Cloud Considerations in Insurance: Critical Factors for Adoption & Success

Cloud is the ultimate expression of technology’s promise to drive efficiency and accelerate the speed of doing business, all while reducing costs. Each new technical paradigm, iteration, and transformation must deliver on this promise, otherwise it’s pointless.

(Image credit: Michael & Diane Weidner/Unsplash.)

Technology’s promise is its ability to drive efficiency and accelerate the speed of doing business, all while reducing costs. Each new technical paradigm, iteration, and transformation must deliver on this promise, otherwise it’s pointless.

The Cloud is the ultimate expression of that promise. It represents a virtualized realm of continuously evolving technologies, full-stack managed services, and automation. It provides the tools necessary to confront a dynamic world that’s also changing fast.

That’s the idea, anyway. But for insurers, it’s more complex.

Navigating the complexity of running an insurance business, while confronting the myriad headwinds buffeting the industry, requires an agile and adaptive response to regulatory shifts, market dynamics, and evolving consumer expectations.

These challenges highlight the limitations ‌of legacy technology and underscore the imperative to harness adaptive cloud services. However, the way insurers approach cloud adoption will be pivotal to their successful transformation.

Transformation Triggers

Today, the insurance sector has a fairly robust utilization of cloud services. Despite continuing to run systems on premises, a significant portion of their technical footprint is now cloud-based.

There are myriad triggers for this. Out-of-date hardware that requires an upgrade to take advantage of software that delivers the latest performance and security improvements. Then there’s the difficulty of attracting technical talent unless you’re on modern technology, and the increasing number of software suppliers who are unwilling or unable to maintain their offerings unless they are cloud-based.

In some instances, software vendors are forcing insurers into the cloud as they phase out their existing platforms. Finally, there’s the ever-present concern around security and compliance and the belief that a cloud-based infrastructure approach will lead to a more secure environment. Or, at the very least, offer ways to offload some of the risk to third parties.

Misconceptions

Underpinning these triggers, is the ease at which cloud services can be procured. However, just because something is easy to buy, doesn’t make it simple to use. It’s here that the cloud’s promise can be very different from its ‌‌reality.

Consider cost. Moving from a capitalized and depreciated footprint that costs next to nothing, to a costly cloud consumption model often brings financial surprises. Especially when you don’t have the experience to manage it. Service levels can also take a hit. Cloud providers aren’t always as responsive a services entity as an insurer’s own IT department.

There’s also a common misconception that core system multi-tenancy inherently offers superior benefits compared to single-tenancy. True multi-tenancy for complex vertical insurance core business processes doesn’t really exist.

The regulatory, resiliency, and security issues associated with multi-tenancy are nearly insurmountable. When a multi-tenant system goes down, it affects all tenants simultaneously.

The economic benefits are questionable. Savings are primarily achieved by reducing the need for labor, not from reducing network or compute costs, which are continually decreasing. If I’m going to invest, I’d rather invest in automation to streamline operations, not in adding complexity to the technology

Managing Complexity and Risk

What happens after the system goes live is another area of confusion and concern. The assumption on the insurer’s part is they’ll have the same level of flexibility they enjoyed with their on-premises system. Something they need because their business requirements are always evolving. It’s the reason carriers invest heavily in IT, not just for maintenance but to enact daily tweaks and configurations.

But, what happens when a software vendor or SaaS provider takes on the operational risk? How do you touch that system? Every time an insurer wants to make a change, they’re inflicting an incremental risk on the platform operator, and risk is money in this industry. How does an insurer do that without incurring a cost every time they want to tweak something?

In contrast, when the platform operator is responsible for operational risk, we must consider how to protect ourselves against the continuous flow of changes. We have to judge the combination of system capabilities and economic and contractual arrangements that allows adaptivity to occur without overly constraining our customers.

When EIS exclusively sold software, these issues weren’t on our radar. We’d hand over the software to the insurer who’d operate it within their own infrastructure. However, now that we’re providing a cloud-based enterprise SaaS core platform, we’re confronted with a plethora of complex considerations.

These considerations include determining how best to configure the system so it can be modified, changed, and evolved by the insurer. We must clearly define the contractual arrangement and the scope of the service offered, including our role and the insurer’s role. All of this requires thorough thought, deliberation, and planning.

If it’s not talked through, the insurer could be severely constrained and won’t achieve the speed and flexibility promised. They can find themselves moving to the cloud and becoming even more constrained than they were before because someone else is operating the system and charging them to keep it operational.

In this instance, no change can be the most secure position for the platform operator, which creates an immediate asymmetry of interests. So, how do you solve it?

Recommendations

For EIS, a key component of the solution lies in the underlying platform, which must be designed to allow both the insurer and their customers to interact with the system, without hindering the vendor’s ability to maintain business as usual.

Achieving this requires a robust set of APIs that can perform effectively as the system scales. This level of adaptability can’t be retrofitted after the system has been built. It must be integrated from the outset. 

Additionally, implementing robust processes, establishing procedures, and a clearly articulated operating model is essential. Further, the contractual framework should be structured to provide the necessary flexibility for insurers while also safeguarding our interests.

This not only includes system modifications and functionalities but also security concerns. Insurers often want to integrate new solutions with their underlying systems, but that integration can compromise both security and system integrity.

Insurers have already navigated the shift from legacy to modern legacy systems, and don’t want to fall into the same trap a third time. To prevent this, they should pay close attention to several aspects of the solutions they’re considering.

It’s a totally new way of thinking about the total cost of ownership. This isn’t just the sum total of the underlying cloud cost or the application of the software with some margin thrown in. This cost may look reasonable upfront, but when you consider the cost of change, you get the full picture. The cost of change is the big cost that’s going to come down the line if it’s not confronted upfront in the build and design.

When selecting a platform, SaaS or otherwise, insurers should avoid viewing it as a simple, self-managing solution. It’s imperative to make sure it offers enough flexibility, APIs, DevOps capabilities, and configuration tooling to make the changes needed without relying on the vendor.

If the ecosystem is too prescriptive, it’ll not only limit the insurer’s existing development strategy, the use of microservices, and the third parties they can integrate with, but also their plans to innovate and grow the business in anticipation of future market dynamics. Such restrictions can significantly diminish your control over the platform, impacting your ability to adapt and innovate effectively.

It’s crucial to maintain flexibility within the platform to allow for ongoing development and strategic adjustments that align with evolving market conditions and technological advancements.

A Shifting Insurance Market Requires Shifting Priorities in 2024

By Michael Dwyer // Mike Dwyer brings 20 years of technical, architectural, and managerial experience in the insurance and telecommunications industries to his roles at EIS. Mike manages an engineering organization of more than 200 people in the United States and abroad, and plays a key role in designing, implementing, and successfully deploying the company’s insurance software solutions to customers around the globe. Prior to joining EIS, Mike held a variety of engineering architecture and management roles for established and start-up companies, including Sprint Corp., Interwave Communications, and Motorola. Mike holds an Honors bachelor’s of electrical and micro-electronic engineering from the University College Cork in Ireland.

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