Legacy Systems in Core Insurance: Modernise, Replace or Encapsulate?

The Burden of the Pioneers

Insurance companies were among the pioneers of digital data processing – and that is precisely what is increasingly becoming a burden. The industry's early adoption of technology means that many core insurance systems have grown organically over decades instead of being fundamentally modernised. The result: highly complex, hard-to-maintain system landscapes that no longer meet today's requirements for flexibility, speed and external collaboration. Even seemingly simple adjustments can cause enormous effort, because data is held redundantly and has to be maintained in many places at once.

Germany and Switzerland are among the markets with the highest density of legacy systems worldwide. The labour market provides a clear indication: analyses of IT job advertisements show that COBOL and mainframe expertise is still in demand – a clear signal of sluggish modernisation across the board.

The Economic Price of Standing Still

Legacy systems are not only inconvenient, they are also expensive. Analysts estimate that up to 70 per cent of the IT budget is tied up in merely operating legacy systems (Source: IT-Finanzmagazin) – capital that is therefore unavailable for innovation. On top of this comes a demographic problem: as experienced specialists who have maintained these legacy systems for years retire, the situation is aggravated further, because knowledge about home-grown special solutions and historical adjustments is lost.

Current market observations confirm the pressure to act as well: a study by the strategy consultancy EY shows that the core insurance systems currently in use increasingly jeopardise the entrepreneurial future of these groups, because technical infrastructure is ever more decisive for competitiveness. A survey by the consulting and software company PPI also shows that a good half of insurance companies still use outdated core systems – even though a majority of insurers would like to modernise their IT systems in order to increase efficiency and automate processes.

Three Fundamental Strategic Options

In practice, essentially three strategic directions have emerged for dealing with historically grown IT, and they are also reflected in studies:

Modernise (renovate). Existing systems are revised step by step instead of being replaced entirely. This approach reduces the project risk of a "big bang" replacement, but demands discipline so as not to fall back into unstructured growth. A clear target picture with a cloud-native reference architecture is essential here, so that modernisation does not become mere patchwork.

Replace (exchange). The legacy system is replaced by a new core system. This route promises the biggest long-term leap, but also carries the highest project risk and requires substantial backing from executive management as well as close cooperation with experienced partners. Practical examples from the industry show that a clear objective and strong partnerships are decisive success factors for a successful core system replacement.

Encapsulate (coexistence and mixed strategy). Legacy systems remain in place at the core, but are integrated via modern interfaces and additional systems in such a way that new functionality can be developed outside the legacy system. This pragmatic middle course is the one most frequently observed in practice.

What the Industry Actually Does

A study by PwC Germany, in which 41 insurers accounting for around 40 per cent of premium income in the DACH region took part, provides a differentiated picture of actual transformation strategies. Three quarters of the insurance companies in the DACH region planned to replace or modernise at least one core system within three years, while 20 per cent of respondents intended to continue relying on their existing systems. The study identifies five typical transformation strategies: legacy users, modernisers, replacers, new-system users and mixed strategists. At 29 per cent, mixed strategists form the largest group – they are characterised by deliberately keeping individual legacy systems in operation while modernisation and replacement take place in parallel for other parts of the system landscape.

This distribution confirms that the pragmatic coexistence strategy is often more realistic in practice than a complete, one-off replacement – especially given the complexity of grown system landscapes.

Do Not Underestimate the Sovereignty Dimension

Alongside cost and maintainability, another aspect is gaining importance: digital sovereignty. Many legacy systems in the financial services industry show an elevated dependency on individual vendors. In times of geopolitical tension, this dependency becomes an additional challenge that goes beyond the classic modernisation arguments of maintainability and cost. Modernisation strategies based on open standards and consciously chosen dependencies address this risk specifically and should therefore be part of every strategic core system decision.

The AI Factor as Additional Modernisation Pressure

Legacy systems have long ceased to be merely a cost and maintainability problem; they now also slow down the scaling of artificial intelligence. Current market assessments for 2026 note that legacy systems and regulatory requirements are holding back the implementation of many AI projects in the insurance industry, even though further scaling of AI is regarded as a central success factor. Especially for the use of agentic AI – AI systems that are increasingly meant to make autonomous decisions in day-to-day work – the further modernisation of legacy systems and high data quality are explicit prerequisites, alongside a "trusted AI" approach with human oversight.

Anyone planning AI investments should therefore not treat the underlying core system landscape as an independent, downstream question, but as an integral part of the AI strategy.

Practical Recommendations

• Choose a strategy explicitly instead of implicitly standing still. Simply continuing with a legacy system without a conscious decision is itself a strategy – usually the riskiest one, because it keeps accumulating technical debt.
• Plan realistically for mixed strategies. Given the market data, a complete, one-off replacement is rarely the most pragmatic route. Deliberate coexistence with clearly defined interfaces can balance risk and progress better.
• Assess sovereignty as a criterion in its own right. Vendor dependencies should be explicitly evaluated in every modernisation decision, not implicitly decided along with the choice of provider.
• Tie AI ambitions to the state of the core systems. Before larger AI investments are planned, it is worth taking an honest inventory of whether the underlying data quality and system architecture are up to the requirements at all.
• Actively manage knowledge transfer. As experienced specialists with legacy know-how increasingly retire, documentation and knowledge transfer for legacy systems should be prioritised, regardless of which long-term strategy is pursued.

Conclusion

The question "modernise, replace or encapsulate?" cannot be answered in a blanket way – the market data show that the majority of insurers rely on differentiated mixed strategies anyway instead of committing to a single path. What matters is less the individual strategy chosen than the conscious, active engagement with the topic. Those who postpone legacy modernisation risk not only rising operating costs, but increasingly also their own ability to participate at all in key future topics such as AI scaling and digital sovereignty.