Claims: To build or to buy?

Insurers consider a range of variables from performance, cost, and security to the demands of ongoing maintenance and upgrades when deciding whether to build or buy a new claims system

A claims system is a core component of an insurer’s increasingly fragmented infrastructure and a touch point for virtually every area of an insurance business.

With insurers under pressure to improve efficiency and satisfy the growing expectations of customers when it comes to fast service and claims payment, many know they must replace their existing claims systems if they are to remain competitive.

Improving speed and workflows, reducing errors, and gathering analytic insights can only lead to better claims service and drive internal efficiencies – and these are integral to any new system design.

Integration with external ecosystems and Electronic Claims File Write-Back (ECF WB) functionality is also increasingly essential as the insurance market embraces digitalisation and real-time data exchange.

Once the decision has been made to invest in a replacement claims system, the first choice an insurer must make is whether to build a new one themselves or buy one from a trusted vendor.

With cloud capabilities expanding and the cost of hardware and software at an all-time low, developers can now scale-up infrastructure quicker than before and at lower cost – making building a competitive claims system in-house arguably more achievable now than a few years ago.

In some cases, successful in-house systems have even been white labelled and marketed to other insurers, providing additional revenue streams.

However, over the last two decades, insurers have steadily moved away from building their own IT infrastructure in favour of buying third-party software solutions.

According to a 2017 survey by Celent, 53% of European insurance CIOs planned to buy their next system while 34% planned to engineer their own leveraging microservices and APIs.

The decision to build or buy will be influenced by many internal and external factors unique to each company, with performance, security, and cost high on the agenda.

Data is mission-critical for any insurer and with cyber threats evolving all the time, security and control have never been more important.

Building a system gives the owner complete control of its data, processes, and customer relationships. However, it is becoming increasingly challenging to keep up with new regulations and security requirements and the continued development of better systems by competitors and vendors.

Insurers must therefore only invest in building a system if they know they can do so faster or better than what is available to buy. This includes harnessing automation and DevOps to ensure they can quickly deploy, build, test, and update applications as quickly or quicker than competitors and threat actors.

A good third-party software vendor will work collaboratively with the insurer to ensure a bought system also meets their specific needs, provides a seamless experience for customers, and guarantees the security of sensitive data.

Vendor systems are built and maintained by experts and are continually enhanced and updated, easing the burden on internal resources while reducing dependence on legacy systems. A bought system can be implemented on-premises or hosted by the vendor securely in the cloud, and a fully managed system allows the insurer to pass responsibility for management, updates, and security completely to the vendor.

When application development is outsourced, owners can scale up their business quickly at low cost and effectively become platforms for innovation. ‘Out of the box’ systems can be quickly deployed, configured, and iteratively upgraded.

Sequel Claims, for example, is a flexible, scalable claims solution which can be integrated with an existing system as a standalone product or implemented as part of Sequel’s end-to-end Eclipse solution.

Buying a system reduces development risk as vendor systems have been tested and used by other customers and subject to ongoing customer feedback, assuring secure and reliable software. Vendors have years of designing solutions, which drives savings on speed to market, hardware purchases and maintenance, additional software and the cost of IT administrators, analysts, and developers.

Building a new system will incur considerable upfront development, testing and execution costs. These costs can quickly inflate as it is estimated only 10-15% of an in-house build is visible upfront with the rest being hidden or hard to estimate.

The up-front costs associated with buying are usually lower and are fixed at the outset, removing the risk of costs spiralling out of control. Buying also often represents better value for money than building as third-party systems often include additional features not included in a custom build.

There are also ongoing operational expenditure considerations. Hosting core systems in on-premises data centres can be expensive over the long term due to the cost of hardware maintenance, software updates and meeting ever-expanding data storage needs. This is forcing many insurers to consider re-platforming core systems into the cloud, or to buy a system from a vendor under a managed service agreement, eliminating these pain points.

These bought options both incur ongoing subscription fees, though outsourcing to a vendor saves on maintenance, update, and development costs. Under a managed service, the vendor takes care of all maintenance and upgrading of hardware, software and infrastructure and provides ongoing system performance monitoring and support, freeing up internal resources at the insurer.

The primary aim of overhauling a claims system is to provide a better claims experience. The claims system of today should bring market and internal claims and document management into one intuitive workflow engine and automate many manual steps, reducing errors and driving efficiency. It should also integrate seamlessly with ECF, allowing users to create their own claim files, view broker data and interact fully with the market’s central claims systems in near-real time from within their own system, enhancing the electronic claims process.

It should also include analytic capabilities to allow carriers and adjusters to better understand loss factors and spend more of their time and resources on adjusting and paying claims – reducing the length of the claims cycle and delivering a faster, more efficient service to customers.

With the right design, this can be achieved by either building or buying, and each carrier’s decision-making process will be different. But in a rapidly evolving information landscape these systems must be built to adapt. Insurers may therefore be best served placing their upgrade pathways in the hands of software specialists.

Author: Christina Hill, Head of Sales, claims, Sequel
Published: Insider Engage 20 January 2021

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