The insurance industry has a problem: Insurance carriers are big, but innovative insurance software developers tend to be small. Carriers want broad solutions and Independent Software Vendors (ISVs) often have expertise in just one area, such as claims processing or policy administration. As a result, carriers are often faced with a collection of varied solutions from different providers, and a massive integration challenge.

Insurance carriers are in the business of risk, but not software risk, thank you very much. The small development shops, in which so much innovative technology is created, lack sophisticated labs to test their applications and provide benchmarks proving how they scale.

Enter Microsoft’s Insurance Value Chain (IVC), which, as part of its mission, is bringing complementary applications to labs in Redmond to benchmark their individual applications and test the links between applications.

The IVC’s goal is to work with insurance partners on using best practices in their development on Microsoft platforms, create standards that all vendors will agree to, and use Microsoft integration technologies to provide seamless messaging between applications.

To achieve these goals, Microsoft has already conducted labs with several software companies that are participants in the IVC.

“We want to make sure the applications can pass messages back and forth in a standardized way,” said Kevin Kelly, Microsoft’s insurance industry manager.

At the ACORD LOMA Insurance Systems Forum, May 22 – 24 in Las Vegas, Microsoft plans to unveil in depth details about the labs, including names or partners that have participated and results of the tests and integration work that have been conducted there.

The CEO of one vendor-company that has been to the lab with two other Microsoft IVC partners said the goal is to have several applications work together out of the box, or at least work with modest customization. Carriers often ask him for recommendations on complementary systems, he explained.

“We'd benefit if we could respond with the name of a vendor we have worked with in the Microsoft lab and we know our systems integrate well.” Already his company is pitching new business jointly with one of the partners it has worked with in the lab.

“Before IVC that wouldn't have happened,” he said.

Microsoft is creating an IVC framework that will be publicly shared. Kelly expects that vendors will find their applications meet many of the conditions for the IVC. To fit into the framework will probably require some adjustments or additional work on the application.

“But we won’t be spending extra cycles doing work that we don’t need to do,” he said.

The purpose of the labs is to make sure applications can work together effectively. That’s what carriers want from application providers.

“Checking the applications in the labs reduces the risk for the insurer,” he explained. “Customers will want a Microsoft IVC application because it has all this work that has been done around it. Microsoft, in essence, becomes a trusted gatekeeper for carriers looking for best-of-breed solutions.”

Senior IT executives at carriers like the concept, Kelly added. When he and Dan Woodman, the insurance industry architect, visited several insurance companies around the country, they found an enthusiastic response to a strategy that would provide them with the latest technology from highly specialized vendors through a program that can demonstrate interoperability. Woodman said that after hearing their presentation, an IT executive at a carrier told them, “You have just taken a zero to the left of the decimal point out of my integration budget.”

As Kelly explained it: “The Microsoft IVC is the best way for us to synthesize all of the assets that we and our partners possess into a strategy that can be adopted easily by insurance customers. It was designed with their greatest needs in mind and delivers a unified business and technical program from which they can select the right solutions for specific business challenges they face,” he said.

Through the IVC, carriers can buy more functionality on a Microsoft platform at a cost far lower than in-house development or continuing to run those functions on legacy mainframes.

“We can talk business value to the business side of the house,” said Kelly. “We are telling the industry it is too costly for them to continue doing what they have done in the past. Microsoft simplifies software. With the Microsoft IVC, we will do for the insurance industry what we have done on the desktop with the integration in the Office suite. The IVC will knit together huge enterprise applications and business workflows.”

A Celent study said 60 percent of insurance executives reported that the primary difficulty in rolling out new software was integrating it with their existing IT infrastructure, Kelly added. Microsoft’s IVC labs aim to solve the integration before the applications ship, although vendors say some customization will probably always be necessary.

“In an industry that has been seeking cross-enterprise, cross-platform workflow for decades, the IVC is the ideal approach,” Kelly added. “It brings together just the right set of business processes and platform technologies to enable them to purchase or build their next-generation systems without spending themselves into a corner, as the last 50 years of IT provision have done. Our ability to help them escape from both legacy thinking and legacy systems is our greatest contribution to our enterprise relationships.”

The integration work that is being done through the IVC will not be conducted exclusively in labs. Microsoft is also holding several partner meetings, like one held in Redmond, WA, February 1-3. The meeting, attended by Microsoft insurance executives as well as vendor partners and systems integrators, was intended to foster integration on a personal and company level.

Beginnings of the Concept

Could the Microsoft IVC work in other vertical markets beyond insurance? Bill Hartnett, GM of strategy and solutions for Microsoft’s Financial Services Group, says it is certainly a possibility.

“To provide a historical view on the IVC, this is something we have been after for 10 years, starting with DNAFS, and in insurance OLife,” said Harnett. “We always had this vision of an integration framework which would allow you to build applications that could share data pretty much seamlessly. Data about a customer is common across many applications within a financial services firm. You need the customer’s name, address, phone number, email, perhaps also information about household members and income.”

Microsoft has made the most progress in the insurance industry for a couple of reasons. On the personal front, Hartnett and Kelly both came from the industry, have worked extensively with ACORD, and have actively participated in most of the industry’s leading technology efforts as it moved from paper forms to electronic communications.

Second, at least initially, the insurance industry was dominated by all-mainframe technology. Almost all of its applications were developed by IBM or CSC. Unlike capital markets, it didn’t have a big chunk of its technology budget going into trading floors where high-powered traders demanded the latest new technologies such as Sun’s engineering workstations, and later Intel PCs with Microsoft Windows so they could run analytics on Excel and integrate their work in Office.

“All the applications in insurance were developed in-house for the mainframe, or by IBM or CSC or spin-offs such as PMSC. But they were all mainframe developments,” said Hartnett.

Third, the insurance industry is far and away the most complicated of financial services (it does, after all, incorporate banking, asset management, and financial risk management in addition to its life and property risk business), but it also has the most discrete pieces of business processing. As PCs became more powerful, smart technologists left carriers to start their own companies developing innovative and flexible applications to handle important bits of the insurance business better – first notice of loss, legal case management and billing, estimates, injury review, property valuation, and floodplain mapping, among others.

Beginning in the 1990s, independent software vendors began creating solutions on Windows.

“New entrants are where you have innovation first, but small players doing innovative things didn’t have the size, clout, or brand awareness to do much,” Hartnett said. “And it was in our interest to have them work together to produce a solution, because no individual company owned the whole thing.”

Moving Beyond Insurance

With the IVC model underway, Microsoft’s financial services group is looking at ways to extend it to banking and capital markets.

“We think this can span other industries,” said Hartnett. “We are finally at a point where we have proven this model in the insurance business. It is not just a conceptual framework but a prescriptive technical framework. When that gets fleshed out a little more, it will be easy to transfer to other industries.”

New technologies, which have come into widespread use over the last three or four years, facilitate the value chain approach of linking applications developed by individual software companies into a larger solution. XML and Web services are much easier technologies to integrate than objects.

“We are trying to provide good, integrated applications in a way that hasn’t been done before,” Hartnett said.

Ten years ago when Microsoft’s financial services group first started looking at ways to link applications, the technology – from the SQL Server database to the operating system and messaging – wasn’t mature enough to bring the pieces together.

Now not only has the piece of the stack matured, said Hartnett, but the stack has become much deeper. Since that time Microsoft has added the technology for transactions and message queuing.

“Now they are in the box with Microsoft Windows Server 2004. Collaboration is now actually part of the stack with SharePoint,” Hartnett said.