Custom Insurance Software Engineering vs. Off-the-Shelf Solutions: What's Best?

Changes in how customers expect merchandise and services, new competitors, and shifting regulations are driving an acceleration of change in this industry, which is rapidly evolving as a result of emerging technologies. To remain competitive, insurance companies must change quickly to these changes. A critical approach is the use of custom software solutions that are designed to meet their particular needs instead of generic, off-the-shelf products. But custom development has its trade-offs, too.

In this article, we will look at the pros and cons of building custom insurance software vs. using off-the-shelf solutions.

It analyzes key factors technology decision-makers should evaluate when determining the best approach for their company. These include:

• Costs
• Customization
• Speed to deployment
• Scalability and performance
• Security and compliance
• Vendor support

We'll compare custom-built and off-the-shelf solutions in these critical considerations. The aim is to provide an unbiased perspective on two viable technology pathways so insurance leaders can make informed strategic platform decisions.

Cost Comparison

Upfront Costs

Custom software development requires significant initial investments for planning, design, programming, testing, deployment, and launch activities.

Learn more about custom solutions from the provider: https://www.luxoft.com/industries/insurance/software-engineering.

Off-the-shelf packages have already absorbed these costs, so their upfront fees are mainly for licenses, data migration, user training, and basic configuration.

The level of customization drastically impacts development costs. Highly customized platforms with advanced capabilities take more resources to build than simpler "starter" systems with core functionality.

Maintenance Expenses

Once deployed, the software requires ongoing maintenance like bug fixes, interface modernization, integration upgrades, and new feature development. Custom systems tend to have higher sustained expenses here as well.

Off-the-shelf solutions spread these costs across their entire customer base. Their shared codebase allows vendors to deliver updates more efficiently, and they also provide access to new features at no added development cost.

Total Cost of Ownership

It is recommended that the total cost for the expected lifetime of a software platform be evaluated. This includes upfront, operational, maintenance and opportunity costs over a 5 to 10-year horizon.

Often, custom systems have higher total ownership costs than off-the-shelf solutions. Nevertheless, for systems vital to an insurer's strategy, the cost may be justified if the end solution is much more tailored, high-performing and strategically aligned.

Customization Capabilities

Insurance is a very complicated industry with its own company-specific processes, products, rules, workflows, data structures and reporting needs. There are no constraints on how custom software can be molded to fit these unique aspects.

Conversely, off-the-shelf packages must serve many clients. So, they standardize functionality, which may not fully reflect an insurer's established ways of doing business.

Gaps in how the software operates can disrupt operations, workflows, analytics and overall productivity if not properly addressed. Here are customization factors to analyze when evaluating options:

UI Configuration

Custom platforms provide unlimited UI design flexibility, including colors, branding, layouts, navigation, styling, etc. Off-the-shelf systems allow some cosmetic changes but limit custom branding and significantly alter default interface elements.

Process Workflows

Insurers can directly replicate existing workflows with custom software. Packaged apps take more effort to align to current processes through configurations, custom components, or external apps that fill gaps.

Data Model Flexibility

Custom systems are built around the insurer's data structure, so critical information maps directly to the platform model. Off-the-shelf apps store data in standardized schemas that may not fully reflect unique data relationships and attributes.

Integrations

Custom integration APIs can be built to connect with any internal or external system per business needs. Packages come with a set of connectors, but adding new ones often requires the involvement of the vendor's professional services team.

Rules Configuration

Policy and claims rule engines within custom platforms can be fully tailored to the insurer's guidelines rather than having to adjust to the constraints of an inflexible packaged engine.

Reporting and Analytics

Custom reporting and analytical features handle users' particular KPIs, dashboards, and data visualization requirements, as opposed to limiting them to the predefined reports and metrics offered by packaged apps.

To summarize, highly specialized processes, data models, and analytics needs are likely to necessitate extensive off-the-shelf customization to force the software to fit current operating methods. However, custom systems can simply use these elements natively.

Speed of Deployment

Custom development projects typically span 6-18+ months until launch, depending on scope. But they result in a solution catered to the organization versus needing post-deployment customization.

Since off-the-shelf solutions are pre-built, they generally take 3-6 months to roll out. However, additional implementation cycles may be required to customize them and address gaps.

As a result, the initial launch of packaged apps is faster, but if on a custom development timeline, the total time to completely customize and stabilize the platform can exceed custom development. While this can be offset with off-the-shelf solutions, the flexibility to roll out capabilities incrementally is also a plus.

Scalability

Custom systems are engineered specifically for an insurer’s technical environment and infrastructure, optimizing performance and scalability. Code and databases are accessed locally without reliance on vendor hosting sites.

Packaged solutions are hosted externally and accessed over the web. They scale by adding server and computing resources on the vendor side, which is largely invisible to customers. However, it's important to validate their capacity levels and service agreements.

Security

Insurance is critical to data security. The ability to get full control over data access, encryption, vulnerability testing, recovery processes and other security controls is not limited by vendor standards when you have custom development.

There are also reputable off-the-shelf vendors with robust security infrastructures. Of course, insurers still need to vet their protocols to make sure that they comply with the internal security and privacy policies for core customer data.

Compliance

Insurance is highly regulated. Custom systems can address required compliance controls like access audits, transaction reviews and report generation. Vendors strive to embed regulations into their products, but gaps can exist, requiring additional investment to fill through custom components.

Ongoing Support

The software requires ongoing maintenance and support. Custom developers intimately understand insurer platforms to quickly troubleshoot issues. Vendors typically offer multi-tiered support plans, which differ in response times and access to advanced technical resources.

With custom development, you can take advantage of your internal IT talent as opposed to the permanent payments of vendor fees. Nevertheless, some choose to pay for vendor support on an as-needed basis instead of staff development teams for ongoing maintenance.

Strategic Alignment

Beyond the technical considerations above, evaluating software options against strategic goals is vital for maximizing value.

Custom systems that are fully aligned to strategy and without the constraints of generic vendor offerings may be most beneficial to insurers with unique competitive advantages through specialized products, data-driven insights, or innovative processes.

Alternatively, off-the-shelf solutions may better serve those focused on cost efficiency, speed to market, or adding capabilities beyond core competencies.

Hybrid Approach

The decision between fully custom and entirely packaged solutions need not be binary. Leading organizations take a component-based approach.

They engineer custom systems for capabilities central to their value proposition, such as policy rating algorithms, CRM and data analytics. Packaged solutions handle nondifferentiation functions like document management, payment processing and supplemental user interface.

This way of architecting technology gives us the flexibility to innovate by custom development on components that are the most differentiating. It also cuts costs by using vendor solutions for capabilities that are not strategic but needed and can be bought off the shelf.

Conclusion

When selecting insurance software, the key considerations above must be balanced against strategic priorities – customization, costs, speed to market, scalability and support.

Despite higher lifetime costs, custom development may be the best approach to maximizing the capability of core systems that are central to competitive differentiation alignment.

Conversely, off-the-shelf solutions can provide faster deployment of non-differentiating but foundational functions at lower overall expense.

A blended architecture combining custom-engineered and packaged solutions is emerging as a best practice for insurers to simultaneously optimize strategic agility, operational efficiency and technology innovation across the enterprise platform ecosystem.

This result depends critically on the particular strategy and technical environment employed by each insurer. However, analyzing tradeoffs across the factors in this article will lead to making the right software decisions to enable both short-term and sustainable long-term success.

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