Article appeared in Reinsurance Magazine, Jan 2011
The question of whether reinsurers build their own in-house IT systems or buy from established providers has long been debated. Richard West, Sales Director EMEA, FINEOS, examines the pros and cons of the Build/Buy conundrum.
“To build or to buy” is the IT systems’ equivalent of “to be or not to be” but in recent years the debate has become increasingly one sided.
There are still those who espouse the benefits of the build argument and on the face of it for some it remains compelling.
Control has always been seen as a key advantage with no reliance on third parties and a solution which is tailor made for your company and will take into account the existing software which means you only get the additional technology and systems you require.
Cost remains a key and the use of existing staff or lowest rate contract staff is seen as another benefit of build. As with any system agility is key and those who back the build argument believe that if it is built to the firm’s specifications there is the ability to tweak the system as needed, as you retain control.
But with control comes complete responsibility. A bespoke built system will deliver to the known requirements of the firm at present. Speak to your key staff and ask them what they want and they will ask for solutions to today’s problems. They will have neither the inclination and in some ways the expertise to look into the medium term to identify the markets trends and what they will mean for the systems of the future.
In effect you are working from your own business and technology skills and while your IT department may well be experts on the systems you have, do they have the capability to design and build bespoke systems?
Building a large and complex system is disproportionally risky when compared with smaller systems and the task can be extremely time consuming for an in house department which is also being asked to carry out the day to day tasks which are part and parcel of IT support. Indeed given the time involved while on the face of it using in-house or contract staff on daily rates can all too often not lead to a cheaper solution.
For many the biggest issue is that a bespoke solution will deliver a version 1.0 system to the requirements of today. How many companies will honestly buy a version 1.0 system which is untested and untried?
Factor in the fact that with a build system that any changes and any cost have to be totally funded by the company and the argument that the build option is cheaper starts to lose a certain amount of traction.
The most compelling argument for buying a system is that the product will already exist and will have a track record which means it will work.
The capability will be beyond the scope of your initial requirements. While a company will have a list of the functions they need the systems to deliver an exisiting product will come with additional functions which while not on that company’s wish list may well solve issues which had not been identified and those which have yet to materialise as the market changes.
If we take the London market as a prime example the coming years will see a fundamental period of process reform as technology drives the way business is transacted. In the claims sector the delivery of Electronic Claims Files (ECF) have been hailed as a tangible result of the market’s process reform efforts so far and the expectation is that ECF will be the platform for the greater use of technology in the market.
Established products will also have been built around not one but a number of clients and they will have pooled their experiences to create the features, and the future roadmap to take into account regulatory changes, new technologies and as we see in the London market the drive for greater automation.
The product provider will drive the updates to the system to ensure it is relevant and those development costs will be shared by the vendor and their clients.
Indeed in the current market the tailor made/bespoke rationale for building your own system is becoming ever more redundant. In the modern insurance and risks market good products have to be flexible and extendable to achieve tailor made levels of customisation and should be easily integrated with existing systems.
The build or buy argument is becoming increasingly redundant as today’s systems providers create products which answer so many of the points which have been cited as the reasons why build is best.
In the current market costs remains a key driver but product providers have to list detailed costs and deliver both on cost and specification otherwise they will become enmeshed in unpaid invoices and bad references. Indeed the flexibility that has for so long been viewed as expensive if placed within an existing product is no longer a nice to have but a necessity.
While for some the build debate continues increasingly in the insurance sector ever more firms are buying in to the argument that established products are not at a stage where they deliver functionality and cost effectiveness in equal measure.