October 2011

Insurance Briefing
a move to cloud computing can have transformational impact on insurers
Introduction Cloud computing is more than information technology (IT), it is an enabling force for insurance companies to reengineer their corporate strategy efficiently and effectively. Insurance executives should consider how cloud computing can bring new opportunities to reduce costs by improving internal operations, and new opportunities to create revenue streams by providing new cloud-based services. Some insurance providers are already using cloud technology extensively. Many others have projects either underway or planned, and the results of these efforts are changing business processes and transforming existing insurance business models. What is cloud computing? The cloud computing model provides Internet-based data access and exchange coupled with Internet-based access to low-cost computing and applications. It is a model for enabling convenient, on-demand access to a shared pool of virtual computing resources, including networks, servers, storage, applications, and services with minimal management effort or service provider interaction. Cloud computing has the potential to change business processes in a fundamental way and is enabling the transformation of business models at a pace and scale not possible before. Enabling cloud computing allows for greater flexibility in IT function and scale at a lower cost and in a shorter time than traditional IT systems. It is usually offered as a subscription service or is billed on usage. This model enables organizations to adopt new information systems in days or weeks, rather than in months or even years.

1 | Insurance BrIeFInG / October 2011

2011 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of , the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the U.S.A.

Cloud computing enables elastic capacity, which allows companies to increase or decrease their capacity needs quickly. This provides increased agility in responding to the changing market; greater flexibility in combining people, processes, and technology; faster results in recognizing business value; and reduced costs in deploying new technology. Organizations can use or provide cloud computing in three main service models: infrastructure as a service (Iaas), software as a service (SaaS), and platform as a service (PaaS). Impact of cloud on insurance companies
Cloud Environment

As with any new approach to business services and technology, the adoption of cloud technology requires a careful examination of potential operational risks and challenges. For example, companies need to consider data security, privacy, regulatory compliance, and several other issues. Organizations could develop a sustainable competitive advantage by recognizing risks related to cloud technology and managing them effectively.

Internet-based data access & exchange

Internet-based access to low-cost computing & applications

Virtualized Technology

Virtualized Processes
Opportunities to leverage commoditized enterprise applications and economies of scale

Virtualized Organization

Virtualized Business Models

Speed to Market Improve Working Capital Reduced Invested Capital Reduced Cost of Goods Sold Reduced SG&A

Insurance industrys response cost savings through improved business processes Although IT has largely driven the discussion around cloud computing, the discussion around its broader business impact is only beginning. Cloud technology can enable virtualized business applications, processes, and services, and this virtualization replaces the need to invest in physical IT infrastructure or software. The resulting cost savings can have a transformational impact on business models and strategy, as it allows organizations to focus resources on core competencies and to respond more quickly to changes in the market. Under the infrastructure as a service (IaaS) model, insurance firms can lease or rent IT infrastructure to improve and outsource internal functions. This can increase speed to market and reduce IT development costs, as IT projects that usually take several months or even years to implement can now be implemented within a few weeks or months, and usually at less than half the cost of an internal server. For example, an insurance firm might own and operate its call center while outsourcing processes like claims processing through the

cloud. The firm would be able to add or reduce IT capacity based on the volume of claims processed. In addition, large insurance companies looking to enhance their enterprise risk capabilities could use third-party sources through the cloud. Under the software as a service (SaaS) model, insurers can leverage third-party tools such as customer relationship management, credit services, and business information services. These cloud services often allow insurance companies to implement the same systems and processes across the organization but without the large investment in capital and time usually required for the development of new systems. Under the platform as a service (PaaS) model, insurers can lease or rent the layer between the infrastructure and the software from third-party sources. Database management and application design, for example, could be offered as part of a PaaS model. Privacy and security concerns have caused insurers to be slower in adopting some of the platform as a service (PaaS) offerings. As organizations overcome these concerns, PaaS could provide an opportunity to move core business applications into the cloud. This could significantly change the costs to insurers in updating technology.

2 | Insurance BrIeFInG / October 2011

2011 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of , the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the U.S.A.

Increased revenue through new services Cloud computing can help insurance companies find opportunities to increase revenue by enabling them to change their business models and become a service provider through an SaaS or a IaaS model. For example, insurance companies could provide cloud-based services to independent insurance agents or other companies. This could include cloud-based agent management systems in which an agent can use the firms systems to manage its portfolio business. For other commercial users, an insurance firm could use cloud computing to provide services such as processing insurance claims, which would otherwise be processed by its human resources department. As with the outsourcing example, the volume of its cloud-based IT capacity would change with the volume of insurance claims. Insurers could find another revenue opportunity by embedding insurance purchases through other Web sites. For example, some companies are selling travel insurance directly through travel Web sites. This could be extended into other insurance lines such as auto insurance, which could be sold at auto dealers or through auto Web sites. These types of opportunities have the potential to change the business model for where and how insurance companies sell and manage their products.

next steps Cloud computing provides powerful new opportunities for companies across the entire insurance industry. As with any new business or IT approach, it introduces new risks and challenges. However, cloud computing can also offer measurable cost and revenue benefits for firms that can build actionable and phased strategies. Insurance executives can follow some recommended next steps to begin considering how they can use cloud computing in their businesses: Form a senior leadership council with representatives from across the organization to explore potential cost savings or revenue enhancing opportunities Document where or if these services are already being used in the company Choose one or two small, non-critical opportunities to help build knowledge and experience around managing cloud implementations Develop a business case for further investment Learn what competitors are doing to ensure that your firm is not falling behind in cloud computing and is not missing out on any first-mover advantages.

Cloud is not the futureits now. Its an enabling force for business evolution that goes beyond technology, allowing organizations to reengineer the companys corporate strategy more efficiently and effectively.

2011 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of , the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the U.S.A.

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contact us: Laura J. Hay National Sector Leader, Insurance ljhay@kpmg.com 212-872-3383 rosalie s. collado National Marketing Director, Insurance rcollado@kpmg.com 404-979-2285 contributing authors: Jonathan M. cohn Principal, IT Strategy & Performance jcohn@kpmg.com 212-954-5815 Jason c. Freedman Principal, IT Enablement jfreedman@kpmg.com 860-297-5016 kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 2011 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of the KPMG network , of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 24980NSS