The Game Has Changed. Why Haven’t Insurance Companies Adjusted?

I find it somewhat amusing and somewhat frustrating that insurers are still trying to solve their business problems with new technologies using antiquated methods. It is analogous to trying to use a 1950’s football strategy of just giving it to the running back and banging it up field. They seem to assume that because the players have newer uniforms and better equipment, the old playbook will still work. Other industries have realized that the “west coast offense” is much better, but insurance fails to recognize this. The West Coast offense was first used by the San Fransisco 49’s football team to utilize short passes to replace the running game to control the ball in the mid 1980s. It totally changed the approach to winning football games. Insurers need to realize that the old playbook that they continue to use will only net a few yards with a lot of effort. Newer playbooks exist that allow carriers to move forward at 20, 30 or more yards a clip. It’s time to rethink how to attack your IT problems.

Several carriers have already started to leverage new approaches to technology with great success. The first example is Tokyo Marine. Tokyo Marine a few years back moved away from a committee decision process in which little gets done because committees rarely make big decisions. They took on a strong leadership and accountability approach and used a “Bappan Kaikaku” approach to their IT strategy which means “going back to the root”. They didn’t use the old playbook to solve current problems. They addressed current problems by evaluating root issues and moved forward incrementally from there. Their focus was on simplifying products and processes, in addition to renovating agency and employee systems. When the tsunami hit and caused the great damage in Japan recently, they were able to quickly acquire 1400 terminals and provide immediate support for their claims process due to their investment in mobile and cloud technologies. They never would have been able to respond to this disaster as effectively if they had not taken a new approach to IT years before the disaster hit.

A second example can be seen through FAST company’s approach to addressing IT gaps and core system modernization/replacement. They do not approach the problem with the typical platform solution approach, incrementally rolling out lines of business over the years, hoping to eventually retire the legacy system with the new modern one. They provide a strong BPM/SOA approach to building services, implemented in Java or .NET, (vendor’s choice) to fill the business gaps and replace parts of the legacy system that are bottlenecks to meeting the business goals. The new solution is designed so it may be replaced itself (or parts) easily at any point in the future when better IT solutions come along. The old components can be swapped out with newer, better solutions without impacting the overall system. Several other vendors are also taking framework solutions to allow more flexibility in complimenting, supplementing and/or replacing legacy systems. The systems can now be designed in the first place for retirement. This should be a key principle of any enterprise strategy.

Cloud computing provides another new approach carriers are just beginning to explore. Celent believes every application developed internally or from a vendor should be cloud based. Even if a carrier hosts the application on premise, the application should be more easily upgradable, as well as replaceable later if desired. Also, if the situation changes and hosting externally becomes a better option, the effort to do so will have been minimized.

The old insurance IT playbook was focused on decisions by committee; internal development with a lot of customizations; tight coupling or IT system dependencies between systems resulting in high integration and maintenance costs; line of business centric solutions and approaches; and from an IT perspective, the playbook called for long and expensive rip and replacement projects. We still see many carriers still using this approach to the annual projects.

The new “West Coast Offense” for carriers is focused on agility, speed to market and lower TCO (total cost of ownership) options. The plays that are being successfully employed today to better achieve the desired results include: strong, enterprise leaders (not business segment, committee decisions); SOA approaches focused on location independence (Cloud/SaaS), implementation independence (focused on business function), component-based or framework solutions that allow for flexibility (as opposed to rip-and-replace solutions), and design for retirement from the beginning (as opposed to the traditional design to last forever – because they tend to do just that!). The new West Coast Offense for carriers still allows for planning for replacing or modernizing core systems, as the run was still employed in the football version. It just becomes more effective.

SOA Removes the Fog from Cloud

A lot has been made about Cloud computing recently; even to the point of asking if it is more fog than cloud. The focus of these discussions is strictly on the technology which is where they miss the point. It is reminiscent of the early SOA discussions.

Celent defines Cloud computing as the use of computing resources, typically a server or part of a server, over the Internet. The implications of this are: companies can leverage a vendor’s server offerings to build or expand their server capabilities; focus is on hardware, not software; and carriers need to package up an image of their software to install it quickly.

While technically speaking, Cloud solutions do leverage the Internet and virtualization, neither of which is new. However, if using these technologies is so easy, why do companies, especially insurance companies struggle with gaining the benefits of Cloud themselves? I believe the answer is identical to why many insurance companies were not as successful with SOA, lack of strong governance and understanding of the full picture.

Many companies when trying to implement SOA solutions, focused strictly on WS-* standards and SOAP, although inconsistently across the enterprise. Companies that have been successful in their SOA journey have realized that SOA is more than technology and standards; it also includes architecture, organization, governance, strategy and process maturity.

Insurers that believe Cloud, and more importantly, SaaS is nothing more than invocating functions over the Internet and using virtualization for cost effective infrastructure implementations will miss the benefits of Cloud and continue to struggle with application and infrastructure upgrades and cost savings. Similar to SOA, insurers must look at their architecture, organization, governance, strategy and process maturity to decide if a private cloud is more effective than a public cloud solution. The advantage that most Cloud vendors provide is that they will do this for you if you cannot or do not.

Cloud, technically speaking, may simply leverage the Internet and virtualization, old technologies, but do not be fooled into thinking that is all it is.

1.28.09: Senior Analyst Jeff Goldberg participates in "Avoiding SOA Paralysis" webinar

Senior Analyst Jeff Goldberg will be participating in an Insurance & Technology Vendor Perspectives WebCast: Avoiding SOA Paralysis: Cutting The Costs of Mainframe SOA for Insurance Date: Wednesday, January 28, 2009 Time: 9:00 AM PT / 12:00 PM ET Duration: One Hour More information is available here.

National Underwriter Magazine on SOA

There’s a good article in this week’s National Underwriter about the use of SOA (service-oriented architecture) in the insurance industry. It features a lot of my thoughts about how SOA can be leveraged (and how it can be confused) as well as some great comments from other industry analysts. Check out the article: “SOA Widely Used, Though Misunderstood” One thing I’d add to this piece is that I do think SOA has the power to be a transformative technology in the insurance industry. Just because most insurance SOA projects provide benefit through better internal integration doesn’t mean there aren’t future steps that will bring it to the next level of value.