Part of my role here at Instec is help our clients and prospects understand what is going on, not only in the insurance industry, but also in the core systems space (policy admin, claims, and billing). There is a lot of confusion these days, mainly due to the presence of multiple strategic narratives competing against one another.
What is a Strategic Narrative?
Strategic narratives are the stories you tell key stakeholders (investors, customers, prospects, industry analysts, employees, and others) to explain your company, its background, its principles, and products. In short, they explain who you are, what you do, where are you going, and why you are unique. These narratives encapsulate your strategy in storytelling form, serving as a strategic blueprint. At any particular time, one or two narratives will dominate an industry. There will be a primary narrative, and then narratives that seek to supplant this main narrative.
Narratives can take three forms. First, narratives can be created by a company expounding on its vision and its view of the environment in which it competes. This form typically centers around the company’s product. Second, a narrative can be created based on a reaction to what is going on in the industry itself. This is a market-centric narrative. And third, a narrative can be a hybrid of the two, but predominantly lean toward one side or the other.
The Dominant Core Systems Narrative
For core systems in the insurance industry, the current dominant narrative centers around suites. It says that a single vendor can provide all three major components (policy admin, claims, and billing), so there is no need for insurers to select multiple vendors. If you have one point of contact, then integration, project management, and vendor management are much simpler. This narrative has its origins with the enterprise resource planning (ERP) vendors, back in the eighties and nineties. While valid at the time, the reality today is much different.
The suite narrative has three main problems which are significant. First, the very notion of what components make up a suite is changing. It used to be policy, claims, and billing. Now some definitions also include portals, underwriting, and data analytics. In addition, some modules are no longer as important as they were (think claims and the TPA market) due to changes in the insurance industry. Second, not all components of suite vendors are created equal. There is no such thing as a suite consisting of best of breed components. At least one component is always weaker than the others. We see it a lot in the policy space, particularly when the insurer gets around to implementing commercial products on the admitted side. Unless the product is really simple, the suite vendors often get stuck. Which leads us to the third point. Suites are usually implemented under the guise of a modernization project which is short hand for a mega project.
The suite projects we see are multi-year multi-million dollar efforts that have no end in sight. System integrators and suite vendors make out, while the insurers often must sacrifice product uniqueness and market opportunities to make all the components work. The multi-year aspect of these projects is a particular problem because we are now at a point where external events are moving at a faster pace than carriers and insurers can move internally. This means, in many cases, that products designed and built using suite vendors, in the midst of a modernization project, are obsolete before they are launched. (Cyber, which will likely become its own line of business rather than a general liability coverage, is a good example.)
A Market-Centric Narrative
At Instec, our narrative is based on what we see happening in the insurance industry, an environment we call the Darwinian Economy. It’s a market in which freely-available capital and technology are lowering barriers to entry and making the insurance industry one of cutthroat competition at a breakneck pace.
Consider alternative capacity in reinsurance, for example, which is now 20% of the overall market. With $36.4 trillion in pension fund assets under management alone, there is a global oversupply of money which is not going away anytime soon.
On the technology side, you can now tap into enterprise-class infrastructure without deploying a single new server. Microsoft, for example, has built cloud data centers around the world at a cost of half a billion dollars each, packing the equivalent of ten data centers into a 40-foot shipping container.
Together, these twin forces of technology and money are lowering barriers to entry for insurance companies, resulting in new entrants experimenting with new business models, new ways of distribution, new technologies, and new products.
The result of the Darwinian Economy is that it now places a premium on time to value – a combination of speed to market, alignment of initial investment with opportunity size, and reliability of implementation. Insurers are suffering from project fatigue and can no longer spend $30-50 million in software and service fees only to see the project fail to deliver value.
Since we crafted our narrative in 2015, we see many of our competitors either overtly copying or weaving it into their narratives as an “aha” moment. We see a number of suite vendors focusing on the program space with little expertise or knowledge of how the space works. We see other vendors, having sold big cumbersome projects that have delivered little or no value, suddenly concerned about the future of insurance. Other vendors have acquired smaller players and are now going to market with a system portfolio approach, a collection of unintegrated products that contradicts the suite proposition, and carries the risk of cannibalizing their main product line.
The Market Will Decide
Over time, more of the insurance business will be like the program business, requiring a solution that is the opposite of suites. Software as a Service (SaaS)-based platforms that are priced competitively and quickly deployed with minimal services will dominate. These SaaS platforms will consist of many components, some built by the vendor, others provided by partners as part of an ecosystem. Eventually this will result in vendors, such as Instec, offering a true “best of breed suite” of cloud-based applications priced competitively. Over the next couple of years there will be a clash in the market, as the two narratives collide. Although product-centric narratives will evolve, realities on the ground will ultimately replace the suite narrative with a market-driven narrative, and for many in the industry who are tired of failed projects, this change can’t come soon enough.
Kevin Mason has worked in many aspects of software development since 1981, including roles as product strategist, software development methodologist, project manager, and technology architect for companies such as Cincinnati Bell Information Systems, SHL Systemhouse (now part of EDS), AGENCY.COM, and GENECA. He joined Instec in 2008 and is responsible for development associated with all products. He holds a BA in Political Science, from the University of Iowa and an AS in Computer Science.