Editor's Note: John Sarich is vice president of Strategy at VUE Software.

While the mere mention of the cloud might raise concerns among insurance professionals, cloud technology offers smaller carriers an ability to compete for business on a much larger scale by increasing efficiency and reducing costs.

For mid-tier insurance companies, the application-deployment options that are available to their larger brethren simply do not exist. Today, the largest insurance carriers often exceed $10 billion in revenue while the industry's smallest companies may write less than $100 million. Since the top-tier carriers have significantly higher budgets, resources, and experience, insurance-software companies often cater their products to meet the needs of these carriers with the highest revenue numbers.

This reality results in an increased burden for smaller providers that are already struggling to compete for business with companies that can be 10 times their size. The question on the minds of many smaller insurance company CEOs is: "Why can't I get the same functionality that my larger competitors have, and do it on my budget?"

The short answer to that CEO's question is simply "you can." And not only can you get it, but it could very well surpass the feature and functionality of that "big" system.

Smaller companies have the advantage of being nimble, less bureaucratic, and faster to market with new products and services. But those same smaller companies share a common disadvantage: they aren't sitting of a pile of cash.

Facing a significant technological and financial disadvantage, small to mid-sized insurance companies might consider turning to the cloud for applications in policy administration, claims, distribution, and underwriting. Not only does a cloud based system require less of an investment in hardware and infrastructure, cloud solutions allow for faster deployment, shorter training cycles, and quicker deployment.

How the cloud offers a solution

In the typical hosted or cloud application, the vendor is providing the entire infrastructure necessary to operate the system. Additionally, because the software is already running on the vendor's site, it takes very little effort to enable a company to access the system and operate as if the software was running on its own servers. Users also benefit in upgrades and enhancements simply by being on the same system as other clients.

The alternative to the cloud is, of course, on premises, which means that the insurance carrier will utilize its own IT staff and systems to deploy the software. The company will be limited by license to the number of users that can access the system, and upgrades are not automatic unless the insurance carrier purchases maintenance services as an additional cost of owning the software.

Perhaps, the easiest way to distinguish the difference between the traditional on-premises model and the cloud model is to compare the costs and functionality of renting a condominium and owning a house. Homeownership requires a significant investment, maintenance and upkeep, and as it ages, it might not be the right house 10 years down the road.

Compare to the person who rents a condo or an apartment. While there may not be a yard to play in and not a lot of room to grow, any upkeep is done by the landlord, leaking faucets and drains are fixed by someone else, and if the property is upgraded it is all just built into the rent.

Obviously, there are advantages and disadvantages to either alternative, just as there are advantages and disadvantages of how software is deployed.

For some carriers, security and privacy concerns are the main obstacles preventing them from a migration away from on-premises systems. Insurance carriers hold massive amounts of personal and business information that, if breached, would have detrimental effects on the company's public image and financial stability. And many larger companies can be targets for hackers and others who want to cause havoc.

But advances in network technology as well as better security infrastructure throughout the broad financial-services arena are mitigating many of the perceived risks of cloud based software compared to on-premises.

Cloud technology has the potential to become the "great equalizer" within the insurance industry. Small and mid-size companies are able to compete in a significantly larger arena with this type of enterprise system.

While the top-tier providers are largely choosing to remain internal network users for now, it won't be long before technology allows for increased data security within cloud enterprise systems. When security is no longer a hotly-debated issue, larger carriers will likely begin to implement cloud systems to reap the obvious benefits associated, and soon internal network systems will go the way of the dinosaur.

Special Reports /

The Great Equalizer: Cloud-Based Tech Allows Small Carriers to Think Big

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