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In the past, the insurance industry met its technology needs by working with vendors that were influenced by, and took their product cues from, the industry itself.

The insurance industry was bogged down with cumbersome legacy architectures. Software from traditional vendors offered, for the most part, minor variations and marginally incremental change in processing capabilities. There was not much true innovation being introduced into the industry.

"Insurers and vendors were not paying attention to new technologies that had applicability to the insurance industry," he says. "Traditional vendors were merged out of existence, and enterprise software firms grew into behemoth companies, not vertically focused. Insurance, not an industry to embrace change, quickly became a laggard industry."

But the industry is witnessing a new breed of insurance technology providers that now offer insurers a way to utilize technology that finally fulfills the innovation promises of the past. This new wave of companies are led by entrepreneurs who understand contemporary technologies, have deep roots within the major technology innovation centers (Silicon Valley, Seattle, Boston), and have the vision to see how the application of these new technologies and approaches can benefit the insurance industry.

This new wave of companies is changing industry dynamics by applying contemporary technologies and approaches to solve conventional and long-standing industry issues.

TECHNOLOGY INFLUENCES

This new breed of technology vendor utilizes tools and approaches such as service-oriented architecture; Software-as-a-Service; search, pattern recognition and semantic technologies; advanced predictive analytics; open source; and Web services, just to name a few. While these technologies have proven their value and sustainability in other industries, the insurance industry is just starting to take advantage of their capabilities.

For carriers, the real power of the Internet is as a driver for complex business models. Web-services frameworks integrate all methods of processing from policy administration to claims management to business intelligence. In 2005, a study from the San Jose, Calif.- and Paris-based business intelligence software company Business Objects, titled "Business Intelligence: Insight for the Insurance Industry," stated that many carriers had more than a dozen different policy administration systems. AXA Financial has predicted that policy management costs will drop by 98 percent due to use of the internet.

The uses of integrated open-source technologies enable a high degree of flexibility, speed and cost-effectiveness. Service-oriented architectures, or SOAs, offer carriers the ability to surround or replace legacy environments with flexible frameworks, which can open up new sources of data.

Acquiring software through the application delivery model called Software as a Service, or SaaS, can allow companies access to the latest technology without the capital or information-technology resources traditional software purchases require.

Says Kaiser, "It used to take expensive enterprise software effectively integrated into existing legacy systems. It was too hard and too costly for the industry to pursue. Now with open source architecture and SaaS, the idea of externally developed software allows companies to move forward into the 21st century."

There are three relatively young insurance technology companies that are perfecting this new vendor approach. Full Capture Solutions, Guidewire Software and FirstBest Systems are all combining technical savvy with industry expertise and the support of technology venture capital firms. Each company employs contemporary technologies and is heavily influenced by Silicon Valley/Seattle/Route 128 business models.

GROUNDED IN INSURANCE

Full Capture Solutions develops predictive analytic software exclusively for the insurance industry. The company is committed to an architecture that leverages open-source technologies and SaaS delivery models for flexibility and economies of scale. Their analytics are based upon technologies such as advanced pattern recognition, linguistic analysis, and sophisticated ontologies and semantic models.

Recognizing the transformative role that predictive analytics plays in providing critical business intelligence for other industries, Stephen Holcomb, Founder and CEO of Full Capture Solutions, seized an opportunity to use his depth of knowledge in insurance to adapt predictive analytic technology to the industry's needs.

Kaiser notes that "with Full Capture you have the Silicon Valley mentality--sense of urgency, competitive awareness and quick development--within former insurance industry executives. Stephen and his team have the credibility, industry knowledge and established relationships that allow them to penetrate the industry as credible technology partners."

"During my career in the insurance industry, I was a bit of a maverick, constantly searching for new ways to improve insurance company performance through innovation. I had the good fortune to develop valuable relationships within the venture capital and private equity world, which exposed me to innovative technologies being used effectively in other industries" says Holcomb. "It was obvious that these technologies, if deployed practically, would have an enormous impact on the insurance industry. Full Capture was launched to match these contemporary technologies to the unique industry needs to help pull the insurance industry forward."

"The other issue we needed to reinvent was the delivery model. From a carrier perspective, the traditional process of acquiring software, no matter how good it was, involved a major cost and hassle. As a former executive, I understood how backlogged corporate IT departments can get and the tedious process of getting new IT projects approved at the enterprise level. We designed all of our software to be delivered via a Software-as-a-Service model, which virtually eliminates the impediments found in the traditional software acquisition process."

GROUNDED IN TECHNOLOGY

San Mateo, Calif.-based Guidewire Software develops Web-based claims, billing and underwriting systems. "Guidewire took the reverse approach, assembling incredible technology talent and peppering that talent with insurance expertise with the specific intent of penetrating an industry in need of innovative solutions," said Kaiser.

A successful and rapidly growing company, Guidewire embraced Web technology in a Silicon Valley management approach. Six years ago, the company started with a "complete greenfield design," no legacy issues and initially developed systems based on Simple Object Access Protocol, or SOAP, making it easy to externally integrate interfaces. Guidewire was ahead of the technology curve as SOAP is now the dominant standard.

"We bring an agile methodology to the industry and that's new. There has been a long-term trend in retiring legacy systems, and we have provided carriers a path from current legacy systems into contemporary technology," says John Seybold, co-founder and chief technology officer of Guidewire.

The term "legacy systems" goes beyond the physical equipment and software applications. There is a real shortage of people who understand the customized applications that the industry has been using over the past generation. The engineers who tailored those applications for specific purposes are nearing retirement, or have retired, and the knowledge has not been passed to younger colleagues.

"For carriers that traditionally build in-house, the stakes have gone up. Adjusters use modern Web-based technology at home to read their e-mail and shop online, so they know what modern systems can do," explains Seybold. "Complicated technology like AJAX (used for interactive Web applications), and demands for richer functionality, are making it harder for internal IT and other vendors to deliver on carrier needs. Guidewire is a software company with deep expertise in developing and delivering modern applications quickly."

"Guidewire understands the technology needs and opportunities of the industry and is building upon that expertise," adds Kaiser. "They found the early adopters in the industry and built the business from there. The approach was text book in Silicon Valley, but unique in the insurance industry."

ADOPTING A HYBRID MODEL

A new entrant to insurance technology, FirstBest Systems was formed in 2006 by three technology executives with an impressive track record. They founded a company that was a leader in Java-based component software for enterprise applications, and sold it to BEA Systems in 1999 for $160 million.

After serving in executive positions at BEA, the team set its sights on the insurance industry. FirstBest seized the opportunity to leverage the need for consistent underwriting by creating a new product category, an underwriting management system, which captures underwriter knowledge as well as drives new process consistencies.

"FirstBest is somewhat of a hybrid of the Full Capture and Guidewire approaches," notes Kaiser. "The founders are tech guys that investigated process-heavy verticals to apply new applications that could solve an industry problem. The technology industry expertise and the Silicon Valley mentality have made the transition to the insurance industry relatively seamless."

"When we spoke to insurance executives, they knew exactly what they needed for a more efficient underwriting process, but did not believe it was possible," explains John Belizaire, CEO and one of three co-founders, "We offer carriers the technology expertise and development flexibility to take a different approach. Insurance executives are beginning to realize the new vendors are able to give them what they need and do it quickly. We're changing the game and that's benefiting the industry."

For the past few decades, the industry relied on outdated technologies--not only internally developed legacy systems but software offerings from traditional vendors. That technological stagnation eroded the competitive position of individual insurance companies and the industry as a whole.

The arrival of this new wave of technology providers serving the insurance industry could signal the adaptation and delivery of innovative technologies and Silicon Valley influences for use in the insurance industry.

"In some ways we've come full circle to the IBM mainframe days where everyone had dumb terminals on their desks. SaaS provides an upgraded interface with increased computer power one could only dream about in the 1970s," says Kaiser.

"Now the idea of externally developed software allows insurance companies to move forward in more efficient processes and the result is 'found money' that older systems and applications were not capable of uncovering," he says. "That improves the bottom line, competitiveness and technology savvy and allows the industry to remain viable in a global economy."

JOHN ZAGULA is a partner at Ignition Partners, a leading technology venture capital firm based in Bellevue, Wash., and co-author of the "The Marketing Playbook."

ALSO: READ THE OTHER PARTS TO THE INNOVATION SHOWCASE ISSUE.

September 15, 2007

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