Build vs. Buy

Celent is releasing a report soon on build vs buy. I find this debate frustrating because I feel like it isn’t a difficult decision.

Insurance companies are made of three things: money, a processing system and an underwriting system. Money is money and at current regulatory margins I don’t believe there is an advantage to be gained for insurers having more or less of it. Underwriting systems exist to sniff out moral hazard so humans have to handle those (committees, referral, etc).

100 years ago, the processing was done by humans, too. Today, you choose between build or buy.

If you find yourself among the small minority of (re)insurers that write volatile, hard-to-price insurance, you don’t really need a rock-solid processing system. You probably write big deals and work more like a hedge fund than a retail bank. You can buy.

As for the rest: if you don’t build, the risks are simple and the money isn’t yours, your job is to provide a commodity on the cheap. If you aren’t building your own system, what on EARTH do you get paid to do?

Over time technology improves, making new systems better regardless of whether you build or buy. This will, however, rarely (never?) affect whether a company chooses picking clients or shaving margins as its business model.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s