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Why Insurers Shouldn't Attempt to Build Their Own Software

Updated: Feb 1

The insurance industry is a tough cookie to crack, and while some insurers may be tempted to bake their own software cake, it's usually a recipe for disaster. In the current hard market where reinsurers are either cherry-picking the portfolios they’re willing to reinsure or demanding soaring rates that put cedants in the red, insurers are scratching their heads and wondering where they went wrong. One obvious culprit is that their expense ratios are too high. As the market evolves, insurers often turn to software solutions for tackling complex tasks such as data scrubbing and policy management. However, the decision to build these solutions in-house can be a risky and expensive endeavor – like trying to make a cake without a recipe. In this article, I’ll employ analogies of a bakery, a rodeo, and poker to illustrate why insurance companies should opt for specialized software solutions rather than attempting to build their own.

The Bakery Analogy: Vertical Integration vs. Specialization

The decision for an insurance company to build its own software platform is akin to a bakery deciding to start its own farm to grow and harvest wheat to produce its own flour. While vertical integration might make sense for a large organization with a thousand bakeries (or a bakery mogul with a green thumb), it's not a viable strategy for most insurance companies.

The main reason is that the fixed cost of building the foundation of a software platform is extremely high. Moreover, unlike the number of cakes baked being directly proportional to the amount of flour required (and the number of satisfied sweet-toothed customers), one solid software platform can manage any number of policies up to infinity for several insurers. In other words, a specialized software solution can efficiently handle the needs of insurance companies, regardless of their size, which incidentally, is the only reasonable way to attempt to justify the cost of doing so.

Insurance companies aren't software companies. The focus for insurers should be on customer experience, compliance, diversification, financial stability, operational efficiency, risk management & transfer, and sustainable growth.

The Rodeo Analogy: Short-term Gain for the C-suite vs. Long-term Profitability for all stakeholders

When insurers decide to build their own software, they may be influenced by the vested interests of their CTOs, who seek to secure their positions by showcasing technical prowess and leading complex projects. However, this approach is myopic and overlooks the long-term impact on the company's profitability and overall success – much like trying to ride a bucking bronco at the rodeo when you're actually a computer programmer. The lure of control is so powerful for insurers. You think you have control, but you are now developing software, so the constant upkeep and evolution needed to stay in front of the jobs that need to be done forces you to act and behave like a software company. At some point, the software controls you.

Unlike a rodeo, where the goal is to ride a wild horse for a few seconds and hope you don't end up with a mouthful of dirt, insurance is a long-term game that requires stability and reliability. The ideal software solution for an insurer should be a tamed, well-trained animal that can navigate the complex world of insurance, delivering consistent performance over time, like an adorable golden retriever wearing a necktie.

The Poker Analogy: Don't Be Pot Committed

In poker, the term "pot committed" describes a player who has invested so much money in a hand that they feel compelled to keep playing, even if it's not in their best interest to continue doing so. The same can happen to insurers who embark on their own internal software development journeys.

By choosing to buy specialized solutions from external software providers, insurers can avoid becoming "pot committed" to a project that may not be the most effective or efficient solution. Instead, they can make informed decisions based on their specific needs and priorities and benefit from the virtuosity of industry experts who deeply understand the unique challenges and requirements of the insurance industry.

Just as in poker, insurers need to make strategic decisions based on their long-term goals and not become "pot committed" to projects that may not be in their best interest. By choosing to buy specialized software solutions, insurers can stay focused on their core competencies and ensure their long-term success and profitability in a competitive market.

Like a poker player who invests too much in a hand, an insurer may invest too much in developing their own software solution, even if it's not the most efficient or cost-effective option. This is generally the point at which they experience that all-too-familiar “sunk-cost fallacy,” feel pot committed, and feel like they have to see the project through, even if it's not the best decision for the company.

The Benefits of Buying Specialized Solutions

Rather than attempting to ride a bucking bronco, grow your own wheat to make flour, and play a losing hand in poker, insurers should consider leveraging specialized software solutions developed by industry experts. These solutions are designed specifically for the insurance industry, and their creators have a deep understanding of the unique challenges and requirements of insurers. By choosing to buy (rather than build), insurance companies can benefit from lower costs, faster implementation, tailored expertise, ongoing support, updates, simplified maintenance, scalability, integration, data security, compliance, customization options, reduced risk, enhanced performance, improved decision-making, long-term stability, a greater focus on core competencies, standardization, competitive advantage, innovation, better resource allocation, and financial predictability.

Conclusion: Have Your Cake and Eat It Too

Insurance companies should be cautious when considering the development of their own software solutions for complex tasks like data scrubbing and policy management. The lure of control is powerful, but insurance is an industry where you should fight the urge to build your own software. By opting for specialized software solutions created by industry experts, insurers can reduce costs & implementation time and ensure access to the latest features, innovations, and dedicated support. But if you really insist on riding a bucking bronco, ensure you have a solid insurance policy. Who knows, you might just win big at the rodeo and be able to afford your own bakery, complete with all the software solutions you could ever dream of. In the meantime, let the experts handle the software development so you can focus on what you do best: insuring people and their precious belongings. And don't forget to treat yourself to a slice of cake every now and then - you deserve it!

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