Over the last two years, we have talked a lot about the Darwinian Economy, and how insurers are struggling with the twin disruptive forces of inexpensive capital and virtually free technology. Together, these forces have lowered barriers to entry, forcing insurers to respond to ruthless competition and rapid change. Core system vendors are also struggling, as the products and services they offer are no longer what insurers need. The issue is that many of these products and services were created by a business model built in the late nineties and first decade of the 21st century. As such, many core systems’ vendor models have “bugs” in them that are increasingly incapable of functioning in the Darwinian Economy. There are five that we see constantly.
Lift and Shift
The first bug in the system is Lift and Shift. As the Darwinian Economy took hold, and competition increased, insurers started demanding lower-cost, cloud-based, Software as a Service (SaaS) solutions. In response, many vendors simply “lifted” their on-premises enterprise solutions and “shifted” them to the cloud, running on Infrastructure as a Service. These systems were never really designed with the cloud in mind, so their architectures couldn’t incorporate more efficient technologies into the solution stack as cloud technology advanced.
A couple of years ago, Instec avoided this by rearchitecting our technology layer in .NET using Windows Communication Foundation (WCF), which Microsoft has since enhanced to work with Microsoft Cloud. Because of this decision, we can rapidly add new capabilities to our solution stack, including new authentication and identity solutions.
Perpetual to Term
The second bug we see quite a bit is perpetual licensing. Core system vendors with older business models essentially sold their code as a toolkit for a one-time fee plus maintenance. This lasted perpetually. Unfortunately, it locked insurers into a single version of the solution, unless they entered into a costly upgrade path. To avoid this, insurers started asking for term licenses covering a fixed time period, at the end of which they could renew and upgrade to the latest version of software. This new demand conflicted with many established models.
At Instec, we have always used term licenses and have always made sure we upgraded our clients to the latest version of software. Our “no legacy” mantra and experience with term licenses have made this transition in the marketplace painless for us, and for our customers.
Big Bang Theory
Many core system solutions rely on what we call the Big Bang Theory. It’s a euphemism for a very large project requiring expensive consulting and systems integration resources. In fact, it’s not unusual to see entire floors full of consultants when we visit insurers. These so-called “transformation projects” are indeed transforming insurers – into also rans. Caught up in multi-year projects (we saw one timeline that ran six years), insurers have spent millions of dollars with nothing to show for it except a backlog of product rollouts and refreshes that remain unfulfilled. Insurers could get away with that 15 years ago, but not today, as new more nimble competitors are hovering to grab market share. At Instec, we embrace Agile techniques and have rolled out 50-state commercial multi-line products in as little as six weeks.
Another bug has been the ability of insurers to modify vendor source code. A main selling point of build- to-order suites, it unfortunately has the side effect of locking insurers into a specific version. We talk to many insurers who are on version x of some software system, while the cloud-ready version of that same software is version y. The upgrade path to the cloud requires them to hire more consultants to recreate the customizations that were built for them in version x. Needless to say, this takes more time, costs more money, and delays new product initiatives.
At Instec, we do not allow clients to modify the core system. They can customize rates, rules, and forms using our self-configuration features, while our architecture isolates the changes and makes them transferrable to new versions. As such, there is no lock in.
As more and more of these bugs have emerged, many core system vendors have turned to acquisitions to help them address their shortcomings. We see this taking two forms. First, some vendors change their ownership structure, either by going public or being acquired by private equity firms. This usually makes things worse, as both ownership models want immediate payback on their investment and have little tolerance for major changes to the business model. Second, some core system vendors acquire other vendors, either to incorporate into their portfolios or to cover emerging gaps. The problem with this approach is twofold. First, many of the acquired vendors have their own bugs and, second, the lack of integration between the acquired products defeats the purpose of the suite. Privately held, Instec is building solutions to be sustainable for the long term, while being profitable in the short term.
With insurers struggling to cope with a more competitive market, it makes sense to closely examine core system vendor solutions and business models for these bugs. Insurers, more than ever, need to focus on their businesses without having to worry about vendor issues. In the Darwinian Economy, this will be a key to survival.
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.