unrewarded risks in life insurance and annuity business

Unrewarded Risks

Policyholders care most about the guarantees they receive and the price they pay for those guarantees. In other words, they want the best quality insurance policies at the lowest prices, which is no secret. What they don’t care about is how insurers built them.

Developing software technology in-house at insurance companies involves several types of operational risks such as:

Attrition: Insurers often lose the technology talent to the silicon valley or ‘cool’ startups.

Execution Risk: Getting the project completed requires executing a highly coordinated set of tasks and managing a very complex technology stack. Such projects often span longer than the tenure of most middle managers, who come to see their participation in such projects as career risk.

Technology Upgrades: Far too many previously completed internal software projects are either obsolete or abandoned by the company’s internal users due to lack of maintenance or feature upgrades.

None of these risks are rewarded by policyholders – they just don’t care. Outsourcing software solutions can allow insurers to transfer all that risk to a third party.

Software technology for life insurance and annuity data requires cross-disciplinary expertise in software development and delivery, high-performance computing, databases, data security, actuarial and quantitative finance, and advanced data analyses. Life insurance companies could instead focus on their core expertise, instead of chasing people with skills in technology development. One may argue that the core competency of life insurance companies lies in designing, manufacturing, and selling top-quality insurance policies, and then thrilling their customers with exceptional customer service – because that is what their customers care most about.

Policyholders reward the best quality insurance policies available at the lowest prices. Policyholders don’t care about the risks that insurers took to build those policies. 

Outsourcing software technology development can offer many advantages to an insurer. 

  1. Gaining valuable time: Building internal teams can be a huge drain on management’s time. Hiring, training, and establishing an effective culture can divert management’s focus away from the product landscape and competition. 
  2. Cost savings: Hiring well-trained people is expensive, to begin with, and retaining them gets more expensive. Moreover,  to ensure business continuity, insurers often find themselves hiring multiple employees for the same task. Once the project is completed, the insurer typically won’t lay off those extra employees, and instead will try to ‘absorb’ them into other functions and capacities, unnecessarily swelling its payroll.
  3. Higher utility: The solution from a third-party service provider will typically have a higher quality (utility) than that of a solution built internally, simply because the service provider has seen more variations of the same problem and has crafted a solution to deal with all those variations. In other words, the third-party solution will be able to solve problems and handle situations that the insurer has not seen yet in its own operations. 
  4. Implementation (Execution) Risk: The biggest unrewarded risk lies in execution. Taking a project from ideation to delivery is enormously challenging within large corporations, and expert project managers can tell you all about it. Many team members and leaders will quit during the project, causing a waste of time and resources, or cancellation of the project altogether. Again, policyholders don’t care about the sacrifices made by management, and won’t reward them.
  5. Focus on strategic goals: Senior management should be able to stay focused on their strategic goals, which include mastering competitive forces, understanding customer feedback, preparing for upcoming regulatory changes, and maximizing returns to shareholders. The task of setting up and running large data and software teams disrupts management’s focus and drains management’s time.

Engaging software solution providers such as Annuity Risk in non-core capabilities such as software technology and data management can allow insurers to realize the full potential of their products, reach new heights of customer service and product quality, and gain market share.