June 28, 201 – Spending on cloud computing in global financial services will grow from $4 billion in 2010 to more than $27 billion by the end of 2015, a compound annual growth rate (CAGR) of nearly 47 percent, according to a new report released by research consultancy TowerGroup.

Yet despite rapid growth, cloud-based services will represent only about 6 percent of IT spending by 2015 due to challenges of changing delivery models, the need to recover sunk costs, regulation, and reticence. In its latest report, “Destination 2015: Spending on Cloud Computing in Financial Services," Rodney Nelsestuen, senior research director in TowerGroup’s financial services practice, notes that, for a number of reasons, cloud computing for insurers and other financial services firms is here to stay.

One of those reasons is within the vendor community, where, across the IT and service spectrum, service providers are adding on-demand services, which contribute to the continued growth of the cloud phenomenon.

“Even vendors of installed software have been affected by the cloud business model and are adopting 'pay-per-use' options as part of their licensing options or as a total replacement for traditional licensing,” notes Nelsestuen, who authored the report.

Another reason cloud spending will rise, notes Karen Pauli, senior research director at TowerGroup’s insurance practice, is that many insurers already have put much of their infrastructure out in the cloud.

“It varies widely by insurer, but outsourcing is considered an ebb and flow issue, and for big property/casualty and life and annuities organizations, there is a tradition around how infrastructure is treated, and cloud outsourcing is already happening.”

Pauli agrees with Nelsestuen that challenges remain with the various and changing cloud deployment models (public, private, hybrid and community) such as security issues, lack of standards and an eye on watching the bottom line for hidden costs.

But that does not seem to be deterring insurers and other financial services firms from moving forward, using cloud for business services such as administrative or human resources functions and the more common and long-held practice of using cloud for customer relationship management.

“More recent on-demand services involve specialty services such as providing analytics at customer touch points for real-time analysis to determine next best steps with that customer,” notes Nelsestuen.

But, cautions Pauli, insurers would be wise to take cloud vendors that want to “change the world” with a grain of salt. “Everyone wants something to be a transformational trend,” she says. “It’s an opportunistic issue on the part of insurance carriers and will be considered by each of them in a different way. Luckily, our industry is losing the “herd mentality” and many insurers are stepping up with regards to unique

This story originally appeared on Insurance Networking News.

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