One of Robert Frost's most popular poems contains morethan a few parallels with what insurance technology executives aregrappling with as they look at systems in the cloud compared withsystems housed within their own organizations. Consider thisclassic verse:

“Two roads diverged in a wood, and I…

I took the one less traveled by,

And that has made all the difference.”

Setting your course for innovation

Certainly there are many who are opting for theless-traveled SaaS road, and others who prefer the other roadcommonly called enterprise.

Within the insurance industry, cloud technologies have beensuccessfully deployed in ancillary areas of the organization suchas Human Resources, Accounting, e-mail, and other non-core areas ofthe business. Typically, those core applications such as policyadministration, agent commissions, rating, billing, claims, andagent and customer portals have been firmly entrenched inenterprise or on-premises applications.

However, with the success of cloud-based software in thosenon-mission critical areas, SaaS systems are becoming the favored choice fordeployment in certain core insurance areas. But for those coretasks that are truly mission critical, have deep integrationrequirements and importantly, are processor intensive, ITexecutives are taking a go-slow approach before they commit toputting those systems or business processes into the cloud.

Related: Four Major Impacts of a SaaS Solution in BusinessIntelligence

Why the concern? The short answer is that enterprise software is“owned” by the insurance carrier, and the risks of a data breach ofsensitive information is relatively low when the application ishoused behind the insurance company's firewall. Insurance companiesare huge repositories of customers' personal information. And thatinformation is entrusted to the insurance company with theexpectation that it will remain private and confidential.

In short, enterprise software deployments merit a certainkind of security that is hard to duplicate in a cloud-basedsystem.

Another aspect to consider is processing horsepower. Saving andretrieving data such as we see in popular CRM systems likeSalesforce.com is not particularly processor intensive. Tasks withintensive calculation requirements, such as commissions and bonuscalculation, are another matter. These systems can often have morethan a hundred integration points both up- and downstream, andmanaging them in the cloud is a major concern to many insurers.

According to recent research from Novarica, the key driverfor carriers adopting SaaS systems was “the speed of deployment andthe ability to sunset current applications.” (Photo:iStock)

What is driving SaaS adoption?

Among the common drivers for carriers to adopt SaaS system,according to Novarica, were standardization paired withrelease management, which reduces support costs and ultimatelylowers the cost of ownership. However, that standardization, callit efficiency, is largely a trade-off between having key businessprocesses undifferentiated from competitors that are on that sameSaaS application and having a custom designed application thatpreserves competitive differentiation.

Related: The 3 stages of the P&C insurance softwaresystem selection process

Large companies see being able to differentiate from competitorsas a key advantage of the on-premises model. Additionally, largecompanies have very large IT staffs that are capable ofimplementing and managing new applications.

Cost is clearly another factor in making SaaS a viable choicefor many core insurance applications. For mid-tier and smallerinsurance organizations, the advantages of SaaS are clear:

— No infrastructure costs;

— Software is on a subscription model thatincludes maintenance and upgrades; and

— Provisioning is very easy.

With SaaS, a smaller insurance company can readily compete withthe 'big guys.' While some simple back-of-the-napkin analysis canshow advantages for SaaS, the analysis is really anapples-to-oranges comparison. A more detailed look at cost and afew other items show that cost may not be the main concern.

Related: Insurance experts: WannaCry calls for tougher cybersecurity

What about the 'hidden costs'?

You may not appreciate the importance of some of the itemsburied in the fine print of SaaS solution provider contracts. Itemssuch as transaction volume, number of processes allowed per month,data storage fees, data transformation costs and other items canresult in significant additional fees levied by the vendor thatmust be met for subscription compliance.

If you don't understand and carefully quantify each item inthe SaaS agreement, fees can easily double or triple — but youmight not realize the impact until the solution is implemented andin full production and you receive your first over-usage invoice.(Photo: iStock)

In order to get a full assessment of hosted versus on-premisesfactors such as implementation, customization, upgrade cycles, support and maintenance,security, scalability, and integration(s) must beunderstood. For example, implementing a SaaS application isrelatively easy, since it is using a ready-made platform that hasalready been provisioned, while on-premises applications takeresources, equipment, and time to set up a new environment. Inessence, the financial choice is whether the new system will tapthe operating expense budget or the capital expense budget.

Related: Insurance 2017: Priorities for innovation,automation and transformation

The key in assessing the advantages and disadvantages of SaaS oron-premises is one that is common to all technology acquisitions—the vendor. At the outset, the absolute key requirement is that thevendor has extensive experience within insurance technology. There are many vendorsthat purport to have deep domain experience in insurance. From whatI've observed, however, in many applications sold to insurancecompanies vendors are very likely taking a horizontal applicationand providing some level of uniqueness that makes it salable toinsurance companies. This is very common in CRM and commissionsapplications, where vendors have created hundreds of applicationsfrom managing sales to managing human resources to managinginventory. Vendors will claim insurance expertise, but a look underthe hood will usually reveal an application that was built for,say, telecommunications or pharmaceuticals and “verticalized” tomake it acceptable to insurance carriers and distributors. It's theold “one-size fits all” mentality.

Where the rubber hits the road in vendor selection is in looking at a vendors'expertise in integration and security. As experienced insurance ITmanagers are aware, insurance infrastructure can be a hodge-podgeof technologies and applications that run the gamut from fairlymodern to legacy. A vendor that doesn't have a track record ofsuccessful implementations with a variety of technologies is onethat probably shouldn't be on your short list. As a starting point,look for applications with embedded integration platforms that you(not the SaaS IT/Support team) will have full access to. The samething can be said regarding the privacy and security of data andpersonal and private information.

Insurance carriers are very aware of the security implicationsof SaaS, where security is dependent on the vendor. A corollary tothe vendor's experience in integrations is the vendor's experiencein implementing fixes of the software or migrating existing clientsto new versions of the software. Again, vendors that have dozens ofsatisfied clients are more likely to have the experience and talentto become a credible business partner. One more tip on vendorselection.

Ask for a report detailing system outages for the last two yearsthat shows the nature of the outage, core issue and time toresolution. If the vendor refuses to deliver this document, thinkagain about adding them to your short list.

Some large vendors in our space have recently dropped theiron-premise solutions and 'gone all in' for the cloud. It might be asafer to go with a vendor that can provide cloud oron-premise solutions, leaving the final hosting decision in yourhands. You can always migrate to the cloud later if you're notcomfortable with the change. The choice between the cloud andon-premises is very much like choosing between the two paths that'diverged in the wood.'

There are certainly advantages to each alternative, butultimately the key driver is whether the vendor can accommodateboth software delivery models, on-premises and SaaS. Vendors thathave the capability to work with clients with unique requirementsthat mandate enterprise software or SaaS are vendors that have theoverall experience to help you choose which path to take.

John Sarich is an industry analyst and VP ofStrategy at VUESoftware. He is a senior solutions architect,strategic consultant and business advisor with over 25 years ofinsurance industry experience. He can be reached at [email protected].

See also:

10 emerging developments in liabilityinsurance

4 diversity challenges stifling insuranceinnovation