Cloud computing – the way forward for insurers

The insurance market is characterised by two major types of companies:

• The giant market leaders, to whom policyholders and companies have turned for most of their lives; and

• New entrants – upstarts which are using today’s technology to steal market share

The first category depends to an unhealthy extent on legacy systems – often running on ageing mainframes – which represent several barriers to innovation, competitiveness and entry to new markets.

These legacy systems are costly to maintain. They reflect outdated thinking, often encapsulating processes that are a century or two out of date. They open up gaps for new competitors, who do not have the millstone of legacy systems around their neck. And, typically, they carry a high percentage of duplication, with paper files replicating digital information.

These systems do not only inhibit change: they positively prevent it, and those in charge of them are often among the most ardently resistant to change. Three reasons present themselves here: the investment made in these systems is typically very significant, running into tens of millions down the years, and the thought of an equivalent capex outflow is daunting; secondly, those in charge of them have built something of an empire; and thirdly, no one wants to rip and replace.

Cloud computing, or software as a service (Saas) in the South African context, means you don’t have to undo the investment or rip and replace existing systems.

Here’s why:

• Service-oriented architecture (SOA) means you can retain your investment in your existing systems, and instead encapsulate them in what is known as a “wrapper”. This approach allows legacy code to be maintained, where appropriate, and made available to new-generation applications and systems.

• As South African companies have embraced it, SaaS means there is no requirement to invest vast amounts of money in new systems, which would typically embrace applications, implementation, servers, disk, systems management, networks, databases, skilled staff, backup and recovery, monitoring and more.

• Instead, they can enter the new world of SaaS, aligned with SOA, which embeds legacy functionality in such a way as to make it available to new-generation systems and extend return on investment.

• In terms of the local approach to SaaS, payment for systems accrues only on value obtained. Stated differently, a company does not make vast payments up-front, but defers payment on a monthly basis, and in line with business success. Rather than the millions associated with new systems, especially the monolithic ERP suites that have caused nightmares in many metropoles, especially Cape Town and Johannesburg, payment is smoothed out and only kicks in once the system is actually up and running.

This approach is the breakthrough many insurance companies need. It is quite understandable that they are loath to switch systems, but, as one indicator, they should consider the following: the economy of scale and critical mass engendered by many companies sharing similar systems mean they are likely to reduce their costs. As a second indicator, they are certain to benefit from observed best practice, which is local and current. (Again, giant ERP companies have old practices embedded, and they are definitely not local, or lekker. That’s why municipalities and banks struggle so to implement, or obtain return on investment. They are financing ERP companies’ cash flow, but doing nothing to improve their own competitiveness.) Some organisations in South Africa have benefited hugely from aligning their business success with SaaS. They have become more competitive and profitable, and in some cases they have been acquired by insurers who want their expertise, process knowledge and experience. As a consequence, these insurers have been able to enter new markets, drive profitability and enhance long-term competitiveness.

In every possible sense, the cloud, or SaaS computing, is the way forward for insurers, if they choose the right partner.