The use of cloud computing is onthe rise among insurers, and many IT professionals at carriers seeit as a threat.

“IT people are not thrilled with the rise of the cloud becauseit is viewed as the outsourcing of work. A lot of people are stillworried about the loss of equity and the loss of livelihood,”Michael Hugos, a self-described “CIO at Large,” said at the“Technology Super Session” during the Insurance Accounting &Systems Association's (IASA) 2012 annual conference, held June 3-6in San Diego.

“The rate of change is causing a certain amount of distress inIT—verging on panic—but the rate is not going to slow down. Cloudis poised to transform business,” he said.

Hugos believes it's important for IT to understand that cloudcomputing is going to happen, with or without them.

“It is a fait accompli—it's already happening,” hesaid. “The lesson for IT is that, while change is difficult, theymust adapt or be swept aside. If they try to obstruct it, businesswill move around them just like water around a boulder in ariver.

“IT has spent a long time telling business how things can't bedone—and that has to change with cloud computing,” Hugos added.“There's a huge opportunity for IT if they learn to embraceit.”

FACT VS. FICTION

A cloud-computing and technology expert, former CIO,agile-systems architect, IT industry columnist and author of thebook “Business in the Cloud,” Hugos sought to separate hype versusreality in cloud computing.

Hugos' interactive presentation explored where and how cloudcomputing could be utilized, starting by making the budgetary casefor it. IT departments that argue cost-savings of in-housedeployment, he explained, are missing the point.

“In the intellectual rigor aroundbudgeting, you need to consider the indirect costs of [in-housesolutions],” he said. “It may appear cheaper to own and operatesystems, but people often forget to add indirect costs thataccompany owning and operating in-house platforms.”

Those costs include procurement and disposal, insurance,electricity and supporting infrastructure, and vendor support,among other hard-dollar line items. It also includes theopportunity cost of having capital tied up in owned systems. Cloudallows companies to pursue a flexible cost structure.

“With cloud computing and software as a service (SaaS), you'renot saddled with a massive infrastructure cost. Instead you havemonth-to-month, pay-as-you-go, cost-effective structures,” saidHugos. “Also, particularly in the shorter life cycle of today'sbusiness, how can you afford to allocate your capital totraditional purchases? We no longer have that long-termpredictability. When was the last time anybody talked about afive-year plan in IT?”

BUILDING NEW INFRASTRUCTURE

Hugos illustrated cloud deployments within insurance companiesusing specific examples such as payment processing.

The session also featured an interactive, iterative exerciseexploring how to use the cloud at a typical insurer faced with acommon business problem: He offered the scenario of a companywanting to launch a new product. The exercise included sketching aconceptual design for IT infrastructure and application systems tosupport a new venture and deciding whether and how to leverageexisting systems or use cloud-based systems. It looked at how tobuild the proposed infrastructure and to handle common challenges,including security.

GOING HYBRID

During a discussion on costs, Hugos detailed the “hybridarchitecture” that most insurers require to utilize the cloud.

“Almost all companies are going to wind up with some sort of mixof traditional in-house and cloud-based systems. Nobody will beentirely one or the other, particularly in insurance,” he says. “Asa result, you need a coordinated way of interfacing house withcloud systems.”

That includes creating an orchestration layer between both typesof systems. However, it will be a challenge for insurers to linkbetween slower-moving in-house and rapidly evolving cloudplatforms, he noted.

Companies also need to deal with traditional concerns ofperformance and security. “Using cloud doesn't mean opening up yoursystems to the world,” he noted. “You still need to control theborders and establish APIs with a security mindset. The key is forIT to maintain or even expand its relevance by guiding systemsevolution, not obstructing it.”