Context is King

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The February edition of Best’s Review contained an article called, “‘Build vs. Buy’ in the Digital Age”, that said this, in part:

The perennial question of “build vs. buy”—whether to develop proprietary applications or acquire third-party solutions—has been argued among insurance stakeholders for as long as any of us can remember … In 2000, the global spend mix for insurers was 90% internal versus 10% third-party—now it’s 55% versus 45%.

That struck us as a little curious. So, we did a little more digging. And our search gave us some much-needed context. We learned company size, budget, and specialization are determining factors in whether insurers build or buy. Generally speaking:

  • Large insurers like AIG, Allstate, State Farm, et al. often develop proprietary software tailored to specific organizational needs.
  • So-called insurtechs like Lemonade, Root, Hippo, and others tend to develop software in-house software in efforts to differentiate their offerings with things like AI, big data, and automation.
  • Niche insurers that have specialized underwriting needs may also develop their own software.
  • Mid-sized, regional, and smaller insurers tend to purchase software to manage policy administration, billing, and claims.
  • Reinsurers and specialty insurers may buy software or integrate with third-party sources for risk modeling and data analytics.
  • Many insurers customize software from vendors by building additional modules or integrating third-party APIs.
  • While core systems like policy, billing, and claims might be bought, customer experience tools like mobile apps and chatbots are often built in-house.

 

More Specifically

Beyond those generalizations, cloud-based, web-facing systems and SaaS have made buying software more attractive. APIs and microservices make it easier for insurers to mix and match vendor and custom-built components. And AI and data-driven underwriting sometimes compel insurers to build proprietary tools for competitive advantage.

Interestingly (at least to us) 80 to 90 percent of small to mid-size Property & Casualty insurers rely on vendors for their core-processing software. Large Property & Casualty insurers, on the other hand — the top 10 percent by market share — often develop their own data analytics, AI-based underwriting, and customer-engagement tools, even if they’re purchased their core-processing systems from vendors.

 

Where Does That Leave Us?

It’s no surprise that the decision for insurance companies to build or buy software can be complex and dependent on a number of factors. While building software in-house can offer customization and control, buying systems — especially cloud-based, web-facing systems — is more cost-effective and efficient. Throw in no-code platforms and the need for digital transformations to remain competitive, and you have an even more complicated picture.

Our best advice is to choose wisely. If you’d like to talk with us, we’re here to help.