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

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JULY 2009 WHITEPAPER:

Prepare your policy administration

system for the future - Part 1: Off-
the-shelf or in-house?
 Part 1: Off-the-shelf system or build your own? Page 2

Introduction 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

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

www.mantacore.se
 Part 1: Off-the-shelf system or build your own? Page 3

History 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.

In many industries, soft- Examples of industries where software products are now the
ware products are al- norm:
ready 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.

Image: Punchcard

The shift in focus is Gradually, a shift has occurred where most of the logic which
towards front-end sys- was previously found in the old back-end systems has been
tems instead of back-end moved into front-end systems, i.e. to systems where adminis-
systems. 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.

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 Part 1: Off-the-shelf system or build your own? Page 4

The time is ripe for off-
the-shelf systems
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 technology
The right technology is now Modern platform technology, the internet, SOA, web servi-
in place for software pro- ces, xml and user-friendly interfaces are all now readily avai-
ducts. 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 change

It 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 company

These 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.

Globalisation
The Solvency II regulations Insurance companies are no longer just active in their home
promote the idea of system market. It is becoming all the more important to be able to
support. 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 costs

New customers should not Internal IT costs should not increase with every new custo-
mean expensive IT costs mer that comes along. Margins have to be reduced and new
every time. customers and markets reached without expensive IT pro-
jects.

Competence and experience

The 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.

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 Part 1: Off-the-shelf system or build your own?
In-house versus stan-
dard systems
The core business is diffe-
rent for insurance compa-
nies and system providers
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.
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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 IT
An 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:
Technical education Technology surveillance
Certification Development Methods
Partnership Product processes
Test/QA Support
Product organization User-friendliness/De-
sign
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
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 Part 1: Off-the-shelf system or build your own?
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.
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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 products
Major 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.
Unique
needs
Regulations
Insurance logic
Logging Authorization
Database-handling Error-handling
Long-term development
One 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.
www.mantacore.se
 Part 1: Off-the-shelf system or build your own?
Unique needs
Unique 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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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.
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 Part 1: Off-the-shelf system or build your own?
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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When you talk about off-the-shelf systems, there are of
course many different types of systems.
General systems
This 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 systems
Niche 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 systems
A 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.
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 Part 1: Off-the-shelf system or build your own? Page 9

Challenges for soft- You never get exactly what you want
Exact processes and requirements cannot be implemented
ware products 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.

Cost
You 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.

Flexibility
The difference between ad- Naturally, software products need to be really flexible in or-
vanced configuration and der to handle many different customers’ needs. The danger is
development can be razor that, if a software product is built so flexible that it could po-
thin. 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.

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

www.mantacore.se
 Part 1: Off-the-shelf system or build your own? Page 10

About Mantacore 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.se
Mantacore AB
Linnégatan 89E
SE-115 23 Stockholm
Phone: +46 8-505 242 00

www.mantacore.se