Software applications for the insurance industry have greatly evolved over time. After the industry graduated from its earliest days, in which customized mainframe applications that were unique to each company were dominant, various standardized applications began to emerge for the specific functions required by insurance companies. From the beginning of this century, the insurance software market has matured to a point where almost all vendors offer an “all-in-one” set of software (a “suite” of applications) which cover underwriting, billing, and claims. Similar suites are available on the accounting side, covering accounts receivable, accounts payable, general ledger management and statutory reporting. However, each component in a suite may not be the most popular, or “best of breed” program for that function.
As a result, one question that often gets asked today is: should a carrier choose a “suite” of core system applications, or should it purchase “best of breed” applications for each individual function?
This article shares notes from the author’s experience to help address this issue.
Before we go into the details, let’s examine some of the variables in this decision.
Suites: Most suites come with the advantage of a consistent user experience across all applications, and potentially provide a pricing advantage. Additionally, maintenance is usually easier and, therefore, cheaper since the IT staff only need to learn how to maintain a single system.
While a suite is usually based on multiple functionalities developed on a common platform, in some cases the suite can also be a pre-integrated set of disparate systems supported by a common set of tools.
Best of Breed Applications: The advantages of buying individual, well-regarded applications, on the other hand, include higher-quality applications, lower licensing costs (if only one of the functionalities is needed), and faster rollout in comparison to full suites.
In most cases, the following presents industry-practiced solutions to common variables involved in choosing a suite or a best-of-the-breed application:
- The size of the organization: larger insurance companies may have so many existing systems that replacing all of them with a suite may be practically impossible, or at the very least cost-prohibitive. This often results in best-of-breed applications being preferred at such organizations. Conversely, smaller organizations prefer to start off with suites for ease of implementation.
- Breadth of the product line (e.g. whether the product line is a single line such as Automobile coverage vs. whether the product line is very diverse/complex): diverse lines tend to favor best-of-breed as handling them require configurability typically found in best-of-breed applications.
- The scope of the implementation: if the organization only needs to improve one of the functionalities, such as claims management, it may not be ideal to attempt complete replacement of a suite. In this case, the organization usually looks for a best-of-the-breed system.
- Diversity of operational markets (single state/jurisdiction insurer vs. large multi-state/international insurer): insurers having a very diverse product offering or a very wide geographic reach, generally seem to prefer best-of-the-breed application components in order to allow maximum flexibility as they seek to compete in various markets and locations with widely varying demands.
- Whether the application is for a new product line or intends to replace an existing system for a current product line: if a company is launching a new operation or expanding operations, such as a personal line insurer stepping into commercial lines, then many new software functions will be needed simultaneously, so a suite can be more efficient. However, in certain cases, the organization may choose to retain some of the existing systems. In such cases, the use of best-of-the-breed applications is the usual choice.
- The organization’s IT strategy: whether the IT utilizes in-house hosting vs. use of software-as-a-service (SaaS) platforms. In organizations preferring SaaS platforms, a suite is preferable over custom integration of individual components since such integration is perceived to be more difficult for SaaS solutions than the in-house hosted solutions due to security and manageability considerations. Conversely, an organization using an in-house solution could go either way.
- Timeline to implementation: Typically, a suite has a smaller implementation timeframe when replacing all systems. However, in most mid-to-large insurers, installing core systems on a component-by-component basis is often the only practical way to avoid getting overwhelmed with the amount of work involved. Thus when pressed by timelines, such organizations either select best-of-breed applications or select a suite that can be installed in increments by breaking it into individual components.
However, choosing between a best-of-the-breed application approach and a suite approach often gets complicated when organizations start considering the following non-functional criteria. These criteria do not immediately favor either implementation approach, and should be kept in mind when making decisions:
- How dynamic is the insurer’s product line, i.e. does the insurer add/update products frequently? Would the selected choice (best-of-breed or suite) meet future product needs?
- What would happen if another vendor offers a better application in the future than what is being used by the insurer?
- How large is vendor risk if the vendor’s existence in the future is questionable or if the cost of the vendor’s product could change?
The good news is that the market is heading to a state where the above factors are becoming less critical. This is because best-of-the-breed vendors are increasingly providing complete suites to address most insurance company needs. While a couple of years ago, only a few vendors had complete core system suites, many vendors today offer complete suites of core system applications, where each function can be deployed in increments and be mixed and matched with other applications as needed, in order to support the transition and future upgrades.
Such capability presents a solution that can be referred to as a “best-of-both” solution, since the organization gets the benefits of a suite along with the flexibility of swapping individual components with the best-of-the-breed application when needed in the future. However, such a plan requires a well-designed, component-oriented application reference architecture to achieve this flexibility. A well-designed reference architecture enables the organization to know what solutions it can mix and match with a suite or best-of-the-breed applications in order to maximize the value of the implementation.
As the application software market continues to evolve, it will be interesting to watch what happens next. Once the field is leveled with almost all vendors offering best-of-both solutions, what will vendors do next to stay on the leading edge? Value-adding services like bundled business process outsourcing (BPO) services and integration with third-party systems have already started to emerge. As a result, insurance companies should ensure that their information systems are flexible enough to respond to further developments in the ever-evolving software market.
Disclaimer: the views are the author’s personal opinion and do not represent opinions of his employer or any other organization
Author Information: Aman Aggarwal CPCU, PMP, SCEA, TOGAF, ACE, EA, MSc
Aman Aggarwal is an insurance technology professional with nearly 20 years of experience in all sizes and shapes of companies including medium-sized carriers to large, tier-1 P&C carriers. He is also the author of the “Industry Reference Blueprint for Insurance”, a resource that provides business, information systems and technology reference models for executives in the industry.