In the heyday of reinsurance 20 years ago people did not ask if they should build or buy their reinsurance software tools, writes Dmitry Mnushkin, President of Treefrog Consulting.
The combination of plentiful funds with lack of commercially available products meant that hiring a dozen developers was the sensible move.
As a result, most companies built their own software.
Those that were successful benefited from a market-differentiating understanding of risk and ability to rapidly price deals that their competitors lacked. They became the tech standard bearers – widely admired and frequently emulated.
Fast forward to 2020 and the environment looks dramatically different.
Gone are the fat margins of the past. Everyone has a system of some kind now. Brokers have tools, 3rd party companies have tools, mergers and acquisitions have expanded the reach of successful home-built applications to cover larger books of business. In short, there is a lot more choice out there and as a result, the calculus of investing in your own technology has significantly changed.
Why should a reinsurer or ILS manager spend millions annually on internal software development efforts when the benefits of that investment continue to diminish?
It is no longer differentiating to have reinsurance pricing tools – it is required.
In many ways newcomers to this space now have the advantage. Technological barriers to entry have dropped away through the ready availability of off-the-shelf products. Within a few weeks of purchasing a tool, they can be pricing and writing business on an even footing with the rest of the industry.
This is where the advantage clearly manifests itself in significantly lower operating expenses. Instead of multi-million dollar IT budgets that established reinsurers must field, they can spend a tenth of that on software that does most of what is required.
For those companies that have developed their own system over many years, the switch to an off the shelf platform will be difficult to make. Such a move would be politically challenging, resulting in significant lay-offs and bad feelings from project sponsors. Nevertheless, it is something that only the largest corporations can avoid doing in future, as operating expenses continue to share the spotlight with underwriting returns.
So which tools should you get?
That is a great question that we get asked a lot. There are several options to choose from.
Some get you started quickly because they cannot be significantly customized, forcing users to do things a particular way. Others are really a collection of programming tools that can be used to build a larger system with far more flexibility, at the cost of a lot more time spent on customization and software development.
Our own award-winning tool, Foundation, threads the needle between these extremes providing a range of turn-key functionality but also the flexibility to extend the platform in any direction.
The choice is yours – each has drawbacks and benefits but all are much less expensive and time consuming than building and maintaining your own.
My advice to any new reinsurer is to let software development companies develop software so you can focus on what you do best – underwrite and innovate.
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This article was contributed by Dmitry Mnushkin, President of Bermuda-based insurance and reinsurance software specialists Treefrog Consulting, a supporter of Reinsurance News.
To contract Dmitry and his team: