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.
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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