The Year (and more) in Review

At the opposite end of the software product spectrum, suite vendors have been uncoupling (or at least loosely coupling) their major sub-systems so clients, should they wish, can install them on a component by component basis, ending up with either a full or partial suite implementation as meets their needs. Despite origination at opposite ends of a continuum, the best of breed and suite vendors essentially end up in the same place, the middle of the continuum, and offer clients the same options—a suite-based, or best of breed component-based implementation.

Like all things that take time, energy, and money, best of both happened for a good reason. Best of breed vendors realized that in order to compete in the lower tiers of the market they needed to have a full-function suite offering, because this is what sells best to smaller-sized carriers.  Best of breed vendors concluded that they need to compete in lower tiers because that is where most of the carriers are.

A quick analysis of the p&c carrier market shows that while there are between  400 and 500 buying entities in total, the large majority are smaller than $500 million in direct written premium.  While a multi-billion dollar carrier has traditionally purchased best of breed components, smaller carriers buy suites. Also, economically it's difficult to survive as a single product vendor. For the suite vendors, the drivers were at least twofold: clients that wanted the suite but wanted to implement by component; and the opportunity to compete for larger tier carriers.  So, the fact that vendors have met in the middle of the product continuum is a reflection of the fact that they are now competing on each other's marketing turf. Best of breed vendors are coming down-market and suite vendors are going up-market.

In terms of the other movements in the marketplace, in 2012 we dwelt at length in a previous article on the fact that larger, and indeed the largest, carriers are now buying rather than building core systems.  This trend started slowly in recent years and gained significant momentum in 2012 with not only very large carriers such as Nationwide and State Farm buying off-the-shelf software for their core books of business, but the final barrier to fall has been the adoption of policy administration systems by the top tier of companies.

For many years these carriers might buy third-party point solutions such as rating or document management solutions.  More recently they purchased claims or billing systems. In 2012 the trend to actively consider and execute the purchase of policy software, the most complex and mission critical core application, gained a real foothold with tier-one carriers.

My contention is that the key trends outlined above are symptoms of one overriding fact: the maturation and overall market dominance of the highly-configurable software vendors. In my opinion, 2012 has seen the logical conclusion of a market phenomenon, which started about 10 to 15 years ago with the entry into the market of a new breed of software vendor. 

Simplistically stated, prior to the late 1990s p&c insurance software vendors consisted of insurance people who decided to write software. They were steeped in the arcana and minutia of our industry and embedded this knowledge into poorly-architected, badly-written software, which was brittle and difficult to change. We now call these "legacy systems".

Toward the end of the last century a new class of vendor appeared. These vendors were software developers first and knew how to build flexible, well-architected, and robust solutions. They knew software and learned insurance, as opposed to their predecessors who knew insurance and tried to learn software.

The results have been remarkable. The new breed of vendors studied the toughest problems of our industry—product complexity, state variances, constant streams of compliance-driven maintenance—and concluded that the industry needed business logic, data structures, and web-based screen real estate that was rendered in rules rather than code.

Using modern languages and development studios they build robust toolkits that act as flexible and rapid application development environments. Using these development environments they then wrote starter systems that customers acquired and then completed to their own detailed requirements by using the development toolkit. In this way, carriers were able to acquire highly customized business applications without the cost and risk of building a bespoke system.

The entry of these vendors and their solutions into the market followed the general evolution of all such innovations with early adopters making limited and cautious bets. They were followed in turn by the fast followers; and the fast followers were pursued by the general marketplace that concluded in recent years that these vendors and their solutions were safe and superior. 

The last holdouts were the largest and most sophisticated carriers who are now getting on board as we noted above. For these carriers there were extra dimensions to the evaluation of these emerging vendors, which included: Just how sophisticated an application could be built with these development environments? How would these systems hold up under huge transaction and data storage and retrieval loads? And, oh, by the way, what do I do in the future with my 2,000-person IT shop and how do I overcome the cultural resistance to buy rather than build core systems? The answers are becoming apparent.  If State Farm can do it, so can any other U.S. p&c carrier.

These new vendors have transformed our marketplace and how carriers think about acquiring any core-application software. Surprisingly, this has not (yet) led to a significant shakeout in the vendor marketplace. The core system (either suite or policy system) vendor market has not rationalized despite the fact that a small number of vendors (the highly configurables) won the majority of the deals mentioned at the start of this article and have increased their proportion of completed deals each of the last several years.

Indeed, the number of core system vendors has remained around fifty for the past several years and although new entrants arrive each year, few if any vendors actually cease to exist, although many have been marginalized. But adaptation or extinction are the only available options and are underway although it may be too early to recognize this final step in the trend we have been discussing. What is clear is that all conditions necessary for a major evolutionary cycle in the vendor market are now in place and that the cycle is both healthy and inevitable.

Merry Christmas, Happy Holidays and best wishes for the New Year.

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. Follow Shop Talk on Twitter at https://twitter.com/ShopTalk2.

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