Forget the stereotypes--ASP isn't just for small, IT-challenged carriers any more, and many of the ASP problems that gave insurance companies pause only a few years ago are being solved. Dollar savings and fast time to market are still big pluses for ASP, but today there are a lot of other reasons to consider it.The market among insurance carriers for ASPs, or application service providers, is growing by about 10% a year-slower than in most other industries-according to Marc Cecere, vice president and principal analyst for Forrester Research in Cambridge, Mass. From a supply-side perspective, that's partly because of the structure of the insurance industry and partly because of the regulatory scene for insurance companies.

"Insurance is a highly fragmented industry," Cecere says. Big insurance companies tend to be agglomerations of smaller insurance companies, and when a vendor sells ASP services to, say, an AIG, it may sign up only a single business unit-a few hundred desktops instead of several thousand. That raises selling costs and management overhead for ASP vendors and can limit the market's appeal.

Similar problems arise with regulations. "Next to pharma, there is no industry that's as regulated as insurance is," Cecere says. "In the United States, 50 states will decide, each one a little bit differently, how fast you have to pay a claim, for example." And that's just here. Companies that do business overseas deal with rules that change from country to country, and by jurisdiction within each country. ASP vendors "have to be able to accommodate the local regulations of each state and local government," says Cecere. "What that means is that a lot of modifications have to be made to those basic systems." And, that cuts into the economies of scale that make the ASP model attractive in the first place.

Regulation and fragmentation, Cecere continues, also drive ASP business into back-office applications that aren't much affected by either. "There's a lot less variation in how those systems operate than, let's say, systems associated with policy administration or even claims," says Cecere. "So, it's a little bit easier to reach the scale because people are willing to say, 'The way we do billing for this variable life product is a little bit different, but it's close enough.'"

But other forces drive the market forward. "Cost is always the first priority," says Cecere. "Keeping up with technology is another one." Some applications, he says, are changing so quickly that it's tough for insurance company IT departments to keep up with them. In those cases, it often makes more sense to outsource the application to an ASP and let the vendor worry about it.

Technological and functional change also discourage heavy-duty customization, says Larry Stern, vice president of CGI in Fort Worth, Texas. Big changes to code complicate implementing new releases, and that has convinced some of his customers to back away from extensive customization. That, in turn, tends to favor the ASP model, or at least removes an objection to it.

"The problem with making changes to a package in software code is that eventually you can't take releases from your partner any more because you've diverged so much from the base," Stern says. One of the key arguments against ASP has been that it doesn't ordinarily allow for extensive customization, but some insurers are realizing that customization has its own problems and they're reconsidering the ASP model.

The largest insurers are becoming international, which also contributes to the growth of ASP, says Steve Isaac, CEO of Peak Performance Solutions in Orient, Ohio. "The Tier-1 companies are certainly looking to expand into Europe, the U.K. and the Asian markets," he says. "Having a service and a platform that's accessible through a browser-based solution is very critical-and it's more cost-effective."

Historically, ASP's attraction has been its promise of access to robust applications faster and at a lower total cost of ownership than licensing those same applications and running them in-house. That's still true, but insurance ASP vendors are noticing that other factors are also coming into play, and that's affecting the ASP user demographic.

Small and mid-size carriers with small, overworked IT departments-or no IT departments at all-are still common ASP users, says Randy Wheeler, CEO of Valley Oak Systems in San Ramon, Calif. But in the last couple of years, he's noticed larger companies are buying into the service, too.

Wheeler says he used to go into large carriers and just assume they were interested in bringing applications in-house. Now, "I just have to slap my hand before I open my mouth and remind myself that that's the old viewpoint. The new viewpoint is that everybody has different business reasons" for their choices. A carrier with four users might bring an application in-house and one with 500 users might opt for ASP. "Both options are viable now, and it just wasn't that way before."

Isaac finds that the appeal of ASP varies by company size. Billion-dollar-plus carriers are likely to use an ASP when they add lines or jurisdictions. Time to market is shorter than it would be if the carriers tried to implement new systems on their own or tweak legacy systems, and ASP products are likely to be proven solutions. Among mid-tier companies, the driver is more likely to be cost savings, though time to market is important for that group, too. Among smaller carriers, the ability to start economically and easily scale upward as business grows is important.

Some of the barriers that once stood in the way of the ASP model are eroding. Success stories are building trust among IT managers, says Roger Rudell, director of solutions marketing for Computer Sciences Corp. (CSC) in Blythewood, S.C. Demands on IT resources have grown so IT departments are often forced to offload less-important tasks-the chores that do little to differentiate their companies competitively.

"They know that there are certain things they can do with the infrastructure and the resources that they have," Rudell comments. "Why not have somebody else maintain the applications that might not be as strategic to them?"

Declining, too, are worries about the intrinsic security of the ASP model. That's partly because IT managers have grown accustomed to handling similar security challenges themselves. "The home office used to be the home fortress," says Stern. "Now, you see business processes being pushed out into the field. You see agents inputting information and doing everything online. Things are getting delivered back to the agents as PDFs instead of mail. Agents are browsing home office data to answer questions for their clients. Even the policyholders are starting to get access to their own data."

In a world of online access to personal banking and healthcare information, people have become more confident in the security of remote data. An ASP's security is often better than in-house security, Stern adds, thanks to the economies of scale and shared resources the ASP brings to the table.

Wheeler notes that confidence in ASP security is helping to shape the market. Some of the ASP vs. in-house decision-making process depends on how many "stakeholders"-defense attorneys, healthcare providers, agents, even insureds-need access to data. As that number goes up, security becomes a bigger problem, and that gives carriers an incentive to turn the whole thing over to an ASP provider.

Integration issues are fading in the face of newish technology, like SOA (service-oriented architecture) and standards from groups like ACORD. The issue hasn't entirely disappeared, however. "ASP is less attractive when you have a lot of integration points and they tend to be more sophisticated," says Wheeler. As the number goes up, integration becomes more difficult and performance can suffer. "As people count up their interfaces, their interest in ASP drops off proportionately," he says.

Most ASPs that offer insurance systems offer licensed versions of the same software, and most ASP customers have the option of moving ASP solutions in-house at some later date. Surprisingly few of them do. Stern notes that most of his company's ASP customers tend to stick with it. When they don't, it's usually because of changes in business situations or changes in management. "In general, people who've used ASP have been pretty happy with it, and haven't seen the value of moving off it," he says.

Some insurers, says Isaac, sign up as ASP customers to get applications running quickly before bringing them in house. "That makes a lot of sense, because that way you have it contained in an operating environment where you know it performs well. It gives you time to shake out the application and meet your business needs while setting up your own infrastructure."

Often, notes Rudell, customers start with one of his company's hosted systems with every intention of moving it in-house at some later date. Sometimes, if everything's running smoothly, busy IT managers reckon there's not much reason to change things.

What's ahead for ASP? Forrester's Cecere says the market "is only going to grow." He sees more standards-both technical and business process standards-fueling ASP's future in the long term. Once processes become standardized, they become nondifferentiating and users will be able to compare ASP offerings apples-to-apples on the basis of price and performance.

A Matter of Focus

Safety Insurance, a Boston P&C insurer that does about 80% of its business in personal lines auto, operates in one of the most competitive and highly regulated markets in the country, according to vice president of insurance operations Jim Berry.

"Our competitors are predominantly local companies," he says. "There are only 19 companies writing private passenger auto in Massachusetts, and of those, five write close to 80% of the business. It's an incredibly concentrated, local-company market."

Regulations and competitive demands have shaped Safety's approach to IT since it opened its doors in 1980. Given its finite IT resources, the company made a strategic decision to focus technology efforts on activities that would enhance its competitiveness, and let someone else worry about the rest. Since 1997, Safety has used a hosted version of Series II, a policy administration system from Blythewood, S.C.-based Computer Sciences Corp. (CSC).

"We wanted our agents to have a self-serve model on personal auto, where they could do their quoting in a comparative quote engine or in their agency management system," Berry recalls. "We wanted to have a system that would let them export that data into our policy processor and issue their policies that way." CSC, he continues, was most responsive to those goals.

"For a company our size, focus is an enormous issue," Berry continues. "Could we resource it in our IT group and could they be responsive? Well, of course, if we made it a priority." But making it a priority would take IT's focus off other, more important activities. "It's not so much that in-house is bad per se; it's what you have to give up by choosing to make that one of your priorities."

Safety's relationship with CSC's hosted application is now nearly a decade old. Safety reviews the deal periodically, but those reviews "never generate a lot of momentum for us," Berry says. "We'd rather concentrate on giving the agents better tools and better products, and making sure we're doing what we have to do in terms of thriving in this marketplace."

Berry says he values his contacts with CSC's user group, which lets him share ideas with other members-ideas that help shape the software product and leverage the technology. He's also pleased, he notes, with the way the hosted application has scaled up as Safety's business has grown-from about $275 million in 1997 to more than $649 million in 2005. "We've been able to add a tremendous amount of business without having to grow our back office staff-which, being headquartered here in Boston, can be pretty costly," he says.

The key to success with hosted applications, Berry concludes, is a close relationship with the vendor. Some companies, he notes, lose sight of that when they move their applications outside their IT departments. "The vendor is your resource, so you have to have that same degree of intensity, that same degree of focus, to communicate to them what's going on in your business...so that they are in a position to add value."

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