Until relatively recently the explanation for mountain ranges, earthquakes, and volcanoes was the domain for spiritual leaders and mythologists. Such events as earthquakes and volcanic eruptions were the doings of angry gods. However, during the first half of the 20th century geologists proposed—and ultimately verified—the theory that the earth’s surface has changed radically over the planet’s history and that indeed it continues to change today.
Our continents slide across the earth’s surface riding on tectonic plates, which are dragged about by powerful convection currents inside the planet’s crust. Where plates bump into each other we get mountains and earthquakes, and where they slip and grind we get volcanoes.
This came to mind recently in thinking about the vendor marketplace…bear with me. The vendor market “moves” over time as trends change the landscape. We have discussed some of these before but never in geographic terms. In order to test my plate tectonics theory of the p&c vendor market I decided to look at some maps. These maps are taken from work done by the analyst company Novarica and are used by them to provide a picture of the vendor market as an introduction to their periodic Market Navigator reports. The first one shown here is from the MN report dated Q3 2009.
The crosshairs are my addition in order to help show the degree of “continental drift” which has happened in recent years. Basically this is a four-quadrant diagram. Position on the horizontal axis indicates the extent to which a vendor’s average client is more commercial lines or more personal lines. So, on the heavily commercial end we have the likes of Instec, Cover-All, and eSurety, while at the opposite end, we find personal lines-focused vendors such as Insuresoft, CGI and IDMI. Generally, the vendors are evenly spread between a commercial lines focus and a personal lines focus. On the vertical axis we get an idea of the size (written premium) of a vendor’s average client. Only Camillion, CSC (for the Exceed solution), and Innovation Group have an average client larger than $1 billion in written premium.
In summary this picture is a good representation of the “traditional” vendor market for p&c software where vendors were focused on either personal lines or commercial lines solutions and sold software into the smaller carriers. But by 2009 this picture was really out of date, and as we will see, about to change both radically and rapidly.
Now, let’s look at the same report for 2012.This is a startlingly different picture. There are several differences, but the key fact is the majority of vendors have drifted into a tightly clustered group around the mid-point of the cross-hairs. For the majority of vendors their average client is now a balance of personal and commercial business and has a significantly higher premium volume than in the past. In 2009 as we noted, only three vendors had an average client with greater than $1 billion in written premium. In 2012 there are more than 20 (a prize to anyone who can get the exact number).
I discussed these findings with the report’s author, Chad Hersh of Novarica, and he confirmed that the movement is indeed due to changes in clients and not due to a change of methodology or measurement. Indeed, Hersh went on to state that, if anything, Novarica’s methodology would tend to understate the movement that has occurred in the past three years.
What is going on here? What are the convection currents in the p&c market that are moving vendors around in such an obvious way? There are at least two major trends at work here.
The first trend is the result of vendors building and deploying highly configurable software. In the past, vendors wrote code, which performed line of business specific functions. Vendors focused either on personal lines or commercial lines, as we noted above. For vendors with large legacy code bases, migrating from one domain to the other was daunting if not impossible.
Then came a new generation of vendors that wrote configuration toolkits that they in turn used to build line of business applications—more quickly and with more flexibly. These vendors could build any p&c application with relative ease and so won clients in both the personal and commercial lines domains (and in many instances specialty lines and workers’ compensation also).
An initial group of vendors led by Duck Creek (now Accenture), Guidewire, and OneShield led this charge to the center and were rapidly followed by other new entrants and then by legacy vendors that upgraded their software and introduced configuration tools. The vendors that are left on the commercial or personal lines peripheries are either uninterested or have so far been unable to move to the center.
Size No Longer Matters:
The second trend is that larger carriers have become more open to purchasing third- party software than in the past. As we noted above, in 2009 only three vendors had an average client with more than $1 billion in written premium, whereas by Q2 of this year that number was more than twenty. But the diagram deals only in averages and indeed the penetration of vendor solutions into the largest p&c carriers is well underway.
The upper tier of the market opened initially to point solutions such as billing and claims. For example Guidewire’s ClaimCenter clients include Auto Owners, GEICO, Liberty Mutual and Nationwide, while on the billing side MajescoMastek has sold its Enterprise Billing solution to five tier-one companies (over $2 billion DWP) in the last three years.
The policy space has yet to be opened up but promising signs exist. Most notably, Adaptik sold and installed the PolicyWriter solution at Travelers to initially support that carrier’s multi-billion dollar book of commercial business and continues to build out additional lines. Adaptik is in the early stages of a policy administration implementation at another tier one carrier.
So what is driving this change of heart among larger carriers? First, the fact that vendors now sell highly configurable solutions convinced the carrier-base that they could meet their specific and complex requirements without having to undertake the cost and risk of doing an original build. The cost of building a policy administration system for a tier one carrier is measured in hundreds of millions of dollars.
Second, vendors have established a solid enough track record to convince the market they are for real. Third, highly configurable systems are now mature and scalable enough to satisfy carriers that they can support mission critical functions for millions or even tens of millions of policy holders. Fourth, these vendors generally use a disciplined, agile-based implementation methodology which reduces the project risk associated with core system replacement; a risk that grows with carrier size and complexity.
There are other things to be learned about the p&c software market from consideration of these revealing diagrams, the market has moved in response to the rise of the highly configurable vendors. This alone is the convection current that is driving the plate tectonics we are witnessing in real time and that we see frozen in these time-stamped images. TD
George Grieve is CEO for CastleBay Consulting. Previously a CIO and still an acting consultant, he has spent much of the past 25 years with property/casualty insurers, assisting them in the search, selection, negotiation, and implementation of mission-critical, core insurance processing systems. He can be reached at 210-887-6423.
The content of “Shop Talk” is the responsibility of the author. Views and opinions are those of the author and do not necessarily represent those of Tech Decisions.