As a concept, the remote delivery of technological capabilities has been around for years ("hosted applications," anyone?), but as new terms proliferate in the marketplace, confusion about terminology, practices, and benefits have grown. "Cloud" is often used as a broad term to cover SaaS (software as a service), IaaS (infrastructure as a service), PaaS (platform as a service) or any combination thereof. More important than the specific terminology, however, are the challenges and business benefits of embracing any form of off-premise computing.

SaaS models can be very different than what carriers are used to and can potentially present challenges regarding decisions, integration, licensing, lack of customization, and security.

Business models of SaaS providers need to be specifically designed to support an actual SaaS model, including subscription- or transaction-based pricing, the idea of remote and/or multiple data centers, and an architecture suited for SaaS (e.g., strong SOA integration capabilities). Another obstacle is that a number of solution providers claim to offer SaaS as an option but are not set up to provide the professional services essential for break-fixes, timely upgrades, vendor-supplied configuration, and other critical items.

Integration with cloud-based and/or SaaS systems can also be challenging for carriers. Many carriers have little or no experience integrating with systems outside of their own four walls, especially core systems, which must be overcome. Additionally, latency can exist between local and remote systems and is often outside of the carrier's control.

Licensing can also present a challenge to carriers. Procurement and budgeting personnel are often accustomed to using exact costs for budgeting purposes. In many cases, it is impossible to know the exact costs associated with a SaaS or cloud model. Licensing costs often vary from year to year and typically can only be estimated at the start of the year. Carriers may also be faced with contracts that have no limit to the upside costs. Additionally, if the licensing model ties costs to direct written premium, a carrier may feel penalized for growing. Thus, contracts to protect against unforeseeable costs may need to be negotiated.

Potentially limited configuration options and the lack of customization inherent to SaaS models represent other challenges for many insurers, though in reality this is often an advantage in that it forces insurers to think differently about their technology capabilities and restricts them from repaving the cow path.

The difficulty of changing models from a SaaS or IaaS/PaaS option back to an on-premise model also can be challenging. A carrier should plan in advance-and make sure there are strong contractual provisions for doing so-to be able to bring the solution back in-house if needed. They should also make sure a clear migration path exists.

Data security, reliability, and vendor concerns are both perceived and real. Carriers should understand the vendor's security practices, actively manage the provider, and secure indemnity.

While SaaS and cloud models face inherent challenges, in most cases those challenges are far outweighed by distinct advantages. All of these advantages allow the carrier to focus on running its business, not its system(s).

The SaaS model offers a "try before you buy" approach for products on the SaaS system(s). With minimal upfront investment of time and money, a carrier can see how the system works and how their own processes should change. Of course, this doesn't typically apply to core systems, which need significant configuration to provide any meaningful ability to evaluate their value. Similarly, cloud allows a carrier to quickly implement a purchased or evaluation copy of a solution onto "temporary" hardware at a very low cost in order to evaluate it.

With SaaS, all of the necessary resources to run the model are available in one place. One of the major values of a SaaS approach is that it offers the convenience of including hardware, software, disaster recovery, help desk, and other services from one vendor and one contract.

The rapid implementation of a SaaS solution allows for speed-to-market advantage. This is especially important for carriers whose business case for a systems replacement includes the myriad advantages of improved speed-to-market. Getting a new system up and running quickly allows for quicker realization of benefits; being focused entirely on running the business, such as developing a new product (rather than enhancing the system to support a new product) is a critical step in achieving true speed-to-market.

With SaaS, carrier concerns about fitting vendor architecture to their own, tuning servers and databases, purchasing hardware, or acquiring IT resources are all mitigated. The carrier is only tasked with defining requirements, integrating if necessary, and with configuring the system. Additionally, the SaaS model allows the carrier to get a new system without having to change their staff or skills. Without high upfront costs, carriers may be able to acquire a system they wouldn't otherwise be able to afford.

Since the infrastructure of a SaaS or cloud system already exists and inherently works, IT risk associated with the project is reduced. With SaaS, the system is up and running from day one. SaaS can also allow for remote access (though this is still at the carrier's discretion). Potentially, this can free up the carrier's office space through the use of remote workers.

A unique and potentially very valuable benefit of cloud is the potential to use a single cloud environment for development, testing, QA, and eventually production. By copying the existing production environment onto additional servers in the cloud and pointing it at development data, a carrier could start developing into this new environment. Rather than promoting the development code, the code could simply be pointed to a database with testing data. Once testing is complete, the code could be scaled onto additional cloud servers and pointed to a QA data source. Finally, once QA is complete, additional servers could be spooled up and the code pointed to production data for final testing and go-live. The potential savings in time, hardware, and quality improvements are significant.

Now may be the time for carriers to consider the SaaS model for core systems. Multiple vendors now exist and their offerings are maturing. Models for pricing, SLAs, and security have largely been worked out. Carriers are implementing real SOA strategies, making integration to the cloud more feasible and cost effective than ever. Depending on the carrier and their processes, it may even make sense to consider moving some core systems onto the SaaS model, and for those acquiring fully new systems, SaaS may become a preferred option.

The biggest remaining challenge is the lack of flexibility compared to traditional systems, but as a large majority of traditional systems move toward configuration rather than customization, this challenge may be addressed in the near future.

Adoption is likely to spread as systems mature and more carriers prove the model at the low end and high end. In short, while SaaS and cloud still aren't for every situation, their appeal should continue to grow significantly in both the short and long term.

Chad Hersh is a partner in the insurance practice at Novarica. He can be reached directly at

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Corrected March 31, 2011 at 3:11PM: yes