Policy administration systems replacement is on a long-term upswing in the insurance industry as legacy systems exceed their life expectancy. And with the industry dealing with major disruptive forces, more insurers are choosing cloud-based systems rather than traditional mainframe deployments for the next generation of their core processing software.

Carriers believe the cloud model is better equipped to help them meet the digitally based expectations of customers and distributors, says Karen Furtado, a partner at insurance technology analysis firm Strategy Meets Action.

“It’s an amazing difference from three years ago to now of how insurers perceive what the cloud can do for them,” Furtado says.

February research from SMA indicated that 39 percent of insurers are considering cloud options, compared to 33% in 2012. That’s enough to be considered a “tipping point,” according to Furtado.

And the benefits aren’t limited: There are nine key factors for which insurers find that a cloud-hosted system — whether public or private, or software- or infrastructure-as-a-service — just makes more sense.

1. Starting Up

For newer companies like Berkshire Hathaway Specialty Insurance and Palomar Specialty Insurance, a cloud solution made more sense than trying to build an on-premises system from the ground up. 

In 2013, when it was starting up, Berkshire Hathaway Specialty needed a technology strategy that would allow it to grow rapidly, says Jamie Roser, CIO of the company: “If we’re going to move quickly, we’d better take advantage of the fact that a lot of people have done this before.”

In order to get a jump-start, Berkshire Hathaway Specialty (BHSI) selected Accenture Duck Creek to provide and host a software-as-a-service (SaaS) version of its eponymous suite for core insurance processing.

Roser says BHSI gets the benefit of the vendor experience when a problem does emerge. The model “has given me comfort, because I know I’m dealing with people who are not only [supporting] me, but also other clients,” Roser says. “The whole production support process has been more efficient because I’m dealing with someone who’s doing it as their profession.”

Jon Christianson, COO for Palomar Specialty Insurance, echoes Roser’s sentiments. “We were not weighed down by legacy systems that were instituted 10 or 20 years prior” when the company started up in February 2014, Christianson says. Palomar, a catastrophe insurer that underwrites residential and commercial risks, runs a cloud-based version of Atlas from PCMS, a vendor specializing in small- to mid-sized insurance company systems.

2. Cost Structure

With cloud hosting, insurers have fewer up-front capital costs. They don’t need to make a big capital investment in servers and setting up their own data center, says Jeff Goldberg, VP of research and consulting at Novarica.  

Furtado agrees that cost is a big reason why insurers are moving to the cloud. Having an on-premises solution involves the expense of refreshing servers and IT infrastructure, she says. “It’s more of an initial cost concern, but also the ongoing costs,” Furtado says.

“If you want to run your own data center, you have to make an initial capital outlay,” says Jack Dennison, CEO of PCMS. And the investment doesn’t end there. As an insurer continues to grow, it will most likely need to make additional investments.

“But with a cloud-based system, that’s all on the vendor and the customer gets to pay for what they use as they go,” Dennison adds.

 Co-operative Insurance Cos. spent a lot of time evaluating the cost and effort of continuing to run operations in-house versus moving to a cloud-based solution, says Eric Rhoades, SVP, information services for Co-operative, which offers farm, home, auto and small commercial insurance.

“We explored the cost of running a co-location, the cost of extra equipment to run two systems during our migration, the cost of additional staff,” he says. “We personally would have had to make heating, cooling and power changes to our data center.”

The biggest challenge with maintaining an on-premises policy administration system is the continuous need to support all aspects of it, Rhoades says. “It really hindered our ability to stay current, be innovative, and bring more value to the business versus just fixing problems,” he says.

For that reason, Co-operative selected the insurance software vendor ISCS to provide a SaaS/cloud-hosted solution. “We want to differentiate ourselves on our products and our customer service — not on our ability to host and maintain systems,” Rhoades adds.

Canal Insurance, a commercial trucking and specialty transportation insurer, also recently moved from an in-house built policy administration system to a cloud-hosted solution. “It defers or eliminates the costs of having any additional infrastructure or expertise to maintain the database,” says Kevin Brannon, AVP of system architecture and technology for Canal, which runs on the Adaptik Cloud policy administration platform. “We needed something more flexible and more responsive in speed to market,” Brannon says.

Typically, most insurers taking advantage of cloud or SaaS systems tend to be small, Goldberg says. They don’t want to put up the capital to buy hardware and licensing fees, he explains. Alternatively, they may be a smaller group within a larger organization, he adds. Perhaps an insurer is experimenting with a new line of business. In that case, the smaller group may not have the priority to get time for somebody to build it out into their existing core system. Instead, they’ll select a vendor that offers a cloud-based system. That way, the company can experiment with selling the product and decide later if they want to enter that line of business long-term, Goldberg says. 

The cost of cloud hosting over the long run is not necessarily less than the cost of internal hosting, Goldberg says. Insurers will likely have greater long-term costs because they’re “renting” the space as opposed to “buying” it, he adds. So what’s cheaper, buying or leasing? “It depends on the situation,” Goldberg says. “You’re not necessarily getting a cheaper system in the long run, but you’re pushing out the up-front capital costs.”

3. Staffing

Another benefit to moving to a cloud-based policy administration system is eliminating the need to increase staffing. “A lot of insurers have invested a lot of money in building out data centers and hiring people to manage those data centers,” Goldberg says.

For example, Roser says, because Berkshire Hathaway decided to outsource a lot of the “hardcore technology” to Accenture, the company didn’t need to hire a large team of technicians with different technical backgrounds.

“Upkeep of running our core systems has always been a challenge for us,” adds Co-operative’s Rhoades. “We have a small IT team and currently handle the majority of development, statistical reporting and support for most of our core systems with our own staff in-house.” Co-operative’s CFO is also its network administrator, the senior support person, Rhoades says. “We all wear multiple hats in the IT world here.”

“In the end, an insurance company’s core capability is not hosting servers,” Goldberg says — insurance companies are experts in managing risk. In contrast, a vendor specializing in cloud hosting is solely dedicated to that work. “You’re going to get people who focus exclusively on this, and that’s hopefully going to get you better results in terms of keeping a system up, maintaining it and managing it,” Goldberg says.

4. Compliance

For many insurers, staying in compliance can also be an incentive to move to the cloud. That’s why Hiscox Insurance went in that direction for its entertainment production insurance offering, Hiscox One, says Adam Edelstein, COO for Hiscox USA.

The insurer selected Instec’s cloud-hosted Quicksolver policy administration system. “The primary driver for it was to get a better solution for us on the commercial auto space. Ironically enough, it’s one of the very small pieces of cover,” Edelstein says. However, it’s an area that requires quite a bit of regulatory compliance and reporting needs, he adds.

For Hiscox One, in particular, releases are quite important because there’s a big dependency on Insurance Services Office (ISO) products, Edelstein says. “One of the big benefits was the coupling and integration with the ISO,” he says. This allowed Hiscox to stay current and relevant with all industry updates at a materially lower cost than it would have incurred on its own, Edelstein says. “It gives us the benefit of staying relevant and up to date on all of the updates.”

It can be a challenge for startups and smaller companies to stay in compliance, says Ray Simon, president and CEO at Instec. By putting everything in the cloud, Instec can help keep insurers up to date on these regulations, he explains, even assisting them if they are audited.

5. Software Updates

Hardware gets old, and new versions of software get released, so it can be a challenge for insurers to stay up to date on these upgrades and updates, Goldberg says. Within a few years, what was once a modern system may start behaving like a legacy one. “It keeps you from falling into that legacy trap so quickly,” Goldberg says. “It’s part of the package when you’re doing this cloud solution.”

But in the cloud, the vendor is responsible for keeping its hardware and software up to date, Goldberg says. When vendors upgrade their systems, the cost can be shared across many clients. “They’re going to be keeping their hardware up to date and they’re going to be modernizing because it’s going to make the experience better for not just one person but for all their clients,” Goldberg explains.

When insurers no longer need to worry about implementing software updates, “we get the benefit of those updates without having to go through the disruption and cost of incremental releases as we do on some of our other products,” says Hiscox’s Edelstein.

6. Security

High-profile data breaches on the health insurance side have led regulators to take a close look at insurers’ cybersecurity practices. But when insurers move to the cloud, that concern is shared with the vendor.

For a long time, security concerns prevented some insurers from looking at cloud-hosted or SaaS systems. “The reality is, you’re moving your system out of the hands of an organization that focuses on risk management and insurance, and you’re putting it into the hands of an organization whose job it is to maintain a secure system,” Goldberg says.

Small insurers have a particular challenge since they have to keep up with security measures, SMA’s Furtado says.

“There’s a tremendous amount of security that would be very expensive for us to execute here in our office if we had that hardware located on our property,” Palomar’s Christianson says.

“Our security challenges and IT compliance audits are really difficult to keep up with,” adds The Co-operative’s Rhoades. “We felt confident with ISCS's ability to stay in compliance with security changes. The more I learn about security and audit compliance, the more happy I am that it is off-site.”

7. Scalability

Insurers repeatedly cited scalable infrastructure as a benefit of the cloud. Cloud-based systems give insurers the ability to expand to the exact amount of resources they need on demand, Furtado says. “It really depends on the kind of cloud service one consumes, but it can give you a great degree of agility and scalability,” she says.

“We enjoy the benefit of not having to incrementally invest in infrastructure as the product continues to scale,” Edelstein concurs. “Moving into the cloud gives us a big benefit around scalability. The incremental cost of growth for us is very low. The ongoing economics of a cloud solution are quite attractive.”

Christianson also agrees that scalability is another benefit. “There are a lot of technical reasons why a private cloud or hosted system makes sense from a cost and management-of-data perspective,” he says.

8. Ease of Use

Core systems in the insurance world have gone from on-premises solutions requiring a lot of customization using code to more configurable cloud-based solutions using Web-based tools, Goldberg says.

One common feature of a cloud-based service is Web access, Dennison says. When applications reside in a cloud, they can be easily accessed over the Internet. For insurers that operate through a network of independent agents, this is particularly important. “They need their agents to be able to access their policy administration system from wherever they may be in the world,” Dennison says. It gives them the ability to expand wherever the business may take them, he adds.

Demands from customers and agents are increasing, according to Rhoades. “They expect easy-to-use systems that are intuitive and always available,” he says.

9. Disaster Recovery

Another benefit is that cloud providers typically have multiple, geographically separate, redundant backups, Goldberg says. Some small insurers don’t necessarily have a backup data center that’s much farther away from their home base, he explains.

It wouldn’t be prudent for Palomar, which needs to provide reliable coverage in the event of a disaster, to have all of its information located within the walls of its office in California, Christianson says. “A primary hazard that we insure for is earthquake,” he says. “So right there it makes a lot of sense to not have all of our systems in an earthquake-prone area.”

With rating agencies and regulatory bodies observing closely how insurance companies manage ERM, the cloud deployment allows Palomar to check an extra item off its list without engaging a separate vendor. 

In addition, if there is a localized Internet outage, vendors like ISCS will not be affected. “We have Internet connectivity coming from all over the United States,” explains Andy Scurto, president of ISCS. “We have to continue having the system available through disasters, and we do that through multiple data centers and replication and redundancies,” he says.

Moving On

According to a January 2015 report from Novarica, the numbers for cloud core insurance applications are growing even though they are still small. But as more insurers use the cloud for ancillary applications, they are becoming more comfortable with the concept of having their data hosted outside of their organization, Goldberg says. “I think we’re seeing more and more people taking advantage of these systems,” he says.

In fact, Edelstein says, though there are companies approaching the cloud very hesitantly because of security or control concerns, Hiscox realized it already had a lot “up in the cloud” that it didn’t even think about — like its HR, travel and expense management systems.

And, he says, Hiscox hasn’t looked back. “It’s been a good experience for us,” Edelstein says. “It’s been exactly what we expected.”

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