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The research firm has carried out a study of the US insurance industry that has highlighted the need for firms to move to an SOA. It gives plenty of lessons for UK IT directors, said Mark Gorman, strategic research adviser for insurance at TowerGroup. If anything, the UK is probably more in need of SOA than the US, he says.
According to TowerGroup, an SOA lends itself to the insurance industry, which relies on legacy systems made up of disparate product engines and databases.
Legacy IT systems do not allow insurance firms to respond rapidly to changing consumer demands with new products and new routes to market. They also make it difficult for insurers to improve the buying experience of customers and agents.
"From our perspective, the insurance industry is a mixture of independently developed internal proprietary systems or those that they have purchased from other suppliers but which they internally modify," said Gorman. "These systems limit their ability to respond to various pressures in the industry."
Gorman said although the insurance industry in general already used some web services, it was missing out on the benefits of a full SOA.
"If we are talking about web services in the insurance sector we are seeing it a lot more. But if we are talking about SOA as a paradigm of how companies control and deploy technology to achieve business needs, then the insurance industry is a bit slow," he said.
"We believe that SOA provides promise and hope for the insurance industry. There is an opportunity to leverage investment in technology in order to meet business needs."
Mergers and acquisitions, which require firms to take on and integrate different systems, have exacerbated the splintered nature of IT systems in the insurance industry.
They are making it challenging for insurers to introduce new sales models, including selling direct online and using aggregator sites that offer consumers best price guarantees. Old systems must be linked together to enable products to be delivered in this way.
David Howard, director of enterprise solutions at IT services company Unisys, said the insurance market has changed and businesses have had to adopt new technology quickly to remain competitive. Unisys works in the insurance market with a particular focus on the life and pensions sector.
Howard agreed that legacy systems are rife in the insurance sector, which makes fast access of the right information difficult. He said one insurance company and customer of Unisys had 20 different customer databases.
"When we started to look at deploying within insurance companies, what we saw was a huge amount of legacy systems," said Howard. "If you have that level of complexity in your back office it is very difficult to keep people trained and keep records up to date."
He said the need for SOA had increased as competition forced insurers to adopt more innovative forms of competition.
"Insurance companies are more often going direct with policy offers, and as a result need websites and call centres. As soon as you go into this model where there is a lot of competition, the cost of delivering the policy is critical because you can reduce prices if you can reduce costs," Howard said.
"Insurance companies are also using aggregators, such as Confused.com. Insurance companies have to link into this or they will not get the business." He said in the past the insurance industry had been slow, but with the advent of the internet and more competition in the general insurance market, they have had to change quickly
Peter Hambling, head of IT group at Lloyd's insurance market, said the company is actively investing in SOA.
All businesses can benefit from growing their technology on a single enterprise architecture, rather than multiple legacy systems. This will allow them to implement services when commercial business drivers enable it, he said.
But standards are essential if the insurance industry is to reap the full benefits of SOA. Lloyd's is an active participant of Acord, an association that works to establish standards for the insurance, reinsurance and related financial services industries.
Lloyd's contributes both as a board member and by donating resource and intellectual know-how, said Hambling.
"Standards will help the systems of brokers and insurers to work together, for example. Standards are pivotal to enabling the effective electronic interchange of information within insurance," he said.
Paul Gould, chief architect at Norwich Union Life and Pensions, which embarked on its SOA strategy in 2002, said his experience had shown him that standards can work. "As a result it is possible to get some supplier independence," he said.
He warned that businesses taking the SOA route must have a strict business objective and must put in place systems of governance.
"You should only do it if you have a committed business outcome to achieve and not just invest in infrastructure just in case you use it in the future," he said.
"Without governance you cannot make it work. If you do not really manage it and it is compromised, it stops being possible to re-use what you have done."SOA technology still baffles business >>
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