Our recent report on IT services providers has prompted a number of discussions about the relationship between carriers and service providers. Insurers prefer to have long-lasting relationships with service partners. However, building and maintaining those relationships doesn’t happen on its own, and it’s important for both sides to recognize the potential benefits.
Life insurers, for example, tend to think in terms of blocks of business covering a multi-year span based on the mortality tables at the time of writing, resulting in a few large blocks of business. For these insurers, it’s often cost-prohibitive to migrate such a large number of policies into a new system. This results in a balance between legacy systems maintained in the long term for older business and modern systems used for new business.
Property/casualty insurers, on the other hand, have policies with much shorter terms. This allows them to move off legacy systems slightly more quickly. Both property/casualty and life/annuity/benefits insurers deal with a mix of legacy and modern core systems, but the approach to support, conversion, and modernization via IT services partners can take different strategies and follow different timelines.
Approaches to IT Services Partnerships
Most midsize and almost all large carriers have multiple systems and multiple service providers. It’s common, though, to have one big, strategic partner that is viewed as a part of the team and is involved in the planning and decision-making process. Many insurers also like to work with a smaller, boutique IT services partner (though the definition of “smaller” depends on the insurer) where the insurer feels they have more influence.
This can then be augmented by niche partners, either local partners—often a small team that used to work at the carrier—or a services provider with a very specialized skill set like mobile app development. Carriers will also typically use a separate QA partner to avoid conflicts of interest so that the partner doing development isn’t performing QA on their own work.
The combination of a broad, strategic partner augmented by niche specialized partners serves two main purposes: long-term stability and risk mitigation. The presence of a strategic partner helps preserve institutional knowledge and maintain the momentum behind large projects, while the various vendors providing more niche services augment a disaster recovery/business continuity plan with an additional line of defense.
Starting a New Carrier-Services Provider Relationship
For most insurers, over 50% of the year-to-year budget is focused on maintenance, modernization, and replacement of core systems. Most strategic partnerships start there—as an SI partner helping with an implementation. Being a known and certified SI partner isn’t the only way to start a strategic partnership, but it can be a great first step.
This is not always the favorite work of an IT services vendor as it tends to include a large amount of lower-cost configuration work rather than custom software development, but it represents the majority of IT services spending. It is also a great way to provide value, which can lead to more complex and important engagements (i.e., bigger and better assignments).
Services providers aren’t distinct to a single core systems vendor. If there’s a great relationship with a service provider, the strength of that relationship and history will almost always outweigh other factors. New relationships between service providers and carriers tend to start only if the previous one has gone awry, or if a specialized skill or expertise is needed that the incumbent doesn’t have. If the partnership is working well and there’s a good history, a carrier will want to keep working with that partner to build on their success.
A new core system is a trigger to think about or look for a new services provider. In general, however, if a carrier already has a trusted service provider, they’ll want to stay with them. For service providers, it is important to bring deep domain knowledge and relevant experience to the table.
The relationships between service providers and carriers provide long-lasting benefits for both parties, and those that treat it as a true partnership will get the most value from it. To learn more about the IT services providers carriers are relying on, read our full report IT Services Providers for Insurers: Vendor Analysis Report.