The European insurance industry has been singled out as a forerunner in the adoption of service-oriented architecture (SOA). SOA is a modular approach to building the IT infrastructure. Each component is treated as an autonomous service that links into the whole. In an ideal SOA scenario, individual IT functions or business processes are established as universally accessible services that can be accessed by any other application or business process in the organization. (Web services, J2EE, and .NET are the enabling technologies.)
A new report from Datamonitor, "Distribution dynamics in European insurance," makes the claim that the insurance industry is an SOA pioneer. "One might be surprised to see insurers positioned at the forefront of adopting SOA," says Daniel Lessner, financial services technology analyst with Datamonitor and author of the study. But he explains that SOA is being driven by the changing shape of the insurance business itself.
The business model that is taking shape in the insurance industry has become increasingly "SOA-like." Just one brief example: In the London insurance market, it is not the insurer that checks individual policies and collects premiums, but an outsourcing partner Xchanging, a company that manages more than 450,000 claims a year. It also operates a net settlement system for 200 insurers, which annually settle £60 billion (approx. $10.4 billion) between them. Xchanging, then, operates as a service within the insurance industry—thus making it SOA-like on a macro scale.
To put it another way, the value chain has fragmented. There is an increasing separation between product manufacturing and distribution as well as the rise of outsourcing in areas such as policy administration and claims. "This causes various process segments to be established as independent 'service components' that need to be orchestrated to build an end-to-end product," explains Lessner. And, in turn, it paves the way for the implementation of SOA on the IT side.
Lessner also says this is timely since many of the traditional approaches insurers have taken when providing IT solutions to business problems are short-term. "Insurers increasingly recognize that their neglect of back-office transformation and focus on 'quick-fix' projects in the front-office is cost-ineffective in the long-term, and fails to address their long-term challenges in distribution," he says. A longer-term approach is provided by SOA: Insurance firms can transform into "plug-and-play" operations to connect relatively cheaply to a variety of distribution channels and improve process orchestration—that is, provide customers with a seamless engagement experience.
Datamonitor believes that biting the back-office transformation bullet is becoming inevitable in insurance, with several insurers starting to define strategic target platforms in the back-office. "The sector seems to turn on its head the usual struggle of IT professionals having to sell SOA to the business side as a technological concept," Lessner says. "Much to the contrary in this case, SOA-like thinking is being driven from the business side in insurance, and IT functions are forced to follow suit as part of the constant effort of aligning IT with the business."
However, others would cast SOA in a less favorable light. As Butler Group recently put it, SOA is "reaching the heights of hyperbole at the moment."
The problem is that SOA demands a much deeper understanding of what each service provides to the business than is typically provided by describing it as an IT service: each service needs to be understood from a business perspective, in terms of what it provides for the organization—clearly a much harder task. "Applications then need to be 'deconstructed' into their component services—each of which performs a specific business function," says Michael Thompson, Principal Research Analyst with Butler Group.
When placed alongside the SOA-like shape of the insurance industry, this would suggest that whilst processes may be treated as service-like at the business level, it isn't any easier to integrate them at an IT level. An SOA-like business does not automatically lead to SOA.
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