Once upon a time, the toughest technology decision an insurance carrier had to make was build vs. buy. As software matured—and IT resources dwindled—that decision became much easier. Today, though, the decision isn’t just which new software solution to buy, but whether your strategy should be to purchase a best-of-breed solution or the increasingly popular software suite.
In observing the software market over a decade or so, Ram Sundaram, principal of X by 2, doesn’t see suite solutions being a trend just yet—at least not one “with a capital T”—but he detects solid movement in that direction.
“If you think about core systems 15 years ago, packaged solutions were not necessarily a trend,” he says. ‘Building solutions was the trend. In the last 10 years, certainly I would say [the market] is favoring package solutions, which definitely became a trend. Today, you hardly see anyone having the appetite to build.”
Sundaram doesn’t see the same intensity or overwhelming move in the direction of suites vs. best of breed solutions, but insurers certainly are asking that question. As always, there is no simple answer: “It depends on the set of circumstances,” says Sundaram.
Complicating the decision is the fact some best of breed vendors have built out their individual components and are now providing them as suites, according to George Grieve, CEO of CastleBay Consulting. He believes their intention is to serve some of the lower portions of the market.
“Suite vendors are taking their functionally-rich solutions and breaking them apart so you can allow a customer to implement them in component-by-component fashion rather than do it in all in one room,” he says. “Someone recently coined a term ‘best of both,’ which means a carrier now has the choice of buying a suite solution from a suite vendor, but implementing it as if it was best of breed or buying a best-of-breed solution from a best-of-breed vendor and implementing it like a suite. That’s a strong trend that gives carriers more options and it has created more competition in the middle tier of the carrier marketplace.”
Elephant Insurance is a catchy name, associated with positive connotations--smart, big, strong, dependable, never forgetful, and caring, according to Tim MacAleese, deputy director and CFO of the Virginia-based personal lines insurer.
“The name was chosen about a decade ago by our parent company, Admiral Group, to use in Great Britain for one of their brands of auto insurance,” he says. “It worked well in the British culture, so when we decided to launch our business in the United States we considered a bunch of names. We were constrained by the availability of URLs. We tested some possibilities and Elephant tested well so we went with it for our brand in the U.S.”
Elephant first began serving customers in 2009 as a start-up. Admiral Group is the second largest auto insurer in the UK and has a direct to consumer model, which has been successful there over the last 20 years, explains MacAleese.
“[Admiral] learned that in order to keep growth going they needed to consider expansion to other markets,” he says. “They looked beyond the auto market in the UK and looked beyond the UK for auto insurance. They’ve done a little of both.” Admiral launched startup operations in Spain in 2006, Germany in 2007 Italy in 2008, the U.S. in 2009. and in France in 2010.
The U.S. brand has the same model—direct to consumer with a focus on personal auto, although Elephant offer a full suite of personal lines insurance products. The carrier launched in Virginia and has since expanded into three other states—Maryland, Illinois, and Texas—which covers better than 15 percent of the U.S. population.
Elephant started off with a best-of-breed technology strategy, according to MacAleese, beginning with the policy administration system. Elephant conducted a market scan and evaluated over a dozen potential solutions before they narrowed it down to a single product.
“We made our choice, which we thought was the least risky for the short to medium term,” says MacAleese. “We were focused with getting off the ground and minimizing the risk of not getting off the ground. We knew we would lose money as a start-up so we were concerned with minimizing operational risk in order to stay focused on our strategic direction.”
The policy system came with a packaged billing solution that the carrier incorrectly assumed was a tag-along product, according to MacAleese.
“We took it, but shame on us,” he says. “Billing is a huge part of customer service and we learned quickly—and the hard way—that the [billing] product was not sufficient at solving our needs for our customers.”
Elephant had more success selecting a stand-alone claims solution—Guidewire’s ClaimCenter. The insurer also needed a website where it could attach a portal and ended up with the policy vendor building it because the two systems needed to be intricately linked.
“In the end, it wasn’t really ours; it was theirs,” says MacAleese. “We combined the four systems together in less than a year, though, and launched the business.”
The company was happy with the claims solution, but learned quickly that the billing system was not sufficient and had to be fixed.
“We learned billing was a new product offering from Guidewire. We had experience with [Guidewire] so we quickly put our attention on understanding their offering,” says MacAleese. “We also looked at a modified home-grown billing solution, but we quickly decided the Guidewire product was the one for us. We chose to switch to them in 2010—less than a year after we launched. Less than six months later we were live on that system.”
Elephant still saw itself as a best-of-breed company since billing and claims were not tightly linked from a process standpoint, but the company saw that one architecture, one coding language, and a lot of commonalities such as infrastructure support worked well.
“We began configuring the billing system to match our business processes,” says MacAleese. “We didn’t have any established processes. We’d try something and if it worked, great. If not, we’d try something else. The billing system gave us flexibility to try some things and keep pace with our rapid growth. We went from zero customers in 2009 to over 50,000 vehicles insured at the end of 2012.”
Making the Right Decision
The original policy system worked and was low risk, but Elephant quickly determined [the system’s] future was not flexible.
“It gave us what we originally needed, but it wasn’t going to be our long-term solution,” says MacAleese. “What really hurt us was the system’s connection to the website, so we decided to move away from both of them. We focused on the policy system and really considered just one vendor.”
Elephant studied other alternatives because of the critical nature of the product, but deep down MacAleese knew Guidewire was the company for them. Then a decision had to be made on the website.
“Guidewire was not at a place we needed with its portal product, so we made the decision to build a home-grown website and move to Guidewire’s policy system,” says MacAleese. “The implementation went well, but building the website proved to be difficult. We ended up with a Guidewire portal product at the middle of 2012, but we haven’t used it 100 percent yet. We did not set out to be a suite customer, but we learned the hard way that it was the right choice for us. In our situation, I think the suite was right because of the particular product and partner we had in Guidewire.”
The issues and the answers involving software solutions differ depending on the size of the carrier that is considering those options, according to Grieve. The large carriers that have the most resources in their IT environment probably have a set of enterprise components that they’ve had for years that involve a huge investment in time and talent, so they are less likely to want to replace those components.
Grieve explains such components go beyond the big three of the core solutions—policy, billing, and claims—to include areas such as a rating engine, workflow engine, document management solution, and a portal, what he calls the second tier components.
“A large carrier might have a rating engine they’ve had for years and all their algorithms are embedded in that solution,” says Grieve. “They don’t want to buy a policy system that requires they get rid of their rating engine and all the investment sunk into that. For big carriers, it is still the case that they are drawn to best-of-breed solutions because they are deeply invested in enterprise components they want to keep.”
At the lower end of the market, Grieve points, you are more likely to find carriers that have a third-party vendor suite that they want to replace.
“The obvious thing for them is to replace suite-for-suite because they want to expand the entire footprint and with a smaller book of business they have less complex operational issues and less complex business requirements,” he says.
Another issue for the lower end of the market is they don’t have the bandwidth or the sophistication to manage a project involving multiple vendors, adds Grieve.
“It is generally the case that if you buy a best-of-breed solution, the total amount spent on it is going to be more expensive than buying a similar functional footprint from a suite vendor,” he says. There is a sentiment that the lower end of the market gets more bang for its buck from a suite vendor.”
The most important part of the selection process, according to MacAleese, is cutting through all the talk to get the vendor to show you what the product can actually do.
“I need to be convinced by touching, feeling, and doing,” he says. “Some vendors would only talk and never show us the system. Those were quickly crossed off the list. Others knew that showing the product was the most important part. They had demo products that could do that, but if you asked them to go off course, the demo was not programmed to do that so you didn’t know what it was capable of or not capable of.”
Guidewire demonstrated its functionality existed. “That conveyed to us the most important aspect of selecting a partner and a product to purchase is to understand what it is capable of doing by seeing and touching it as opposed to just talking about it,” says MacAleese.
Integration is not as big an issue in the software market today than it was a decade ago, explains Grieve. Modern vendors have written software with the intention that [the software] will integrate with other components in an overall eco-system.
“Ten to twenty years ago, the folks writing software were under the assumption their software was the only software doing anything in the world,” he says. “Now, vendors write software under the assumption they absolutely have to play well with others in order to provide a complete solution to the customer. That change in emphasis has helped a lot. Vendors are using open technologies like XML and they are working hard to incorporate industry standards like ACORD.”
Sundaram describes integrating best-of-breed solutions as important, risky, costly, and painful propositions.
“The vendor space has made significant advancements in integrating systems because there are many good architectural patterns and constructs to pull off integration,” he says. “The leading vendors have good mechanisms and provisions for integration of multiple solutions, but by any means, integration is perhaps right up there when you think about core system transformation. When you look at business processes and change management, integration is a still a significant problem. It has not been solved. It’s a factor when people considering the suite strategy.
Which Way to Go?
An insurer has to trust the vendor’s capabilities to back up their promises and deliver, points out MacAleese.
“It’s not only what they are telling you, it’s the relationship as you go forward when new needs pop up and things change,” he says. “The vendor has to be someone you can work with.”
Another element for carriers is understanding the market and what’s out there. MacAleese explains it did not know Guidewire was an initial option—other than claims—when it began the selection process.
“It is a challenge to conduct market scans because you rely on third parties to tell you who you should consider and what their strengths and weaknesses are,” he says. “You have to quickly get a sense that the promise of the product is real and the vendor is someone you can trust. I still believe deep down that best of breed is the way to go. When you choose the right product and vendor for each business function, the integrations can happen, but the functionality at the point of interaction with customers is the most critical aspect of your business. I just greatly prefer that the best product keeps coming from the same vendor because it makes everything else much better.”
Grieve sees different levels of understanding among the carriers about the software market. Some have a good sense of the market and how it segments, and where they as a carrier fit, but more often he will come across companies that have no sense there even is market segmentation on the vendor size.
“They have some fairly inappropriate and unrealistic expectations as to which vendors might be interested in them, which vendors they can afford, and what strategy they should pursue in order to get a new solution,” says Grieve. “We’ve had companies of $100 million or less in written premium emitting a shock when they first walk in the door with a list featuring some of these well-known and relatively high-end vendors. We have to start off by walking back from a set of assumptions that they are going to be of interest to those vendors. They are too small and can’t afford the vendor.”
There remain more options for insurers interested in the best of breed approach, explains Sundaram.
“If you look at vendors that either have a suite or are heading in that direction, the choices are few and far between,” he says. “If you think of policy administration systems, there is no proven winner. That space is still in flux. When you look at things like claims, even though it may be arguable, you have one or who clearly distancing themselves from the rest of the pack. When you start putting policy, claims and billing together, you don’t really have many options.”
One consideration insurers have to make is if they pick a vendor that is proven to be strong in one area, the question arises over how new their other offerings are, which makes some of X by 2’s clients wonder if the suite strategy is the best direction to go.
“Compelling choices and a market that is conducive to a buyer are just not there yet,” he says.
What to Consider with a Suite Strategy
Ram Sundaram, principal of X by 2, believes there are several factors that favor—and some that discourage—insurers who are looking at a suite strategy
- The size of the insurer and its geographic footprint: The smaller the company and the narrower the footprint, a suite strategy is more appealing. The larger the direct written premium and the more widespread the geography, a suite is less appealing.
- Carrier business model: Is there a holding company and many business units or divisions that are decentralized? If so, a suite strategy is more appealing because the technology is not widely intertwined.
- The simplicity of products, lines of business, and business processes: If a carrier is not interested in complex product innovation but rather looking at attractiveness of price point or some convenience factors, a suite strategy is appealing. Carrier that write one or two lines of business might find it more attractive as well. Those insures writing non-standard products or a combination of personal, commercial or specialty lines, a suite is less appealing.
- The maturity and footprint of the IT organization: The more mature the IT organization is and the larger the footprint, as daunting as integration is they still feel they have the resources to tackle best of breed. If not, then a suite is hugely favored.
- Vendor strategy: If the vendor has an integrated suite and brought it to market from the ground up, there is a more favorable view on that as opposed to a vendor strategy that gets to a suite by way of acquisition. Those vendors have their own headaches from putting things together.
- Timeline to implementation: The more you go best of breed, the longer it will take for integration and conversion. If you are looking at a more aggressive timeline for implementation, a suite might be preferred.
- Appetite for risk: Going to a suite strategy is less risky in terms of project success, but more risky in terms of vendor concentration. If you put all your core systems in the hands of one vendor that adds a dimension of risk.