Insurers Likely to Develop Hybrid Clouds

Cloud computing is poised to become one of the fundamental shifts in enterprise computing, similar to the PC revolution in the 1980s. At its most basic, cloud computing involves the sharing of computing resources -- servers, storage, network hardware, applications and services -- so that they can be used more efficiently. Instead of dedicating servers and storage devices to a particular application, where they may sit idle, cloud computing allows those resources to be used to run other applications.

Central to cloud computing is the ability to share resources dynamically. If an application receives a sudden spike in demand, additional servers may be allocated to maintain smooth operations -- all without manual intervention by IT. Similarly, cloud computing allows services such as security and storage, or even entire applications, to be shared.

The "cloud" in cloud computing comes from the fact that resource sharing often is achieved over the Internet. Cloud providers such as Amazon, Google and Microsoft offer computing resources on a rental basis, accessible via the web. Other providers, such as Salesforce, let companies subscribe to an application run remotely and accessed via the Internet.

Cloud computing is big business. Microsoft CEO Steve Ballmer declared, "We're all in" when referring to Microsoft's cloud strategy. Salesforce -- a pioneering cloud software provider -- has a market cap of around $20 billion. And IBM CEO and president Sam Palmisano said at the vendor's annual investor meeting that he expects the company to generate $7 billion in revenue related to cloud computing by 2015. But what does this mean for insurance carriers?

Two things are certain: Cloud computing is so big that it can't be ignored; at the same time, however, insurance carriers have specific needs that make the one-size-fits-all approach of cloud providers a difficult match.

A Hybrid Approach

What this likely means is that existing insurance data centers will evolve into "hybrid" clouds in which core applications such as policy management remain on-premises while becoming increasingly connected to systems running in the cloud that provide various services. The diagram on the next page illustrates this transition.

This is not only because of regulatory requirements but also because of practical considerations. Much of an insurance carrier's competitive advantage comes from its back-office operations -- for example, its rating algorithms and underwriting processes. The systems that manage these operations are highly customized by necessity and therefore cannot simply be rented from a third-party provider.

In the emerging interconnected world, strategic on-premises systems will grow increasingly dependent on cloud services. Take a concrete example -- policy rating. Systems today often rely on offline batch input of rating data. This is inefficient, error-prone and, most important, not in real time. New, instantaneous rating engines based on analytical modeling are quickly taking hold as an important source of competitive differentiation with carriers. The analytical models that underpin these rating engines incorporate external data available as cloud services. As these rating engines become more prevalent, the boundaries between the on-premises data center and the cloud -- even for core business systems -- will blur.

Managing Cloud Integration

Perhaps ironically, innovations brought by cloud computing will compound a challenge long familiar to insurance IT: systems integration. As more core systems leverage cloud services, there will be an increasing need to create, manage and maintain these connections in an efficient and cost-effective manner.

A key technology for managing cloud integration will be service-oriented architecture, or SOA. SOA describes a set of technologies and a specific approach to system design that facilitate integration. SOA is about designing and building systems as a set of connected services. One common analogy used to describe SOA is Lego blocks: applications are built by assembling individual pieces. SOA will be the glue that ties cloud services together.

Success in adopting cloud computing in the data center will be built on incremental change. Insurance technology leaders need to start planning now to migrate their systems to take advantage of new services offered by the cloud. A first step in this process is to adopt SOA when developing new back-office systems. Legacy systems will also need to be brought into the world of cloud services. Unfortunately, when it comes to legacy systems, there is no magic bullet for doing so. For these systems, a cost-benefit analysis will need to be done to determine if retrofitting or replacement is the best strategy.

Cloud computing will fundamentally alter the dynamics of the data center. How effectively insurers understand, embrace and innovate using cloud services will significantly determine how well they meet their strategic business objectives.

About the Author: Jim Marino is a principal at Metaform Systems, a San Francisco-based technology consultant and integrator. Marino advises clients on technology strategy and architecture. He can be contacted at [email protected].