Myth Busters: “Insurance Systems — Are they like Rubik’s Cubes?”
Remember the Rubik’s cube? We all had to have one and we all tried to solve it. It is regarded as nostalgic, fun and frustrating all at the same time. Why has it been so successful? Some credit it to both its complexity and its simplicity. As a puzzle, it exhibits architectural genius and yet it needs no instructions to begin trying.
Why do I bring this up? Because just like the Rubik’s Cube, Insurance is both complex and simple at the same time.
My one-year anniversary in the insurance industry just passed and I am starting to feel like I am getting a real handle on the market. Though I must admit, I still Google an insurance business term or acronym at least once a week. In my first 6 months, everyone was quick to tell me how complex the insurance business is. Those same people would then tell me that once they got into the industry, it was impossible to get out!
The two things that took me the longest to fully comprehend were:
- The unique complexity of the insurance business and offerings from state to state, country to country, and line of business to line of business. Unlike other financial services products, each element of offerings, pricing, and regulations are not created or managed the same, and;
- Most companies do not have a single core system that handles the full suite consisting of Policy, Billing, and Claim components. And for the ones that do, they don’t generally use the same system for more than specific segments like personal lines or sometimes for one line of business like workers compensation.
That’s mind-blowing. How can any industry handle that complexity? The Rubik’s Cube gets even more complicated since most companies offer at least 5-6 lines of business and may have grown through acquisition, which just results in multiplying the basic math of the market opportunity.
When it comes down to core insurance systems in use in just North America, here is the high-level simple math, straight from my whiteboard.
- There are approximately 1,200 insurance companies in North America for P&C and L&A (over 2,000 if you added their state affiliates).
- Multiply this by an average of 5 product line segments (personal, commercial, specialty, life, workers compensation, etc.).
- Multiply that number by 3 separate systems for Policy, Billing, and Claims.
- The total equals 18,000 potential systems in use.
These numbers are either on the high end (because many companies use a single Billing and Claims system) or on the low end (because many have more than one policy system, since underwriting can vary the most and it is often unique based on product line).
Market Size and Vendor Accounting
Many people talk about market size based on number of accounts, but the reality is they are double and triple counting. One vendor counts an account because they use at least one module for one line of business while another counts the exact same account for a separate module or line of business.
Another common industry-wide metric is DWP (Direct Written Premium) on the system. Again, unless it’s a full suite for every line of business, there is double and triple counting.
Regardless of how you choose to count the number of accounts, number of systems, and DWP, they are all different metrics.
So, while people claim that 60% of DWP is using an on-premise system, it is actually likely less than 20% of all the actual systems that exist. What makes matters even more complicated is that it is likely that 60% might be true for Claims, while it’s more like 50% for Billing and 40% for Policy.
Coming from the enterprise technology market, I was accustomed to breaking the Enterprise 2,000 Accounts into three categories:
- Existing accounts with a focus on renewal and expansion
- Competitor accounts with a focus on replacement
- White Space customers with a need for new technology
The bottom line is this: for those organizations, like Majesco, that serve insurance carriers, MGAs, brokers, and reinsurers there is more market opportunity than I could have possibly comprehended a year ago. Most insurance companies are challenged with a two-speed approach to modernization, optimization and growth. While many would love one single system to modernize and optimize operations, no one wants to sacrifice their unique underwriting business opportunities, and when companies grow through acquisition, they become more and more complex.
So, if this is all true, what does it mean? It means that 80% of all core systems are home grown or legacy (10 – 30+ years old) package technology that is on-premise. Some of the DWP may be running on modern, on-premise systems (current release minus 1), but it seems to be a small percentage of total existing systems. Many of these modern on-premise systems took 5-7 years and hundreds of millions of dollars to implement. They are also probably highly customized, making upgrading timely and expensive, sometimes near the cost of the original implementation. Systems that may have lasted 15-20 years are no longer standing the same test of time because of the pace of change for both the technology and the business. When it comes to modern technology and the need for agile and flexible capabilities, most companies are currently falling short.
And with InsurTech, we are now focusing on innovation and creating new products and business models. Unfortunately, those modern on-premise systems don’t easily adapt to these innovations. Why? Because we implemented our modern on-premise systems assuming the business of insurance would stay the same. But it’s not. As a result, we now have to also consider that our statistics don’t even reflect innovative new lines (on-demand, cyber, rideshare, etc.) or new businesses that are being built on modern cloud-based systems because many are standing up separate solutions to create a new business for the future that is in the cloud, on-demand, hyper-relevant and scalable.
What this means is that insurers are bearing a tremendous operational cost to manage and maintain these environments instead of considering how profitable they could become with a unified new environment. If this is the case, then we must continually look at what drives insurers to maintain instead of transform AND what are the hurdles that are clearly holding many insurers back?
I would like to invite you to become a part of this conversation, because insurers, and those who serve insurers, have a lot to learn from each other. You can weigh in by taking our short annual Strategic Priorities survey. In a short time, we’ll send you a report about the trends happening in our industry based upon your responses and the responses of other insurance executives just like yourself, highlighting what leaders versus followers and laggards are doing. We do this every year and every year it grows in value because we are able to capture some remarkable industry trends year over year.
The value in self-assessment
So, we have a ton of work to do if the market is going to truly transition to a modern, cloud-based digital world. The good news is that culturally the question is no longer “should our organization transform?” but rather “by when should we transform”?
The second question is no longer “have we decided on a digital journey”, but rather “how far along are we in our digital journey”?
These questions fit nicely with another thing that I have learned from insurers in my first year. The most successful insurers seem to be those that are adept at self-assessment. The organizations that truly know themselves, also know where they need to be.
So how far along in the journey are you? How quickly can you solve your Rubik’s Cube? Take this survey. Take a few minutes and assess. All responses are private and not shared, except in aggregate. Thank you for participating and thank you for your role in making the insurance industry a fascinating and exciting place to be.
By Adam Elster