P&C insurers already are reaping the benefits of cloud-based software in segments such as damage estimating and medical bill review. However, when it comes to core processing, many continue with traditional on-premise deployment.
That's about to change. Today, P&C insurers have access to enterprise-grade systems for policy admin, claims and billing on a pay-as-you-go model in the cloud. The question for insurers is no longer, "Will cloud computing work for me?" Now it's, "What business do I want to be in, insurance or IT?"
To answer that question, let's review the "Five Cs": Customization, cost, compliance, control and competitive advantage, which comprise a compelling value proposition for core in the cloud.
Customization. Conventional wisdom tells us our businesses are unique, therefore we need a unique system; one that we have designed or highly customized.
But the truth is, across all insurance companies, a policy is a policy, a bill is a bill and a claim is a claim. What's unique is the combination of specific rates and rules, distribution channels, products, geographic mix and other factors that distinguish a company, all of which can be configured within modern core systems. Current system architectures provide configurability from the first application to the final endorsement.
Cost. Core system replacement projects are a significant expense, requiring not just system-licensing costs, but also investments in infrastructure, servers, monitoring tools, security, utilities, backup, staffing and more.
Cloud computing transforms the large capital purchase of a core system into an operational expense, tracked with business growth through a pay-as-you-go model. With utility-based core systems, insurers always have access to adequate capacity by being able dynamically to acquire resources on demand, rather than spending capital on infrastructure.
Compliance. In the heavily regulated business of insurance, companies are concerned about making sure their systems keep them on the right side of security and privacy laws. Those laws place significant pressure on carriers to protect financial information. Additionally, the pace of new federal and international privacy laws undoubtedly will accelerate.
Putting core systems in the cloud shifts the compliance responsibility to cloud providers and makes it their business to protect and secure data, to keep up with technological changes and continually assess how multi-state and federal regulation affects technology.
Control. For those insurers fearing a loss of control and reluctant to let core systems outside their data center, hybrid cloud models are available. For instance, using cloud for development and testing, while maintaining an on-premise system for production, can help strike a balance between the advantages of cloud scalability and support for innovation and concerns with keeping production data within the enterprise data center.
Cloud computing actually can establish greater control over other processes, such as business continuity and disaster recovery. By definition, cloud provides off-site capabilities in the event a disaster affects an insurer's physical location and ensures that a company will be using the most current version of the core system.
Competitive Advantage. The fifth "C," competitive advantage, is the most compelling reason to move core systems to the cloud.
With cloud computing, resources that normally would be spent acquiring hardware and software, as well as installing, integrating, customizing and testing it, are available for other projects. IT departments can focus on technology that advances market strategy, building customer- and agent-facing capabilities, capitalizing on mobile technologies and creating other innovations.
Cloud applications and Web services help insurers improve their time to market. They can launch new products and services, enter new markets and address competitive pressures proactively, rather than waiting for changes to affect them.
These competitive advantages will be factors for growth in the insurance industry in the months and years ahead, and as more and more business applications migrate to a utility computing model, companies will gain greater comfort in moving policy, billing and claims administration capabilities.
While some insurers continue to wait on the sidelines and ponder the 'insurance business vs. IT business' question, others are recognizing that competitive advantage is the biggest reason to move core systems into the cloud. The time truly is right for core in the cloud.
William Budde, CPCU, is VP of client services and solutions for Insurance Information Technologies Inc., a policy administration services and technology provider for the commercial property/casualty industry.
