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Hybrid Clouds, Integration, and the Cost of Gas: A Modern Parable

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Advancements in cloud computing have create new opportunities and real dangers for insurers.  Lower cost of ownership, ease of maintenance, and the ability to focus on core competencies must be balanced against legal risk and data security.  Regardless, I believe it is inevitable that our technology solutions of the future will be delivered in hybrid mode; that is, some elements will be installed on premise while other pieces will be delivered in the cloud.

Why inevitable?  Simply because a hybrid core system provides a solution that combines the power of hosted cloud applications embedded within the workflow and decision making of a best-of-breed core system.

Moreover, a hybrid solution addresses the ease and cost of integration; something that keeps a lot of us up at night.  In our consumer lives, it’s something we don’t worry about – many of the capabilities we need are delivered in an “instant-on” fashion, like the apps on our smartphone.  Yet there is an assumption today that every technology or data investment requires a massive integration project – because it typically does.

What would the insurance technology world look like with “instant-on” apps?   Let me offer a parable.

The parable of the gas and the groceries.

A man goes out to buy groceries for his family. His shopping list contains about 20 items, totaling $200 for the week’s worth of food. He jumps into his car and finds that he’s out of gas, so his first stop is to the gas station to refuel. Unfortunately the cost of gas has increased to $10,000 per gallon. He sits at the pump for a while to think about his options. He doesn’t actually want fuel but it’s the means to the end:  gasoline can’t feed his family, but he needs gas in order to drive to the  store to buy food.

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A rational man, he thinks to himself, “I need to take fewer trips to the store.”  So he reconstructs his shopping list to buy more food per trip. He chooses not to make trips for small items and instead tries to bundle small items with larger items. He buys a bigger car to transport his purchases. He buys a bigger refrigerator to store his perishables.

He buys a couple of barns to store his dry goods. He buys more real estate to fit more barns. And in a perverse twist of fate, he learns that there is no financial justification for living simply or buying on sale. The high cost of fuel makes the price difference between caviar and fish sticks look like a rounding error. In short, he can only afford to buy the most expensive items!

Grocery store visits and the infrastructure to support them have now become a rather large investment!  So the man goes to visit his financial planner who provides him with a simple way to evaluate how often he should go to the store:

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 Interpretation of the parable

Of course, this scenario is absurd. Yet this is the absurdity that insurance companies must navigate every day.

Insurers need external services and data in the same way that families need food – it provides them with health and knowledge. But the integration projects (the gas) cost orders of magnitude more than the services or data (the groceries).

So what do insurer IT departments do? What is rational: They minimize the number of projects (trips) required. They only buy the most valuable and expensive services and they leave all the minor projects behind; because even if a minor project has a positive ROI, the cost and risk of the integration means that the project is unaffordable.

We can stop the madness!

Is there an alternative to this madness? Hybrid solutions are starting to appear in the marketplace that offer hope.  That’s why at Guidewire we talk about cloud based applications (like Guidewire Live) being “instant-on”.

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For us means that our customers can now evaluate external services based on a simple formula: does the nutritional value of the service exceed its subscription cost?  If so, then turn it on.  If not, then don’t.  It should be that easy. This takes us to the same world  where  the gas costs less than the groceries. Hoarding is no longer required.

Think about what you could get for those extra refrigerators on eBay?

 

Editor’s note:  Eugene is Senior Director, New Initiatives at Guidewire Software.   Eugene has contributed to this space and has presented at the Insurance-Canada.ca Technology Conference

2012 Insurance-Canada.ca Technology Conference

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