In this article, Adam Nunes, Director of Sales at Federato and a long-time insurance enthusiast with a passion for digital transformation, draws parallels between the recent Southwest Airlines holiday meltdown and a perfect storm of problems facing the insurance industry if carriers and MGAs don’t modernize the core underwriting systems that drive their business.
The story of Southwest Airlines' ascent has long been a staple in MBA curriculums. By running lean operationally and making savvy strategic decisions to grow the business, the company was able to scale rapidly and go from a small regional player to a national and now international powerhouse. However, the unfortunate events of late will be taught in business schools in the future as a forewarning for companies who refuse to address legacy technology problems and kick the can down the road when it comes to modernizing IT and mission-critical components of their business.
In late December 2022, Southwest Airlines abruptly canceled almost 15,000 flights without warning, leaving their customers stranded. This represented nearly 70% of its scheduled flights. While other airlines canceled flights as well (Delta – 9%, United – 5%), the sheer magnitude of flights canceled by Southwest was the cover story of the holiday travel season. The prevailing thought was that brutal weather was the reason for the cancellation. As a Chicagoan who lives near Midway (Southwest’s regional hub), the -35-degree temperature made it tough to manage my own home’s heating stability.
However, once the layers from the onion were peeled back (and Southwest’s stock price was in free fall,) it became evident that the weather played only a small role in the widespread cancellations. It has come to light by the Wall Street Journal and other publications that the downstream result of cancellations was caused by years of neglecting IT and Southwest using outdated systems to handle complex and mission-critical tasks. The homegrown system named “SkySolver” – built in the ’80s and held together seemingly with duct tape and hope – became entirely overwhelmed.
While there were hiccups in the system in the past (namely with scheduling pilots and crew members), the problems it posed were deemed to be only minor inconveniences to employees and travelers. Executives saw a business that was printing cash and had little reason to invest in technology and future proof their business.
When the recent winter storms hit, Southwest couldn’t get crew members in the right city at the right time to carry out their duties. Weather problems were compounded by a long-standing and avoidable IT problem that created a people problem which, in turn, led to a very real business problem.
Southwest’s team of schedulers had to resort to old-school methods (pen, paper, and lots of manual brain power) to get crews to the right place. Every time they tried to make an IT fix, because of their technical debt, it ended up creating even larger problems with their software, which lead to more cancellations. As a result, the customers were the ones who were burned, and ultimately the executives will pay the true price of their inaction.
All of this illustrates a core value and belief of Federato’s culture. We do not believe that businesses have problems – people do. Those problems are exacerbated when systems and technology are not responsive enough for humans to do their jobs effectively. And just like Southwest Airlines, they often peak when volumes culminate at year-end or peak effective dates. In turn, this creates business problems and friction for insurers and their customers. If you’ve spent any time using an outdated, slow, and cumbersome underwriting workbench, many of which date from the digital stone age, you’ll know exactly what I mean.
Insurance underwriting is at a similar inflection point. In the insurance ecosystem today, underwriters need to be able to make timely and informed decisions using current policy data, but the plethora of disparate systems and tools make this a slow and frustrating daily exercise of “hunt, peck, and hope”. While the fallout from carriers underinvesting in core system modernization will likely not be as immediately dire as Southwest’s, insurance carriers and MGAs who choose short-term profit maximization over mission-critical changes to their core processes will ultimately lose the long-term talent war and see their ability to generate profits grounded and their future growth up in the air.
We’ve long heard of the pending “silver tsunami” that insurance carriers will face in the future. Much of the existing underwriting workforce, critical to the knowledge base and profit generation of the business, will soon retire. A brain drain will occur, and insurers who were not able to win the talent war and attract new generations of employees will not have staff with the tribal knowledge of risk to underwrite business successfully.
As an industry, we need to get more nimble, modern, and tech-enabled. What new entrants into the industry are seeing are static systems, mundane administrative processes that take up way too much of their time, and the necessity to balance the internal rules and guidelines strewn across folders on their desktop. The next generation of talent, whether they were raised on iPads and smartphones or just adopted them, expects technology and tooling to help them do their jobs successfully.
Underwriting executives need to chart a path – do we maximize short-term profits and hope that we can catch up someday to the competitors who choose to modernize today? Or do we implement solutions now that will pay untold dividends 5 years from now?
If you choose not to transform your underwriting systems and processes, we totally understand. But good luck finding your luggage…. ☺