Part 1: Off-the-shelf system or build your own? Page 1

JULY 2009 WHITEPAPER:

Prepare your policy administration system for the future - Part 1: Off-the-shelf or in-house?

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Part 1: Off-the-shelf system or build your own? Page 2

The market presents a number of challenges. Recognize this?

• Difficult to achieve the demands of Solvency II• Time-consuming to launch new products• Many different systems• Need to be able to communicate with third parties• Inflexible IT-system and demanding manual processes

In this white paper you’ll get information on what you should think about if you are in two minds whether to con-tinue developing your own system or to switch to one of the off-the-shelf software products currently available on the market.

Why should you choose a software product rather than build your own? How can you still be unique, in relation to the rest of the market? What are the advantages of an off-the-shelf system?

This is the first of three papers on the subject of software products for the insurance industry. The others look at:

Part 2: What should an off-the-shelf system be able to handle?Part 3: How to implement an off-the-shelf system?

For more information on when the next two parts will be av-ailable, please e-mail marketing@mantacore.se or visit:http://www.mantacore.se/english/whitepaper

Introduction

Content Introduction.........................................................2

Content ...............................................................2

History .................................................................3

The time is ripe for standard systems .....................4

Own-developed versus standard systems ...............5

Unique needs .......................................................7

Different types of standard system ........................8

Challenges for standard systems ...........................9

About Mantacore ...............................................10

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From a historical point of view, the last 10-15 years have seen a number of different industries go through major changes and switch from their in-house systems to software products.

Examples of industries where software products are now the norm:- Finance- Distribution (orders, stock, invoicing)- Production (Materials Planning Systems, production systems)- Sales Systems (CRM)

IT has not developed in the same way within insurance as it has done in other industries. The 60s saw IT systems based on punch cards replaced by systems based on COBOL, PASCAL and even FORTRAN. It was at this point that the industry star-ted to be ’systemized’ – a major process which, at the time, was extremely complicated.

Gradually, a shift has occurred where most of the logic which was previously found in the old back-end systems has been moved into front-end systems, i.e. to systems where adminis-trators and others handle the information.

Today, many companies still use these systems. Also common is the use of different systems for different products, along with a large amount of manual processing. It is also not unheard of to use Excel as an insurance system. In the case of more advan-ced business insurances, a different Excel is used for each indi-vidual business.

History

In many industries, soft-ware products are al-ready the norm.

The shift in focus is towards front-end sys-tems instead of back-end systems.

Image: Punchcard

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Why is now the time for the insurance industry to switch to standard systems? There are a number of criteria which need to be satisfied in order for an insurance company to change its strategy and go for a software product instead of an in-house development.

Advances in technologyModern platform technology, the internet, SOA, web servi-ces, xml and user-friendly interfaces are all now readily avai-lable to help shape the software products which the indu-stry needs. Major advances have also been made within the areas of development methods and software product pro-cesses.

The market’s demands for rapid changeIt is vital to be able to quickly adapt systems when new bu-siness opportunities arise. The system must be capable of handling these rapid changes.

Interaction outside of the companyThese days it is much more important that external contacts are able to communicate directly with the internal insuran-ce systems; this includes everyone from direct customers, claims adjusters, finance staff and financial authorities to the police and the fire service, etc.

GlobalisationInsurance companies are no longer just active in their home market. It is becoming all the more important to be able to handle new markets and this places completely different de-mands on the IT systems. The Solvency II regulations apply to the whole of the EU, which also makes it easier for soft-ware products to operate in many different markets.

Focus on low transaction costsInternal IT costs should not increase with every new custo-mer that comes along. Margins have to be reduced and new customers and markets reached without expensive IT pro-jects.

Competence and experienceThe system providers that have specialised in the insurance industry have, over the past 10-15 years, gathered the neces-sary knowledge and expertise to be able to successfully im-plement the software products that they offer.

New customers should not mean expensive IT costs every time.

The time is ripe for off-the-shelf systems

The right technology is now in place for software pro-ducts.

The Solvency II regulations promote the idea of system support.

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In-house versus stan-dard systems

Historically speaking, we have seen many industries switch from in-house systems to off-the-shelf systems and the time is now ripe for the insurance industry to do the same. Be-fore going further, we first need to understand the differen-ces between building your own systems and off-the-shelf sys-tems.

We have looked closely at a couple of areas:

- Product Development versus IT departments- Do unique needs require in-house development?- Different types of off-the-shelf systems- Challenges for off-the-shelf systems

System provider versus internal ITAn insurance company’s core business is the selling/arrang-ing of insurances or risk-handling; a software company’s core business is products and solutions. This implies that a system provider is entirely focussed on producing and delive-ring IT products.

Key areas could be:

The product provider have great potential to deliver high quality products on time and at low cost. For an insurance company to be able to do the same requires investment and cutting-edge knowledge in these areas.

The internal IT staff that one has access to should be used as effectively as possible. What is the best way to use IT?

- Concentrate on fulfilling ’unique customer needs’- Act as liaison with product providers and external consul-tants regarding your company’s requirements- Provide integration with external systems- Act as a link between the business side and IT.

Another problem associated with in-house systems being se-riously expensive and taking too long to launch when new business opportunities come along is that internal IT de-partments find it difficult to say no to certain development trends. Or that you is often forced into ”quick and dirty” so-lutions in order to facilitate the quick launching of something

Important to make use of internal IT staff in the most effective manner.

Internal IT departments are often forced to think short-term and not to in-vest resources in long-term solutions.

The core business is diffe-rent for insurance compa-nies and system providers

Technical education Technology surveillanceCertification Development MethodsPartnership Product processesTest/QA SupportProduct organization User-friendliness/De-

sign

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new. A software supplier must look at the bigger picture and produce solutions that neither compromise existing functio-nality nor make it more difficult to develop further solutions in the future.

Shared costs with software productsMajor parts of any insurance or similar system are devoted to areas such as database-handling, transaction-handling, logging, security, authorization, graphic interface-handling, webservices, error handling, etc. As far as insurance compa-nies are concerned, it is entirely likely that the way in which insurances and products are handled is not unique from company to company. Add to the mix regulations such as Solvency II and this argument is strengthened still further. If you purchase a standard system, you are effectively sharing the cost of this with many other companies.

Long-term developmentOne problem with in-house systems is that they are often built just with immediate needs in mind. It is difficult to justify investment in possible future requirements. The pro-blem is that if you do not take future needs into account at the time, then it can cost much more to add these on after-wards. A software supplier has to provide solutions for many different customers’ needs and in so doing will invest a great deal of time and money in research and analysis of the futu-re. As a customer, you share some of your needs with other customers and, in so doing, you also share the cost.

Only a certain percentage of an policy administration system consists of unique solutions.

Problems occur if one builds a system just for im-mediate needs and does not think long-term.

AuthorizationLogging

Database-handling

Regulations

Insurance logic

Uniqueneeds

Error-handling

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One argument for in-house development is often the desi-re to be unique. An insurance company must have solutions that allow them to do things that their competitors cannot. This places high demands on software products for custom made functionality or to modify existing functions on a mo-dular basis. It is extremely important that a software pro-duct is capable of handling all of this in an intelligent man-ner so that new upgrades or hotfixes do not interfere with these customer modifications. Tailoring to customer require-ments can involve different types of re-configuration or even completely new development.

With these types of opportunities, the internal IT depart-ment can concentrate on the aspects which make their com-pany unique and differentiate it from their competitors.

The fact that an insurance company has individual needs is certainly true if that company is on the cutting edge and has business advantages that its competitors do not have. This does not necessarily mean however that its current proces-ses are the most effective available. A common mistake when you look at software products is that you try to map exis-ting processes directly across onto the standard system. You should attach great importance to first analysing the pro-cesses themselves in order to see if they are in fact the most effective available. Those that make the difference from the competitors’ are those which make the company unique and it is these that should be adjusted within the software pro-duct.

Some processes that work with an in-house system may not suit a standard system (customer care, advanced finan-ce functions, support). There are other software products within these areas which deal with these aspects in a much better way. It is however important to be able to effectively integrate with external systems.

Unique needsUnique needs should be manageable through ad-justments that are not af-fected by upgrades.

Analyse and evaluate the existing processes in order to maximise the benefits of a software products.

Not everything is suitable for off-the-shelf systems.

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When you talk about off-the-shelf systems, there are of course many different types of systems.

General systemsThis type of system is often built on a ’general’ base plat-form which can be used by many different types of indu-stries (insurance, banking, etc). Onto this base platform is added industry-specific solutions. The problem is that these platforms do not fit the processes and information structu-res relevant to any one specific industry. This means that, when attempting to solve specific problems and processes, it is not possible to do this in the most effective way. This leads to frequent ’work-arounds’ in order to solve specific problems. On the whole, these ’general’ models require a great deal of configuration in order to make them industry-specific.

Niche systemsNiche systems are designed for specific industries or specific parts of a specific industry (i.e. pensions or property & ca-sualty). The advantage with this type of system is that they are based entirely around processes that are specific to the insurance industry. This can often mean that the product provider is extremely knowledgeable about the insurance industry, has worked with insurance companies over many years and is aware of the challenges which lie ahead. With these systems it is important that one has made provi-sion for being able to communicate effectively with external systems and to be able to handle exports and imports. One problem can be that it is difficult to tailor the system to the requirements of the ’unique’ parts of the business.

Hybrid systemsA hybrid system is often built around a programming inter-face which has been specially developed for the insurance industry. The customers’ specific processes and graphic in-terfaces are then added on top of this interface. This type of system is a cross between a standard system and an own-developed system.Hybrid product providers are often large consulting compa-nies. These systems nearly always require the customer to use the consulting company’s resources in order to imple-ment the required solutions.

Different types of off-the-shelf system

General platforms do not always solve industry-spe-cific requirements in the most effective manner.

Niche systems are ba-sed on extensive industry knowledge.

Hybrids require extensive implementation.

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You never get exactly what you wantExact processes and requirements cannot be implemented 100% in an off-the-shelf system. Please note that you should review the processes to see which are really the most effec-tive. It might also be that new business opportunities, out-weighs existing requirements that cannot be reproduced 100% in a software product.

CostYou may have to pay for modules/functions that you do not need or use, if the software product cannot be tailored so that you only pay for what you use.

FlexibilityNaturally, software products need to be really flexible in or-der to handle many different customers’ needs. The danger is that, if a software product is built so flexible that it could po-tentially handle all imaginable scenarios then it often beco-mes extremely difficult to configure. It often requires experts from the product provider or dedicated internal resources. The difference between configuration and pure program-ming can be razor thin. An off-the-shelf system should have a good balance of configuration possibilities and code adjust-ments.

Reliable supplierAn insurance system is business critical and it is important to have a reliable supplier. Small companies can go bankrupt and then what happens with further developments, source code, etc.? As a customer, you should analyse the supplier and see if the company is financially stable and if they have credible and long-term relationships with their customers. Demand for instance, that they deposit source codes via the Swedish Chamber of Commerce.

Challenges for soft-ware products

The difference between ad-vanced configuration and development can be razor thin.

Good finances and long-term relationships indicate a reliable supplier.

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Mantacore AB is an IT company which supplies products and services to the insurance industry with particular focus on property & casualty insurance.

We supply the web-based off-the-shelf system Mantacore CS, which handles customers, products and business pro-cesses associated with insurance companies, captives and global brokers. The product has been developed using the latest Microsoft technologies.

This is the first of three papers on the subject of software products for the insurance industry. The others look at:

Part 2: What should an off-the-shelf system be able to handle?Part 3: How to implement an off-the-shelf system?

For more information on when the next two parts will be av-ailable, please e-mail marketing@mantacore.se or visit:http://www.mantacore.se/english/whitepaper

Homepage: www.mantacore.seMantacore ABLinnégatan 89ESE-115 23 StockholmPhone: +46 8-505 242 00

About Mantacore