, making API development accessible and reliable. 
• Auto-Generated Database CRUD APIs, Dynamically Filter, Sort, and Paginate: Generates CRUD operations for databases with dynamic response management, ensuring efficient data handling. 
• One-Click Deployment, Asynchronous API Deployment: Allows seamless and scalable API deployment with one click, supporting various environments and processes. 
• Versioning and Maintenance, Auto-Generated Swagger Documentation: Manages API versioning and auto-generates Open API documentation, aiding in API maintenance and communication. 
• Developer Portal, Monitoring and Logging: Provides a centralized portal s or API sharing and performance insights, facilitating collaboration and optimal API functionality. 
• Enterprise-Level Security and Compliance: Includes a built-in security framework for APIs, ensuring regulatory compliance and data protection. 
• Auto-Generate Test Flows, Real-Time Server Traces Responses: Generates API test flows and provides detailed processing information, ensuring API reliability and performance. 

Start 14-day Free Trial: Test Astera’s powerful features first-hand. Transform core insurance system’s lifespan and gain access to the latest technologies in the modern IT landscape.