Balance Shifts in Build vs. Buy
Editor's note: In December, Celent Communications LLC published
"A Global View of Policy Administration Systems: The 2007 Overview," co-authored by insurance industry technology analysts Chad Hersh and Catherine Stagg-Macey. In it, the analysts underscore
the propensity for European technology managers to purchase systems that require a minimum of integration. In the United States, however, managers are more likely to buy best-of-breed systems and worry about integration issues later. In a January telephone interview with Stagg-Macey, Managing Editor Cyril Tuohy probed further into the nature of the purchasing habits of U.S. insurance technology managers.
Q: Is the insurance industry more open to alternatives to IBM mainframe-based systems?
Stagg-Macey: That's correct, especially in the property/casualty area. With the volumes in life and health, they are more likely to stick with older mainframe technologies for two reasons: One is the volume they have to deal with and also the code. So much of the logic of the long-tail business is hard-coded, and it's just harder for them to move off. So what you see is more of the activity within the property/casualty area anyway in this kind of area, and as a result, if you can throw out your old system, you might as well start looking at new technologies and you don't have the constraints around volumes that the life/health industry has had.
Q: Are there some pitfalls to moving to a more componentized system for a U.S. carrier?
Stagg-Macey: The United States compared to Europe has always preferred best-of-breed components versus end-to-end systems. The U.S. view is they'd rather have the trade-off between best of functionality and then deal with the integration issues that come with taking different components and trying to stick them together. That's less of an issue than it has been. With the more modern solutions, using services-oriented architecture, and having Web services exposed does make things a little easier to integrate. It's interesting because it's quite a different view. It's almost like a cultural thing.
Q: The United States is a little bit less concerned with regulatory issues, which is one of the big differentiators between the United States and Europe. Why is that?
Stagg-Macey: In the U.S. they've had to deal with Sarbanes-Oxley for the past four or five years, and for the most part it seems to be largely done and they are on top of that. And now they are dealing with the incremental changes to state regulations and filings. For Europe, their next thing is Solvency II, which unless U.S. carriers have business in Europe, they don't need to worry about. Sarbanes-Oxley has preoccupied companies and taken up budgets in the United States for the last six years. In Europe they haven't had that distraction, but we've now met our maker in the form of Solvency II. It's not that regulatory compliance will ever fall off; it's that spending will shift to whatever's going on in the market.
Q: So, the big carriers are loosening up a little bit. You mention Windows and Linux being fairly well positioned to capture some of that from IBM or the old platforms. Are there any other platforms that carriers are looking at, or is it really just Windows and Linux?
Stagg-Macey: Yes, it is pretty much Windows and Linux. It's largely about cost and about the vendors having proved themselves with the technologies--that you can scale, that it's reliable, that it performs. I still think it's an interest area for midsize carriers. The smaller midsize insurers and the startup specialty lines carriers are more open to move. Typically, they've been running (IBM) A/S400. Now it's like, well, what about Unix? And if you're looking at Unix, why don't we look at Windows and Linux because there are reputable vendor solutions out there that will run on that and on those platforms.
Q: Does being more open to these other platforms alter the way they (the carriers) look at risk, or does it significantly change their approach to risk management at all?
Stagg-Macey: No, I think it's an indicator of the insurance industry having accepted what other financial services industries have accepted some time ago: That these are reliable platforms. It's just about if the slowest guy in the class is catching on to what everyone else has got. If the London Stock exchange and the New York Stock Exchange can run on NT and .Net, I think it's scalable. But insurers, being risk averse, just don't want to be on the bleeding edge, which is understandable, I suppose.
Q: Microsoft over the past four or five years has made a very big commitment to insurance, whether it's through their systems or lining up vendors on their side. Has Microsoft made a convincing case for itself?
Stagg-Macey: Yes. I think Microsoft and some of the other vendors like Oracle and SAP have cottoned onto the value of verticalizing the business. Microsoft's answer is the insurance value chain, taking Microsoft partners and preintegrating their components. ... So, to answer your question, they're not standing still. They are going to continue to invest, and you can see that in the way they are continuing to expand their teams at a global level. There's a Microsoft insurance team for the United States, and for the Middle East and Africa, and for Asia. I think that just goes to show the level of commitment to the industry because they can make money out of it.
Q: So who is Microsoft taking market share from in the insurance area?
Stagg-Macey: To some extent, they are winning the build-versus-buy discussion, which still goes on in parts of the world. People have decided that buying an off-the-shelf package is good enough for a number of reasons, and there are a number of Microsoft technology stack-based solutions out there that look good.Who are they winning it from in terms of competition? Probably IBM and CSC. The '80s and '90s were all about heavy IBM hardware, and if you went with IBM hardware, you had to go with proprietary software and were stuck in a corner. Now there are alternatives, not to say that they are necessarily all better, but there's just more choice.
Q: So where does Microsoft go from here now that people have seen that its platforms are adequate?
Stagg-Macey: They can't be complacent about their position. Oracle or SAP (is) going to start acquiring assets, which will compete. There are probably two Indian vendors as well. If I were Microsoft, I'd focus more on getting the message out to midsize insurers that there are solutions out there that will work in a variety of product lines, which will scale.
Q: Clearly, they've made their case to the Tier-1 folks?
Stagg-Macey: The Tier-1s tend to have bigger IT departments and more cohesive IT governance strategies: We are IBM, these are our buying partners, this is our technology stack, whatever. Midsize is a more open game. They have less organization. They are more open to being sold to going along with new technology.
Q: You talk about the market for policy administration systems remaining strong in 2008 and 2009. How much beyond that are we talking about?
Stagg-Macey: When we initially did the basis for the report, it was back in late summer and before the subprime global recession discussion had really featured. Certainly, Chad and I have seen unprecedented levels of requests for information out there in the market. The fundamentals are there to drive the replacement. We were talking about a three-year period of going out in the market and making a decision, by which time those open to replacing will have replaced and there will be some tailing off of that market. We're going to have to revise some of our figures, and it's going to be downward.
Q: But subprime has hit more banks than anything else ?
Stagg-Macey: It's less the subprime than it is more the fears of an overall economic recession. If they've selected a vendor, they probably are going to go ahead with it. I wouldn't be surprised that if they got approval to start looking in 2008, that the board's now put a hold on that.
Q: You talk about the bulk of the growth coming from commercial and specialty lines. Are there some systems out there that are better than others?
Stagg-Macey: It's an interesting subset of the market. They seem to have a predominance of homegrown solutions in this market, and this is based on the work we've done with specialty lines. It's not surprising.
The complexity surrounding large commercial risks has historically meant that it's easier to build your own, and a lot of insurers coming to us now in this line of business are saying, "It's come to the natural end of its lifecycle, should we build versus buy," because they've never considered buying off the shelf and there are a number of solutions coming out of the London market capable of doing that. I think that's quite different from when they last looked seven or eight years ago when it was CSC or EDS or bust.
CYRIL TUOHY is managing editor of Risk & Insurance®.
March 1, 2008
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