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.
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.
ADVANTAGES OF BUILDING
ADVANTAGES OF BUYING
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.
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.