The Critical Impact of Cloud for Insurance on Business Transformation

Transcription

1 The Critical Impact of Cloud for Insurance on Business Transformation Charles Juniper, Senior Insurance Analyst

2 Executive summary Cloud technology and its role within the insurance industry has generated much marketing hype in the last five years among both ardent proponents and those expressing serious reservations. While these arguments will doubtless continue over the next few years, Ovum believes the insurance industry would benefit from understanding the current reality in terms of cloud adoption in the insurance industry. This includes where cloud is being used, and how the role of cloud will develop over the next three to five years. To achieve this, Ovum has undertaken an independent and in-depth study with 200 senior CIOs from the global insurance sector conducted on behalf of SAP. Key findings of the survey are Cloud is business as usual for the majority of insurers and continues to grow in importance Use of cloud has moved beyond horizontal services to support an insurer s entire business ecosystem Cloud is no longer just about cost reduction, as insurers use it to drive organizational agility Cloud is poised to transform the insurance industry, driving increased levels of competition Regulatory compliance remains the biggest inhibitor to cloud adoption within the insurance industry, but the issue is being resolved Insurers need to focus their cloud strategies on the critical role it has in business transformation A breakdown of the insurance organizations interviewed is given in the Cloud study demographics section at the end of the document. What is cloud? In part, some of the uncertainty surrounding the role and adoption of cloud technology in the insurance sector stems from the differing understanding, both on the part of IT groups and wider business functions, of exactly what cloud is. To ensure consistency and accuracy in the study, Ovum provided respondents with a concise definition of cloud and its components prior to the interview. Ovum definitions used in the study are: IaaS (Infrastructure as a Service): IaaS offers computing, storage and network resources and associated services usually from a virtualized environment. PaaS (Platform as a Service): PaaS provides a platform to develop and run applications, delivered via a public or private network and includes operating systems, development environments and tools supported by the PaaS provider. SaaS (Software as a Service): SaaS combines application functionality delivered via a web browser and open published APIs with data encryption, transmission, access, and storage services. The deployment of SaaS is usually supported by underlying IaaS and PaaS elements. Cloud: cloud technology, services or solution is defined as the combined use of IaaS and SaaS, and possibly PaaS, to provide required business functionality delivered via a public network (such as the internet), private network or a combination of both. A number of questions in the study are specifically focused on the adoption and use of SaaS rather than referring to the more general cloud. The use of SaaS-specific questions ensures that respondent 2014 Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 2

3 organizations are broad users of cloud technology as SaaS deployments, and in most cases, are enabled and supported by underlying IaaS (and possibly Paas) components. Cloud is business as usual for the majority of insurers and continues to grow in importance Among the insurance IT decision makers interviewed, the use of at least some cloud technology is almost universal with only relatively minor differences in take-up across geographies, sector or size of insurer. This widespread adoption is reflected in the degree of new IT spend that is accounted for by cloud technology components. Respondents were asked what proportion of their organization s current new IT infrastructure spend was allocated to IaaS/PaaS versus on-premise infrastructure. They were also asked what proportion of total new application spend (including license, maintenance and services costs) was allocated to SaaS versus traditional packaged, or in-house developed, software. The results showed that over half of all insurers are currently spending between 20% and 39% of the relevant budgets on cloud technology or services (see Figure 1). When respondents were also asked about their organization s policy towards the use of SaaS, the study revealed that the majority of insurers are currently deploying it in a mainly tactical way. It is being considered for most new IT projects and will be used if it is the most appropriate choice (see Figure 2). Figure 1: Current proportion of new IT spend on IaaS/PaaS and SaaS While there are still approximately a third of insurers that rarely consider using SaaS, nearly a quarter have adopted a cloud first policy in that it is the preferred deployment option and is being used wherever possible in new IT projects Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 3

4 Figure 2: Respondent organization s policy towards the use of SaaS This cloud first policy is particularly prevalent among insurers in the mature and highly competitive European and North American markets, with a small number of European insurers implementing new projects only if they can be deployed using SaaS. The study also revealed a level of polarization among insurers in Asia-Pacific. While SaaS was the preferred deployment option for many insurers in the region, a greater proportion of insurers currently remain unconvinced with some 44% rarely considering SaaS as an option. The study offers further proof of cloud technologies growing significance with 33% and 21% of all respondents expecting to see a significant increase in spend on both SaaS and IaaS/PaaS within the next 18 months respectively. The study also revealed a positive correlation between insurers that are already significant adopters of cloud and those that expect to see a significant increase in spend on cloud services in the next 18 months (see Figure 3). This result suggests that the industry as a whole is still in the adoption phase with cloud, but that early adopters are increasingly confident with the technology and are realizing a range of both business and cost benefits that is further accelerating adoption within the organization Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 4

5 Figure 3: Current cloud spend and future growth plans SaaS is increasingly supporting the whole business ecosystem The initial uptake of SaaS among insurers has been around horizontal and collaborative-focused systems, with the survey revealing a significant proportion of (65%), backup/archive (65%) and business continuity (58%) solutions now being supported by cloud. But cloud is far from being restricted to horizontal activities with SaaS increasingly used in support of what has traditionally been seen as vertical and core business activities (see Figure 4). This adoption is not limited to a narrow range of specific core activities, with a growing proportion of insurers utilizing cloud services across a broad range of functions. These encompass: customer-focused activities, such as customer servicing; back-office functions such as policy admin; and complex, domain-specific activities such as underwriting and fraud detection. In addition, a proportion of insurers are also deploying SaaS in support of business growth and revenue generation activities such as new business acquisition, marketing, customer targeting, and the development of new insurance products. While the use of SaaS in support of these critical business development activities is only occurring within a minority of insurers, the approach is notably prevalent among new entrants and start-ups Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 5

6 Ovum believes that this broader adoption marks a watershed shift in attitudes from that of only three years ago, when the majority consensus of the insurance industry was that cloud had only a limited role in supporting core, business-critical processes. Figure 4: Current extent to which business functions are supported by SaaS Cloud is no longer just about cost reduction, as insurers use it to drive organizational agility The study also revealed that the benefits sought by insurers through the use of SaaS is more nuanced than simply reducing overall IT costs, with business growth and organizational agility objectives emerging strongly (see Figure 5). This highlights a further shift in attitudes and priorities among insurers as IT cost benefits, while still important, are increasingly expected and accepted as the norm with SaaS deployment. The prominence of benefits such as geographic expansion and reducing time to add new business functionality indicate that the wider-business community within insurers is increasingly looking to cloud services to overcome the organization s inability to respond to rapidly evolving market needs. SaaS is seen as a means of overcoming the bottleneck of extended development cycles and overworked IT groups. The traditional IT delivery models are becoming increasingly unsustainable against a backdrop of weak premium growth in many markets and continuing IT budget constraints. However, insurers do not see cloud technology as the panacea to all their IT problems, and some issues are inhibiting the wider adoption of SaaS. These concerns are principally around the maturity and reliability of the technology and ensuring compliance in the highly regulated insurance industry Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 6

7 Figure 5: Top benefits sought through the use of SaaS Concern over regulatory compliance is cited as the major factor inhibiting SaaS adoption among insurers which is no surprise in such a heavily regulated sector. However, Ovum believes this is a situation that is changing and will be resolved over the next three years, particularly as governments and the public sector globally are rapidly adopting cloud technology themselves (the UK Government s G-Cloud being an example). While regulators have tended to be behind the curve when it comes to accommodating new technology within regulation, their stance is generally benign, not wanting to unnecessarily restrict an already stressed insurance industry. Evidence of this trend, albeit from the banking sector, includes the recent Dutch Banking Regulator s ruling allowing banks to use the public Microsoft Web Services (Office 360) after Microsoft and the banking industry agreed to provide access for audits. Other inhibitors point to the need for cloud vendors to further convince the insurance industry of the maturity of their offerings by demonstrating robust SLA, proving the compelling business benefits, and emphasizing consistent, best of breed availability metrics Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 7

8 Figure 6: Factors limiting adoption of SaaS within insurers SaaS is poised to transform the insurance industry To understand what insurers think will be the longer term significance of SaaS, respondents were asked what they thought the impact of SaaS will be both on their organization and the wider insurance industry in general over a range of time horizons (see Figure 7). The responses show almost universal agreement within the insurance industry that SaaS will have a significant impact on their industry the only differences are around the pace of change. In terms of perceived impact of SaaS, the most immediate effects are occurring at an industry level, with 43% of respondents believing that SaaS will have a significant or greater impact on the industry within 12 months. As organizations respond to these impacts, it will increasingly drive change within insurers, with 51% of respondents believing SaaS will begin to have a significant or greater impact on their organization in the 12 to 24 month time horizon. With regards to the longer-term three to five year view, the vast majority of respondents believe that SaaS will have a major impact on both their organization and the industry with some 50% describing that impact as transformative. Conversely, those believing SaaS will have only some impact on both the industry and their organization over the same time horizon account for less than a fifth of respondents. These findings point to the fact that even among insurers that are currently not major adopters of SaaS, there is a widespread realization of its significance. Consequently all insurers, if they have not done so already, need to develop a clear strategy regarding the role of SaaS within their organization Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 8

9 Figure 7: The impact of SaaS on the insurance industry and individual insurers To understand the ways in which SaaS will impact the insurance sector, respondents were asked to the degree to which they agreed or disagreed with a number of statements highlighting the possible consequences of SaaS deployment (see Figure 8). The move to a variable cost model achieves a high degree of agreement, reflecting the current focus on the cost benefits of SaaS. There is also a strong consensus around more strategic and market focused benefits, particularly those improving an insurers agility and responsiveness to market opportunities. The statement receiving the strongest level of agreement was that IT groups welcome the changes that SaaS brings, contradicting a common misperception that IT groups see cloud technology as a threat and may attempt to stall its adoption. However, the responses also suggest some concerns for job security remain as IT groups look at the need to restructure as a consequence of the greater use of SaaS and the reduced need to support the organization s existing IT landscape. The enhanced organizational agility achieved through the use of cloud technology is likely to have the most tangible and significant impact on the insurance industry. In particular, it allows smaller players to access capabilities and functionality that have previously remained the preserve of the larger, well resourced insurers. In addition, the ability to rapidly build a flexible IT infrastructure reduces the considerable barriers to market entry, allowing innovative, new entrants to quickly establish a foothold in the insurance industry. Both these factors will drive yet more competition in an already highly competitive industry Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 9

10 Figure 8: Agreement/disagreement with statements about the impact of SaaS on insurers Cloud technology will fundamentally change how insurers source IT and drive further competition in the industry This study shows that cloud has achieved a significant presence in both the life and non-life insurance sectors today across most major geographies and all sizes of insurer. The pace of adoption is set to accelerate, especially among those insurers that are already significant users. For the late adopters, this presents an increasing risk of being left further behind. At the individual organizational level, cloud technology is changing the way insurers source and consume IT, as well as fundamentally altering the role of the IT function within an organization. Despite IT budgets in the tens of millions of dollars and substantial in-house IT teams, many insurers continue to struggle delivering new capabilities needed by the business (whether in the form of new product, services, regional expansion or entry into new sectors) in a timely fashion. At the same time, significant portions of the IT budget and resources are used to maintain current IT ecosystems to support an insurer s existing capabilities. Cloud technology is beginning to fundamentally shift this model by using ready to go infrastructure and application components. These dramatically shorten timescale and allow IT to be funded on a subscription basis, rather than through up-front capital investment. In addition, on-going maintenance and the technology refresh of platforms and applications becomes the responsibility of the cloud vendor rather than consuming significant in-house resources. More significantly at the industry level, the potential for cloud to level the playing field by enabling smaller brands and new entrants to disrupt the market presents a clear danger to players who adopt a wait and see approach to cloud. These insurers risk being at a significant competitive disadvantage to more agile players and aggressive new entrants as cloud fuels increased competition Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 10

11 Cloud strategy must encompass business transformation So how should insurers respond to the increasingly significant presence of cloud technology in the industry? All insurers must have a clearly defined and widely communicated strategy for cloud, and while many do, Ovum believes these remain principally cost reduction-focused. For the minority of insurers that do not have some level of a cloud strategy, it must become an urgent priority. They should not wait for the technology to mature further or for remaining issues to be completely resolved, as this delay will significantly impact the benefits of adoption. In planning their IT and cloud strategies, insurers must focus on the transformative role SaaS can have on their organization in the context of wider industry change. Cloud technology can play a critical role in supporting an insurer s overall business goals and supporting its wider ambitions. Ovum believes most cloud strategies in the insurance industry today need to be more comprehensive and more fully encompass the potential for organizational transformation. A consequence of implementing a broader cloud strategy is that the IT function in many insurers will need to undergo significant change in its role and structure with this likely to give rise to some challenges in terms of change management. Ovum believes that part of the IT function needs to evolve towards assuming a broker role, bringing together an insurer s wider business functions with relevant cloud vendors. IT groups should begin to build a detailed understanding of the cloud vendor landscape and its capabilities, actively promoting opportunities enabled by cloud within the organization, in contrast to the typically more reactive role of today Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 11

12 Cloud Study Demographics For the cloud study, Ovum interviewed 200 senior IT decision makers from the global insurance sector during September The survey respondents were typically Chief Information Officers (CIO), Head of IT Strategy or Head of IT Architecture and had to have a leading role in deciding their organizations IT strategy, control of IT budget and an understanding of the organizations current IT systems landscape. All respondent s organizations were insurance carriers from both the life and non-life (general / property & casualty) insurance sectors operating across a number of geographic regions and of varying size in terms of annual premiums. Health insurers, re-insurers and insurance intermediaries, such as brokers, were not included in the survey. The breakdown of respondent organizations by sector, region and size is shown in the table below. Table 1: Breakdown of respondent insurers in cloud study Sector % of respondents Life insurance 56% Non-life insurance 44% Region % of respondents North America 25% Europe 25% Asia-Pacific 25% Central and Latin America 13% Middle East and Africa 12% Annual Premiums ($m) % of respondents Less than $5Bn 56% $5Bn to $20Bn 30% More than $20Bn 14% Author Charles Juniper, Senior Insurance Analyst, Financial Services Technology charles.juniper@ovum.com Ovum Consulting We hope that this analysis will help you make informed and imaginative business decisions. If you have further requirements, Ovum s consulting team may be able to help you. For more information about Ovum s consulting capabilities, please contact us directly at consulting@ovum.com Ovum. All rights reserved. Unauthorized reproduction prohibited. Page 12

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