What insurers should consider before building or buying software

Insurance companies are not software companies, yet why do so many feel the need to develop their own software? In an era of digital transformation across industries and as the insurance industry overall has begun to more fully embrace technology, legacy carriers have traditionally been slow to keep up, at times attempting to compensate by developing their own software in-house.

Yet a traditional insurer cannot easily pivot to become a software company, and many failed attempts have been left in the wake. An easier solution often appears to be the purchase of needed software from an external provider, but it’s not as simple as that. There are multiple hurdles to navigate when outsourcing that decision.

Here we examine some of the issues behind insurers developing their own software or deciding to purchase an external solution and the pitfalls of both paths that they may encounter along the way. 

A question of cost – upfront and over time

As with any investment consideration for an organization, there is the question of cost. It may seem at first that building out a new software system would eventually save versus purchasing similar software, spending on annual licensing fees, contracting costly implementation and maintenance consultants, etc. but that might not necessarily be the case.

Developing software in-house generally requires a significant investment in infrastructure and highly-skilled talent.

Developers, designers, data analysts, user experience experts and other professionals proficient enough in the creation of the required software are generally not cheap or easy to come by, especially at the scale needed for more ambitious initiatives. Combine that with the persistent perception of the insurance industry as somewhat stodgy – the industry still doesn’t naturally come across as a classic hub for tech talent – and it can be a challenge to source high-quality, cost-effective teams.  

Also, depending on performance of the underlying business continuous investment and updates can be less predictable with own-designed software rather than with purchased solutions. 

It may seem at first that building out your own software infrastructure makes sense, but the higher upfront costs of purchasing a solution may eventually balance out longer-term talent and resource expenses. 

Time horizon

While some development and implementation time is to be expected, purchased solutions typically win  the race to the finish line handily vs developing an in-house, bespoke option. Building anything from scratch can be a consuming process, let alone for a complex insurer with multiple moving parts, legacy software, a regulatory framework to abide by and any other number of complications. In the case of regulatory issues alone, many out-of-the-box solutions have already addressed those particular hiccups, speeding time to market considerably. 

Moreover, dedicating valuable internal resources to software development might divert attention and budget away from other critical initiatives, leading to a challenging prioritization allocation for deploying limited resources effectively. 

Integrating a bought system into a complex web of software solutions can be a major headache, while building software in-house – though allowing for closer integration with existing – requires careful, time-consuming planning and execution.

When it comes time to customize 

A relevant downside to purchasing software is that many “out of the box” solutions don’t allow for the significant customization and flexibility that many carriers normally need, often requiring a shoe-horn approach that can jam up operations, or worse. 

Building software gives carriers the ability to tailor the end solution to their particular business and client needs and also allows for processes to be more easily adapted at future points should business requirements change. 

Insurers must decide which option – make or buy – will lead to the agility and ability to scale that will keep pace with or even advance beyond evolving customer needs and industry trends. 

The innovation advantage

Carriers developing their own software may enjoy a competitive advantage, since they can differentiate themselves in the market, license the software to others, earn industry respect for an innovative solution, etc. Unfortunately, a primary challenge for carriers has been their outdated systems and infrastructure. Many legacy systems are monolithic and inflexible – not the ideal combination for encouraging innovation. As well, the insurance industry is not typically associated with an agile and iterative development culture. 

Alternatively, purchasing ready-made software which may already be in use by competitors can limit first-mover advantage or slow down other opportunities for growth or standing out in a crowded market. A plus to buying that software though is the producer may have already built in necessary elements such as a seamless online experience for customers, more personalized interactions, self-service capabilities, etc. which will augment the success of the integration. 

Begin with the end in mind

The decision to make or buy software should not be taken lightly by carriers. Cost, implementation timeline, regulatory issues, talent availability, competitiveness and scalability amid a multitude of other factors need to be considered before making a final informed decision. 

Starting with the strategic goals of the organization, it’s often useful to work backwards to see what challenges the software is meant to solve, conducting an in-depth cost-benefit analysis along the way to result in an informed decision.