(Re)insurtech: Build or Buy?

In the interests of saving time I’ll give you my advice upfront: buy.

Skimming past the fact I’m CPO for a (re)insurtech company (which I’m sure you’ll weigh into account!), let me explain why I think specialists provide a better service than non-specialists.

Creating a best-in-class software is hard.

You need a combination of smart software developers working closely with (re)insurance experts who understand how things should work, based on their own real-world experience.

That’s very challenging. Perhaps more so within the world of reinsurance, where the pool of specialists is a scarce and niche market.

But the end result of this powerful blend is more than worth the effort.

Business is digital and company balance sheets typically rely on either 1) selling software, or 2) using software.

In both cases, the better the software, the better you can perform.

Complexities Unique to Reinsurance Technology

Historically, larger firms would partner with huge tech companies, IBM and the like, to have a solution built from scratch, which can be spectacularly expensive, to tackle the immediate and unique needs of the company.

Prior to the explosion of SaaS and the digitisation of commerce, there were no out-of-the-box solutions readily available for (re)insurance.

Times have changed.

And these earlier attempts at in-house systems have created a fascinating aftereffect; there are now entire conferences dedicated to escaping legacy technology.

Reinsurance is nuanced and a special case when it comes to operational software.

There’s a unique need to carry all historical data forward: past deals are useful because they contain valuable information which help cedents and brokers present risk to reinsurers in subsequent years.

Further complexity is added by mergers and acquisitions.

M&A activity, common in the world of (re)insurance, accelerates fragmentation in insurance companies, brokers and reinsurers.

Companies may start small, become acquired by a larger entity and forced to integrate, placing increasing pressure on siloed legacy systems which are unable to innovate to meet changing needs.

If you’re an insurance or reinsurance professional, you’re probably familiar hearing, “everything’s on the new system now. Well, except X, Y & Z. Oh, and A, B & C. Maybe some other things too.”

When companies blend together, data mapping is a huge issue.

This is required to align their systems to create a single source of truth; this process matches fields from one database to another - the first step in data migration or integration, which must be done to homogenise the data so it can be used meaningfully for all involved parties.

In the world of (re)insurance, bringing multiple companies into one system can be a several year long process.

Sometimes the aggregating of (re)insurtech systems can be slower than the M&A activity itself!

The issue unique to reinsurance is that everything is bespoke, we’re an industry where all deals are custom and nothing is commoditised.

This makes it very difficult for different systems to align on certain data points, such as contrasting lines of business, names of companies and subsidiary entities, and borders of (seemingly unchangeable) geographic regions.

There’s a lot to consider.

The Need for Better (Re)insurance Data Is Undeniable

Reinsurance is an old industry and one of the few that thrived prior to digital technology coming along.

The days where underwriters could take cedents and brokers at their word for how things work are finished, we all know the data exists and it must be the foundation on which reinsurance deals are made.

Consequently, there’s an understandable and credible push from reinsurers for more data so they can better understand the underlying risk they’re taking on and price appropriately.

This transparency provided by better data ultimately helps everyone within the reinsurance tripartite value chain; customers get better deals and underwriters have a clearer picture of exposure.

The amount of data we now have access to can’t be properly managed without a purpose-built system.

Reinsurance companies are being confronted with the need to utilise digital technology, either from a mandate to innovate for client needs or responding to regulation.

Companies deciding whether to buy or build must factor in:

  • Cost: startup costs and ongoing maintenance.
  • Independence: if you buy rather than build, it’s vital to know whether your software provider is independent, or connected to a competitor.
  • Connectivity: is my software able to directly connect to my partner’s systems?
  • Timeline: how long will it take to buy compared with the time taken to build?
  • Maintenance: systems must be maintained over time to remain effective, which costs money and resources.
  • Compliance: similar to maintenance, software must be compliant with rules and regulations which are subject to change over time and geographic location.
  • Scalability: can the reinsurance software I need scale effectively, and will it still work for who I need it to in a decade?

When you build your own (re)insurtech software, you’re not only responsible for getting it started, meaning wireframe design, defining functionality and feature set, and a million other things.

You’re also responsible for the ongoing maintenance, including patches and updates, in order to respond to software bugs and the need for functional improvements over time.

Building your own solution is expensive, and the expense of time and resources often trigger the sunk-cost fallacy in managers; reluctance to abandon the endeavour because of the heavy investment, even when abandonment would be more beneficial.

There are advantages to building your own software, of course, the biggest being that custom solutions can be built to your exact requirements.

However, the cost may now outweigh the benefit with so many existing tools fit-for-purpose.

Another increasingly common option, which many companies are opting for, include partnering directly with an independent software vendor (ISV) in order to build features on their core platform to cover specific needs that they don’t immediately address.

There’s also the option of integration via API.

My question to the (re)insurance industry: is it better to spend years de-focusing your workforce to create an in-house solution, or should you let them do what they’re good at and outsource reinsurance software to reinsurance experts?

The Problem With (Re)insurance Software

All incumbent players who built their own software within the sphere of reinsurance are all finding the same problem: their systems don’t communicate with counterparties.

Insurance software goes as far as your insurance company. Broking software goes as far as your reinsurance broking company. And reinsurance underwriting pricing software goes as far as the reinsurer.

What about the all-important gaps in the middle?

Reinsurance is an industry built on the foundation of relationships, so it’s rather ironic that the systems used by industry players lack the ability to effectively communicate with one another.

The space is filled, poorly, by scattered emails and spreadsheets.

The Solution to (Re)insurance Software

Reinsurance people need focus to be effective.

Complicating their time and distracting them from their main responsibilities is going to result in subpar placements and imprecise presentation of risk, resulting in inaccurate pricing from reinsurers.

When working in an ecosystem like reinsurance, it doesn’t make sense for each player to duplicate software for the same sets of operations.

This is an analogy I stole, in part, from The Reinsurance Podcast, applying the principles of ‘build or buy’ to an office building:

Imagine an insurance company looking at its staff base and saying, I don’t feel like using an existing building, so you, well-trained brokers or underwriters, quickly upskill and learn to build a skyscraper. Dave can do the foundations. Lynda can do the electrical wiring. Shelly, you can do the plumbing.

This wouldn't happen, you’d rent an office space, like a sensible human, and you’d let the experts manage and maintain the things they’re good at so you can focus on what you’re good at.

Wise words.

Let the independent software vendor take on the responsibility for making sure things work.

They’re in a far better and more focused position to tackle the complexities of software development.

And if you’re not happy with what they have to offer, you’re able to buy new software (or rent a new office space to continue the analogy) from a different reinsurance ISV that provides more of what you need.

This is, of course, assuming the ISV in question isn’t open to working with you on ‘renovating your existing office space’, meaning they’ll work with you to build out new features.

To reiterate my earlier advice: buy.


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Jerad Leigh
Ben Rose
Jess McCausland
Tom Spier
Livvie Sandells