4 Drivers Behind the Increasing Popularity of Alternative IT Delivery Models

Most insurance IT executives go through the vendor selection process for one or, if they're unlucky, maybe two or three core systems replacement projects in their careers. By that measure, I must seem to be incredibly unlucky, since I have spent the past eight years evaluating core systems -- mostly policy administration systems -- for insurers. Of course, in my case, it's an occupational hazard, and after so many of these projects (and years of covering the policy administration space as an analyst), I've learned a few things.

First, many things have changed in the past few years: underlying technologies (from COBOL to Java and .NET, from code to rules and tools, from APIs to web services), the vendors (Remember Castek, ePolicy, AdminServer, SteelCard, Inspire, Allenbrook and others? They've all been acquired), and even the fragmentation of the market (There are at least 30 percent more policy administration system vendors now than there were in 2005.), the functionality and maturity of modern systems, and much more. One thing in particular that hadn't changed until recently, however, was that few insurers chose to have their systems provided via an alternative delivery method.

What's an alternative delivery method? It's a fancy way of saying that a system is delivered in some way shape or form that is not a traditional, on-premise solution running inside a carrier's own four walls. This includes software as a service (SaaS), cloud-based solutions, hosted/application service provider (ASP) offerings, and even hybrids of these options plus an on-site component. To be fair, some vendors have offered hosted solutions for years (especially providers that handle business process outsourcing or third-party administration for part of an insurer's needs, with the carrier retaining certain functions). But recently, something has changed.

Piqued Interest

There has been greatly intensified interest in all of these options, with a number of well-publicized projects going live on SaaS offerings, and the majority of the vendor selection projects now seriously considering hosted or SaaS offerings. As some vendors ready their systems for use in the cloud -- in some cases with the application running in the cloud but the data staying inside the insurer's data center -- expect growth in the adoption of it as well.

Why the sudden interest in these technologies? There are quite a few contributing factors, but the main ones are:

• The Economy. While a SaaS offering may cost more in the long run (though this is debatable), it almost certainly will cost less in the short run due to the lack of customization, shorter implementation times, a reduction in hardware needs internally, and no large up-front license costs, as SaaS is offered on a subscription basis. This looks pretty appealing when you need a new system but don't have a lot of budget to work with. Some of these benefits, such as hardware cost reductions, also are inherent in cloud and ASP options.
• Security/Reliability. One of the biggest hurdles to adoption of these technologies has been perceived issues related to security and reliability. While the reliability and resources of any particular partner should be carefully scrutinized, some hosted services are more resilient than companies' own systems. For example, Amazon Web Services (Amazon's cloud services) recently brushed off a large-scale attack from WikiLeaks supporters where others (e.g., MasterCard, Visa) succumbed to the same attack. Add to that remarkable redundancy, access from anywhere and other features, and it turns out that Amazon spending hundreds of millions (if not billions) of dollars to build a massive, reliable, secure infrastructure is more effective than most insurers' miniscule budgets for this. Oh, and access to essentially unlimited computing power for bursts of demand sure is nice, too.
• Maturity. Alternative delivery methods are light-years ahead of where they were just a few years ago. While core insurance systems have a long way to go to best take advantage of emerging delivery methods, expect that to happen sooner rather than later.
• If They Build It, We Will Come. Insurers don't generally push vendors into new technology, but vendors often do push insurers into newer technology -- even if carriers really are not comfortable with it. Plus, it's usually a good bet that when insurance system bellwethers like CSC announce cloud initiatives to complement other hosted offerings, it's time to start looking at these technologies as going mainstream.

Since most insurers evaluate core systems infrequently, it takes a while for them to be comfortable with new approaches. But don't be surprised if you find yourself considering an alternative delivery method in your next enterprise software decision.

Chad Hersh is director of research and advisory firm Novarica's insurance practice.