Should an insurance carrier buy, build, or outsource the development of its systems? This is a common debate that insurance IT professionals routinely face. When deciding whether to build, buy, or outsource any core system, carriers must consider the justifications, as well as the risks and concerns of each, and the overall trends in the insurance industry.
Even though neither buying nor building can be all things to all carriers, the current trend has shifted significantly in recent years. The packaged solutions market for insurance has expanded greatly in the last decade. This, in turn, has been amplified by the shift in the past three to four years towards modern solutions being offered en masse. Unfortunately, the large number of policy administration systems that have been modernized has not been matched on the claims side. Although many claims systems offered as part of a suite are being modernized, in many cases those systems are not on par with the robust functionality of packaged, stand-alone claims systems. As a result, today only a handful of modern, stand-alone claims systems are offered.
The Homegrown Solution
It isn't rare for a carrier to use a homegrown system. In fact, a large percentage of carriers have at least one legacy system--and in most cases, a great deal more than one--where some functionality is still employed. It is rare, however, for carriers (and especially P&C carriers) to continue to build their own systems in lieu of what is available in the market. Yet, while building systems is declining in popularity, some carriers continue to do so for a variety of reasons.
These days, however, carriers are not typically building claims systems. With more than 100 packaged claims systems sold in the last few years, obviously insurers have embraced packaged claims solution offerings. Occasionally claims systems are built by both P&C and life and health (L&H) insurers to address unusual or infrequently offered products or lines of business that are not available in a packaged solution. However, some insurers still want to build a custom solution or have one built for them for common lines of business or products.
As commercially available packages become more robust, functional, and modern, they are becoming increasingly popular. Even vendors that traditionally provided custom-built systems are now providing packaged solutions. Given what is available in the market, there are few justifications for a carrier's decision to build its own system. Common carrier concerns (and the probable validity of each) are described in Figure 1.
Building Versus Buying
Although valid reasons to build are limited, the debate regarding buying versus building continues. Of course, there are advantages and disadvantages for each approach. Some of the pros and cons associated with building and buying are outlined in Figures 2 and 3, respectively.
ADVANTAGES OF BUILDING
- In theory, building allows the carrier to get exactly what it wants using the technology it chooses.
- In some rare cases, building can provide competitive differentiation or functionality not found elsewhere.
- If available, using otherwise under-utilized internal staff may be a lower-cost alternative to buying.
- There are probably no formal license or maintenance fees except in underlying technology.
- Building may result in creating an asset, although this is unlikely.
- A solution may be tailored to fit existing hardware/software to maximize existing infrastructure investments.
DISADVANTAGES OF BUILDING
- There may be lack of essential internal skills needed to develop modern systems, such as for building rules engines or a system that can be maintained easily.
- The desire to use existing infrastructure may cause suboptimal decisions. For example, it may be considerably cheaper to build on an SOA than a mainframe (while comfort levels may drive mainframe development).
- Maintenance costs for homegrown systems are typically higher than paying vendor maintenance fees.
- The lack of documentation with most in-house built systems results in very difficult maintenance.
- Even when building with a partner, there is little long-term support, as resources typically roll to other projects and knowledge is lost.
- Without development communities, innovation may be stifled, as the only innovation that exists is what the company has asked for.
- True upgrades rarely happen in a built environment--there may be enhancements, but a real stop and refresh is unlikely.
- There is no chance that acquired companies or acquirers will use the same system.
- Usually, built systems have a longer implementation and therefore a greater risk of failure.
- There is risk in building an unproven system.
ADVANTAGES OF BUYING
- Many packages provide rules and tools to maintain and configure the system, dramatically reducing maintenance costs.
- New technologies such as business rules engines, BPM, and SOAs may already be built into the system and can anchor what is done in other areas.
- Buying can free up resources during implementation for other projects as compared to building with internal resources.
- "Standard" processes are provided out of the box, allowing the carrier to start fresh rather than with processes built around constraints of legacy systems.
- A purchased system is usually well-documented, and the maintenance of that documentation is done by the vendor on a regular basis.
- Requirements are already defined at a high level and may even offer functionality a carrier wouldn't know to ask for.
- Modern, purchased systems have a simple upgrade process; upgrades are often like patches.
- Professional support is available, with a cost spread across multiple clients.
- Purchased systems can typically be implemented on commodity hardware.
- The code is often written by specialists and experts in the chosen technology, not re-trained internal staff.
- R&D costs are spread across many customers, which may result in more innovation than would be available to the individual carrier.
DISADVANTAGES OF BUYING
- A vendor that goes under or fails to meet its contractual obligations can pose a bigger burden than a homegrown system.
- To achieve the benefits of buying, vendors must be chosen wisely, with consideration for stability, track record, experience, and so on.
- The vendor may not understand your requirements as well as you do.
- There is a potential for vendor dependence: a carrier could get locked into a vendor for upgrades and other things.
- There may be unforeseen technical or other issues.
An Unwanted Legacy
With legacy systems aging and growing more difficult to maintain, carriers are increasingly turning to buying new systems and systems replacement projects. On the P&C side, this is happening in near record numbers, despite the recent economic downturn and soft market. Novarica also observed a sharply increased interest in packaged solutions by life, health, and annuity writers in 2010.
As the pace of technological change quickens, applications must in turn evolve more quickly. Vendor solutions have matured; they are far more configurable and flexible than in the past. Modifications no longer consume as much time or effort. Increased options for choosing platforms and databases make buying a system even more flexible. Innovations such as SOAs, Web services, EAI, BRE/BPM, legacy migration tools, and commoditized hardware have made migrations, conversions, and integrations far more reasonable than ever before. All of these reasons have led to a justifiable preference for buying systems instead of building.
In addition to building or buying a system, outsourcing remains an option. For a small but growing number of carriers, especially the very small and the very large, various types of traditional and non-traditional outsourcing options are being adopted.
Carriers continue to use traditional claims BPO/TPA options, ranging from FNOL to full virtual insurance company operations. Newer varieties of outsourcing include ASP/hosted solutions and Software as a Service (SaaS). The primary benefit of these systems is that they can be implemented very quickly and help limit initial capital outlays. With growing flexibility, they are more and more capable of supporting carriers.
While there are newer varieties, traditional outsourcing, from call centers to offshore development, are still used, although these have moved from center stage in a challenging economic climate, thanks in part to cheaper and more available domestic labor. This tends to be cyclical, however.
While many carriers, especially those that are mired in their legacy systems, continue to build enhancements, only a handful still build full systems today. Those that do build new systems tend to be larger carriers, with the vast majority having greater than $500 million in DWP. Often, their built systems include purchased components that they then cobble together.
The vast majority of carriers today choose to buy packaged solutions. Novarica estimates that 90 to 95 percent of carriers' new core system implementations (including claims) come in the form of packages, while 85 percent of systems implemented today at carriers across the board are packages. Additionally, a growing number of carriers are choosing to use the new breed of outsourced offerings, such as SaaS, as a way to reduce risk, speed implementations, and minimize upfront investment.
Over the next five to ten years, expect building to become an even greater rarity, as packaged solutions grow increasingly flexible, functional, and modern. SOAs will continue to break down barriers between vendor packages and even between vendor packages and existing systems, allowing them to work better together.
Novarica also expects the outsource option to mature significantly, largely because the systems themselves can better support SaaS or hosted options, though this is also a result of vendors getting better at supporting it. Accordingly, adoption rates should grow relatively quickly. This will be partly mitigated by an improving economy and market creating a growing willingness to invest again in perpetual licenses.
In short, the current trends are expected to continue.