Is SaaS a Viable Option for Core Insurance Systems?

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My recent blog on whether or not homegrown systems are a dead issue in our industry prompted one of our readers to wonder about a related topic. Specifically, he wanted to know: “Is the insurance industry ready for a SaaS (Software-as-a-Service) offering around the core systems?”
What intrigued me about the reader’s question wasn’t so much the idea of SaaS use in insurance, which is already a reality in some quarters, but the idea that it would be applied to core systems. Using the technology for sales and marketing efforts is one thing, but would skittish insurers apply it to their critical data backbones?  
It might be useful first to consider what we mean by SaaS. According to Webopedia, an online technology reference, SaaS is a software delivery method that provides access to software and its functions remotely as a Web-based service. SaaS typically allows one to access business functionality at a lower cost than the usual method of purchasing licensed seats, because the pricing is based on a monthly fee. And of course, since the software is hosted remotely, users don’t need to invest in additional hardware.  
Sounds good so far, but there are also drawbacks. The names several: 
1. Customers can’t control software versions and functionality.   2.  It may not be possible for the customer to change or customize the software code so that it functions differently than the standard software.  3.  Security is not under the customer’s control.  
(The last two points may be particularly vexing for insurers.) 

Insurance is far from a one-size-fits-all business, and customizing applications for a company’s unique needs is pretty much standard practice in our industry. Meeting a carrier’s requirements in this regard may well require much more flexibility than is offered by the SaaS vendor, especially when it comes to core systems.  
Then there is the security issue. All you have to do is scan the headlines of the last few months to find stories of hacking and other tech-related criminality more than sufficient to convince you that the Internet is a very insecure place. Add to that the inability to control the security measures that will protect data that is the very lifeblood of an insurer’s business, and you have a powerful inducement to avoid the SaaS model.  
And what about the economic future of SaaS companies themselves? Seeking Alpha, a Web site for stock market opinion, featured a 2007 article (pre-recession) that asserted: “In a declining economy, SaaS companies may take a triple hit as they will see their initial transaction sizes trimmed [and] upsell opportunities reduced or eliminated …  History suggests that if the downturn/recession lasts longer than nine months, we will likely witness a meaningful negative impact on SaaS companies.”  
All this is far from encouraging for any carrier considering the SaaS model for its core systems. Insurers are a cautious lot to begin with, and when the risk is to their core systems, the caution level reaches stratospheric proportions.  
So, are insurers likely to embrace SaaS for their core offerings? Probably not at this point, but SaaS vendors are working hard at mitigating the potential problems with their systems and their paradigm. It will probably take more of this work—and a more risk-friendly economic climate—to convince many insurers to choose the option for critical systems. But it is not out of the realm of possibility.

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