Whether it’s an individual component or a full suite, replacing a core system is a massive decision for any insurer. In our recent study on insurance core system market activity, we took a deep dive into market activity as well as examined factors that vendors and carriers should consider when embarking on a core system replacement. This is important information for vendors looking to identify and evaluate market opportunities and for insurers looking to judge their own system plans against market standards to ensure they’re staying competitive.
The property/casualty (P/C) and life/annuity/benefits (L/A/B) sectors are two very different markets in terms of how insurers maintain, modernize, and replace core systems.
The P/C space has a high volume of transactions with short-tail liability, while L/A/B has fewer transactions and drastically longer tail liability. This generally means that P/C insurers will modernize or replace their core systems more frequently and are able to decommission older systems after several renewal cycles.
L/A/B insurers, on the other hand, often keep older core systems (with older books of business) running for decades even after newer systems are in place. This slows down the entire replacement curve. And, of course, there are simply more P/C insurers in the United States, meaning more core system deals regardless of system replacement cycles.
These deal numbers are reflected in the number of vendors focusing on each space. There are over 40 vendors in the P/C policy administration space, whereas the L/A/B policy administration space has roughly 20 vendors. More deals in a market means more vendors servicing a market.
Are These Deal Counts Too High?
Headline estimates for the total number of deals in a space can sound high, even compared to the estimates that we have informally provided in the past. A vendor looking to judge their involvement in insurers’ system selections over the course of a year will feel like they are missing out on opportunities if they only consider the top-line number.
The first thing to consider is that the top-line number includes a lot of different types of deals. The overall numbers include core system buyers of all sizes, from the largest carriers to small MGAs to insuretech startups. They also include all component deals, not just policy administration and full suite deals. In other words, these type of estimates represent a full accounting of major system purchases across the industry.
To make things even clearer, I want to share a further breakdown of these numbers. Many vendors only target the midsize to large insurer marketplace. If one gets into the weeds of the study, these numbers can be identified, but let’s review them here.
Our estimates show that for P/C insurers over US$100M direct written premium (DWP), there are 225 component deals total and 110 core suite deals. For L/A/B insurers over US$100M DWP, the estimates show 61 component deals total and 30 full suite deals.
It’s that second number in each category most vendors are looking for, and that number aligns very closely with the less statistically based estimates Aite-Novarica Group has made in past years. But even those numbers can be misleadingly high when considering more factors that divide the system behavior of each space.
Factors Fracturing the Field
The way we name and refer to these broad categories itself reflects further levels of specificity. There’s a reason “P/C” and “L/A/B” have multiple letters and slashes! These are not singular categories covering one type of insurer, rather they are a convention for a collection of lines of business that share some attributes (and historical grouping) but still represent very different types of business and system needs.
To run through a simplified accounting: L/A/B includes individual and group life, disability, absence, fixed/variable/indexed annuities, a whole assortment of non-medical benefits including dental and vision, and more; the P/C space covers an array of personal lines, small and large commercial lines—all with a question of admitted vs. non-admitted—the varied category of specialty business both simple and complex, workers’ compensation, and more. These lists could both easily be half a page long. Each of these subgroupings has its own specialized capability and workflow needs from a core system.
These insurers aren’t all in the market for the same system. A core system vendor serving life carriers shouldn’t expect to see dental opportunities just as a workers’ comp core system vendor wouldn’t see opportunities with surplus lines carriers. As we get into these smaller categories, it becomes increasingly difficult to produce robust statistics without violating someone’s trust—or NDA. Furthermore, since some of these subcategories only see one or two publicly acknowledged core system deals a year, any extrapolations would not be reliable. An anomalous year with just a few extra insurers choosing a new system would throw all the numbers off.
Vendors comparing the number of opportunities that they see to the total number in their space, either L/A/B or P/C, must remember that those numbers represent all opportunities across each subdomain and across all carrier sizes. Vendors should consider which portions of the market are their target audience and may need to look more closely at the number of opportunities with carriers of various sizes, all the while remembering that there are likely opportunities with lines of business which they don’t support that they will never see.
To learn more about activity in the insurance core systems market, read our report Insurance Core System Market Activity: Deal Count Estimates and Trends for Core Components and Suites or reach out to me here. You can also view our recent webinar, where a panel of Aite-Novarica Group Insurance experts discussed the findings of this study in detail.