From our conversations with Insurance leaders, several topics have emerged as key focus areas for 2021 and beyond. In this series, some of our experts will provide insights on how to adapt, accelerate, and innovate in Insurance by tackling the areas of Open Insurance, Data Exploitation, Cloud Migration, Customer Retention & Cross-Selling, Intelligent Underwriting Workbench, and Low Code. In part 3, Robert Anderson explains the reasons why insurers should and want to migrate to the cloud and how to successfully start your cloud journey.
In the previous parts of this blog series, Gareth Miller and Dan Pelos expounded upon the ideas of Open Insurance and Data Exploitation, both of which will require a profound shift in how insurance companies handle and share data. However, we are already in the midst of another attitude shift within the Insurance industry, namely that of migrating systems to the cloud.
About a decade ago, I helped a company adopt their first application that was natively built in the cloud. It was exciting because I was blazing a trail and establishing a precedent in the company for the adoption of all cloud solutions that were to come afterwards. But it was also challenging because the company was only set up to adopt IT solutions with on-premises hosting. I had to fight tooth and nail to change established processes and make them more appropriate for cloud services.
In the decade since this project, Cloud has matured and become an acceptable part of any IT estate. Today, there are different ‘types’ of cloud: infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS). And these days, we are entering the era of serverless technology.
While companies in other sectors, like retail or travel, have fully embraced the cloud, the Insurance sector as a whole has been slower in its adoption. This was primarily due to security concerns, especially when it came to data controlled by regulations. However, over the past years, insurance companies have moved from being fiercely resistant of the cloud to cautiously optimistic. A recent survey of over 100 Insurance CIOs found that 63% of insurance companies are looking to further migrate their applications to the cloud.
This is primarily for the following reasons:
- Cloud is viewed as more secure than it was a decade ago.
- Cloud is seen as a way of outsourcing commodity.
- Cloud services themselves have matured.
- There are some natural synergies between cloud adoption and other transformation programmes (e.g. data, digital) they are undergoing.
DRIVERS FOR CLOUD ADOPTION
There are four key reasons why insurance companies want to migrate to the cloud these days.
The first reason is that the Insurance sector needs to find ways to reduce costs. For the past few years, general insurance companies have been able to keep premiums down and remain competitive by releasing reserves due to lower than forecasted claims. However, this is an unsustainable position. Additionally, the rise of price comparison websites has squeezed margins. In the reinsurance space, there is an excess of capital flooding the market; there are a lot of capital providers chasing market share, which in turn is driving margins down.
With the downturn in most national economies, which has been exacerbated by the global pandemic we are currently facing, people and corporations have less money to buy insurance products. Insurance companies respond to these conditions by reducing their operational costs to try and keep their premiums low. They also look at other sectors and see how they’ve adopted Cloud and how this has had a favourable impact on their bottom lines. The insurance companies naturally want to follow their lead.
Legacy IT replacement
A second driver for cloud adoption is that many established insurance companies want to remove their dependencies on legacy IT estates. In the early days of technology, insurance companies were some of the first adopters. However, instead of keeping pace with the times and changing their technology stacks to keep them current, they often just developed on the existing platforms, usually without any overall IT strategy.
Additionally, most of the established insurance companies have grown through mergers and acquisitions. Instead of properly integrating and rationalising their IT estates, they often just bolted them together in a haphazard manner. This has resulted in IT estates that are a spaghetti junction of intertwined, obsolete technologies, otherwise known as toxic IT. Therefore, insurance companies see the adoption of cloud as a way of modernising their IT estates and removing the outdated technology.
An unfortunate side effect of legacy IT estates is the difficulty to make any changes to them. As such, the third reason for insurance companies to migrate to the cloud is to help them respond to changing market conditions in a quicker and nimbler way because some things are just not possible with on-premises systems.
For example, most insurance companies have a so-called ‘renewal season’, a period when policy activity is significantly higher than at other times of the year. In an on-premises estate, you must size your services to cope with the peak activity levels. This leads to services that are well overprovisioned for, say, ten months out of the year.
Additionally, it is difficult to scale your on-premises IT systems to handle unexpected events. How did insurance companies scale to handle the massive influx of travel claims at the beginning of the COVID-19 pandemic? The sad answer is that most didn’t, and therefore many of their customers were left frustrated and upset. If Cloud is done right, the IT services can scale up to meet increased demand and back down once that demand has passed. This frees insurance companies to focus on their true differentiators – their underwriting skills and claims handling.
New ways of working
We are seeing insurance companies not wanting to wait years before an IT project delivers any benefits, as is the case in traditional waterfall delivery. As such, they see Cloud as a way of truly being able to introduce DevOps and to work in a more efficient, agile manner. Some of the cloud services available today, such as serverless architecture and containerisation, enables developers to work in a segregated manner, allowing them to work at pace with minimal adverse effects on the overall product. This results in benefits being delivered quickly and iteratively.
STARTING YOUR CLOUD ADOPTION
While adopting Cloud can solve a lot of business challenges, it’s not without its perils. Insurance companies cannot just migrate blithely to the cloud and expect it to be a success. There are two primary things to do in order to get started correctly.
Assess your company’s cloud readiness
The first thing insurance companies need to do is to assess how ready their business is to adopt Cloud. As illustrated in the opening paragraph, the old ways of working don’t really fit with the cloud. Processes need to be changed, new governance structures need to be established, and different skill sets need to be developed or sourced. If an insurance company treats the cloud as just another data centre, this will increase costs without providing any of the benefits. This could explain why some companies have gone back to an on-premises setup after dabbling with the cloud.
Assess your IT estate’s cloud readiness
The second thing an insurance company needs to do is to assess how ready its IT estate is to migrate to the cloud. Our experience has shown that organisations often vastly underestimate the effort a cloud migration will take – because they don’t appreciate just how unready for the cloud their IT estate actually is, and therefore they keep getting hit with delays and unexpected costs. The result is that a two-year cloud migration might be in its fifth year of delivery, and still not everything is migrated yet. Things to watch out for are an overreliance on legacy technologies with no clear upgrade path, numerous point-to-point integrations, and many bespoke applications to fit the company’s unique processes.
One way we’ve helped clients mitigate against this is by taking a more nuanced approach where systems are migrated in a number of smaller tranches, enabling learnings from one tranche to be applied to the next one.
Insurance companies are starting to see Cloud as a mature technology. While there are many benefits of cloud adoption, it isn’t without its risks and challenges. In order to make sure that a cloud journey will be successful, it is vital to start by assessing how cloud-ready an organisation really is, both from a business and an IT perspective. Such an upfront assessment and getting professional, trusted support during the cloud migration itself can result in a number of the potential pitfalls being avoided, as we have experienced firsthand in many client projects. Cloud is here to stay, and it is best to embrace it, instead of closing your eyes and hoping that it will go away. Just remember: behind every cloud is another cloud.