What’s the best cloud architecture for insurance core technology?

Today, more insurers than ever are adopting cloud technology for their core platforms, leaving behind legacy systems of the past for digitally transformative software. However, many are surprised to find that the cloud is perpetuating some of the same challenges their legacy system created. The reason lies within cloud tenancy, which determines how cloud customers access and utilize resources. Tenancy carries substantial and lasting implications for insurers and can impact profitability, flexibility, sustainability, and more.

In this article, we’ll compare the various forms of cloud tenancy across five important areas for insurers: cost, security, agility, maintenance, and scalability.

What is cloud tenancy?
Tenancy is a term used to describe software architecture, and more specifically how customers access and utilize digital resources. A “tenant” is essentially a customer who purchases cloud resources. Like a tenant renting a house or an apartment, the customer doesn’t own the infrastructure and simply pays to use it.

Three main models exist single-tenancy, multi-tenancy, and hybrid-tenancy. 

Single-tenancy
In a single-tenant model, customers have access to one set of resources (i.e., an application, database, and server). These resources may comprise on-premise legacy systems or applications hosted over a dedicated cloud. Using the real estate analogy, customers that choose ST rent an entire house; the renter doesn’t share space or property resources with other houses. Single-tenancy cloud applications are generally best used for systems of differentiation, such as portals.

Multi-tenancy
In multi-tenancy, multiple customers choose to share a single application server and/or data server (a single pool of servers), which houses the system and data. In real estate, this is analogous to a customer who rents an apartment in a building; they acquire their own space, but share resources like hallways, trash disposal, HVAC, and common areas with other tenants. Customers subscribe to this model when they use systems like Google Workspace and software-as-a-service (SaaS) systems like Salesforce. 

The advantages of MT are numerous. Customers gain flexibility, cost-efficiency, and scalability, among many other benefits. Unlike ST, insurance companies can use MT to digitally transform their operations, become more agile, and fully optimize integration and configuration capabilities.     

Hybrid-tenancy
Combining the ST and MT leads to the third form of tenancy, HT. In this model, customers theoretically gain the best of both worlds by getting to decide which resources to share and which ones to make private. In the real estate analogy, It would be similar to a housing community where their house is still single tenancy, but the HOA might own a community pool, security gates, shared water, electric, etc. This is a great model that helps many people find the right fit.  When it comes to insurance core technology, however, HT remains an elusive model. That’s because customers must rely on core platform providers that don’t provide clarity into which aspects of their platforms constitute ST or MT. Insurers buy HT core platforms only to discover they purchased expensive, inflexible ST systems.

Cost

Single-tenancy: As with purchasing a house, customers who choose ST, select the most costly tenancy option. In this model, each customer receives dedicated resources, yet bears the full expense and responsibility of buying, deploying, and maintaining their IT infrastructure. ST requires insurers, for example, to purchase their own instance of an application, server, and database–a significant upfront cost. It also forces them to back up and restore their data, implement a disaster recovery system, and manage patching and updating. Additionally, customers can’t maximize the efficient use of their system and its resources. They pay for a server that doesn’t operate at full capacity, and when it does, they must purchase additional server space that allows them to continue to underutilize resources. 

Multi-tenancy: For customers who choose MT, they select the most cost-effective form of tenancy. They share the expense of IT infrastructure with other tenants, which the core platform provider owns and bears the responsibility to support and maintain. This, in turn, saves customers from the high upfront costs associated with ST systems. Instead, customers pay a subscription fee (similar to monthly rent) for system access, support, and maintenance. What’s more, customers can scale up and down based on demand to accommodate changes in users and traffic. This enables them to achieve peak efficiency at all times and eliminate the waste of overpaying for the capacity they don’t use. 

Security

Single-tenancy: As mentioned previously, single-tenant customers receive dedicated resources. While this eliminates the need to share them with other tenants, customers bear the responsibility of security. That means handling cyber threats and security breaches, which may leave insurers with systems less secure and more vulnerable than MT applications. 

Multi-tenancy: Because of the ‘shared’ nature of MT systems, customers may have security concerns over this form of tenancy. This view ignores that many technology providers, especially those dealing with sensitive data, have developed their platforms with security top of mind. Salesforce is widely trusted and used by insurers to house sensitive information. The application is safe and reliable because it’s hosted on one of the major public (multi-tenant) clouds. Public cloud providers such as AWS, Google Cloud, and Microsoft Azure have industry-leading safety protocols and massive teams that are proactively managing their networks to optimize data and cyber security. Taken together, this translates into greater data security for insurers than many ST systems provide.

Maintenance

Single-tenancy: Customers who choose this form of tenancy shoulder the burden of maintenance. As mentioned previously, this includes IT-intensive responsibilities such as backing up and restoring data, as well as patching and updating the system. The burden to maintain the system only worsens over time. That’s because customers who select an ST system choose an application that must be supported on an individual basis by the core platform provider. In other words, customers must depend on vendors to roll out new features, enhancements, security updates, and bug fixes. 

Because customers don’t share the same IT infrastructure as other tenants, the cost and time of receiving these updates are far more prohibitive to the extent insurers may delay necessary upgrades. For core platforms, insurers often spend more on upgrading their existing ST system than they do on the implementation. Maintenance also causes another problem. Customers must use an application in which continuous improvement is an afterthought, as platform providers offering ST applications spend as much as 50% of their development budget to support old code branches and patching bugs.

Multi-tenancy: Customers who choose MT systems benefit from cost-effective and sustainable maintenance. That’s because they use systems that standardize IT infrastructure across all tenants, which enables core platform providers to roll out enhancements and bug fixes that benefit all customers, rather than a single one. This frees up providers to concentrate on continuous improvements, rather than waste time, talent, and capital on duplicative maintenance. What’s more, because customers using IT systems don’t own the underlying IT infrastructure, they’re not responsible for maintaining the platform. System enhancements are rolled out continually without causing any downtime. This allows insurers and other customers to achieve sustainability and concentrate on growing their businesses. 

Agility

Single-tenancy: For what customers gain in exclusivity with ST, they give up on agility. Their systems slow their ability to innovate and respond to market changes for a variety of reasons. First, ST systems require lengthy and expensive implementations and setup, which delay their ability to get to market fast and take advantage of new opportunities. Another reason is maintenance, which we discussed previously, which results in costly and time-consuming impediments that worsen over time. Yet another barrier is the lack of integration. By design, ST systems are not designed to speak to other technology. That makes integration more costly and time-consuming for customers, who must pay providers to manually customize and configure the ST system to integrate with each technology solution. 

Multi-tenancy: On the other hand, customers choosing MT systems adopt technology designed specifically for agility. Rather than deal with a lengthy implementation, customers gain instant access to a functional environment that allows them to begin realizing value on Day One. They also benefit from continuous improvements, which don’t cost them time or money. Another advantage is integration. Because MT systems are designed with integration as a core principle, customers gain the speed and cost advantages of being able to complement their MT system with best-in-class solutions that strengthen their digital ecosystem. As a result of this agility, customers can accelerate speed-to-market and more quickly innovate. For insurers, this means quickly developing, deploying, and scaling unique insurance products. 

Scalability

Single-tenancy: For customers, scalability is a weakness when it comes to their ST systems. Considering the prohibitive nature to acquire and maintain the system, not to mention the lack of integration afforded by it, customers struggle to achieve efficiencies of scale. That includes the ability for the system to scale up and down based on the demands of adding or removing new users or accommodating peaks or lulls in traffic. Their systems don’t scale down, and to scale up, they must invest in additional resources such as server space. Together, these systems prevent rather than enable customers from scaling not only technology but products and services. 

Multi-tenancy: Conversely, customers using MT systems can scale seamlessly and sustainably. When customers experience changes in their business or overall IT usage, MT systems adapt accordingly. Adding new users results in instant provisioning, giving them instant and immediate access to the system without the need for installation or configuration. Customers benefit from a system that eliminates waste and maximizes cost efficiencies while affording them greater speed and elasticity to respond to internal and external conditions.