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European Market for Life Insurance Policy Administration Systems: Fewer Deals Will Eventually Lead to Vendor Shakeout

The European market for life insurance policy administration systems saw fewer new deals in 2010, compared with 2009, and is still far away from precrisis deal volumes. Life insurers and pension providers aiming to purchase a new system need to understand the market structure and be aware of vendor viability.

Key Findings
  • Two-thirds of the vendors rated 2010 as a better year for business, compared with 2009, but the market as a whole hasn't recovered yet from the aftermath of the financial crisis.
  • Almost two-thirds of the client base of the vendors are Tier 3 insurers with less than 1 million policies, which reflects the structure of the European insurance market.
  • The average purchasing cycle is significantly longer than nine months, according to the majority of the vendors. This delay is commonly caused by life insurers obtaining more senior management approvals.
  • The vast majority of the European vendors see growing interest for software as a service (SaaS) among their prospects and plan to expand functional capabilities to meet this demand.
Recommendations
  • Develop a fallback strategy in case vendors exit the market or fail to make continued investment in their solutions.
  • Try before you buy.
  • Negotiate hard for additional license discounts by using your brand and market influence.
  • Compare the costs and potential benefits of on-premises implementations with those of a cloud-based deployment scenario.
ANALYSIS
Introduction

The European market for life policy administration systems is highly fragmented. Gartner currently tracks 38 vendors, most of which are focused on a region, such as the Nordics, or just a single country. The vast majority of vendors face a number of challenges, including the habit of life insurers and pension providers to build applications themselves, very long purchasing cycles and the difficulty of many IT departments to build a business case for legacy modernization. As a consequence, this market continues to be a buyer's market, with approximately one new deal per vendor per year.

This is not a sustainable environment, which will ultimately lead to a vendor shakeout. European life insurers and pension providers intending to purchase a system need to be aware of the changing market dynamics. To analyze this development in 2010, Gartner conducted in the first quarter of 2011 a survey among 38 European vendors of life policy administration systems. The responses of 32 vendors are summarized in this research, providing business and IT managers with a better understanding of the market structure and patterns.

Most Vendors Considered 2010 a Better Year With Bigger Deals

Two-thirds of the 32 surveyed vendors thought that 2010 was actually a better year for them than 2009, and less than 7% considered 2010 as worse. Almost 50% of the vendors saw bigger deals than in 2009, while 42% saw no difference. The 32 vendors managed to get 33 new deals in 2010, which is a decrease of 21%, compared with 2009, and actually the second decrease in a row after 2008. The average number of new deals per vendor in 2010 was down to 1.03, compared with 1.21 in 2009, and is still far away from 2008 (average of 1.63). The market hasn't recovered yet from the impact of the financial crisis, which led to more scrutinized purchasing patterns as well as delayed decisions.

Almost 40% of the vendors didn't strike any new deals in 2010, with another 44% that signed only one or two new customers in 2010. Less than 15% were able to pursue more aggressive growth. While some vendors may even lack the sales and service bandwidth to pursue more than one opportunity a year, European life insurers and pension providers should be alarmed if a preferred supplier can't demonstrate new deals over a certain period of time, because this may be evidence of the market perception of a solution. One of the most likely and immediate consequences is that vendors will try to substitute licenses with service revenues and will decrease regular product maintenance. As a consequence, existing customers would have to pay for functional enhancements that are already common in the marketplace.

Another aspect is that customers won't benefit from shared innovation if vendors struggle to add functional enhancements to their systems. For life insurers planning to replace their legacy systems, this constitutes a material risk, because they typically plan system lifetimes that last several years. Vendors that are unable to add new clients to their portfolios are more likely to exit the market, sooner or later. Based on the available data, Gartner expects further consolidation of this software market within the next three years.

A Largely Untapped Market Potential, With Several Barriers to Adoption

The customer portfolios of all vendors consist of approximately 500 life insurers and pension providers; based on Gartner estimates, this is less than 25% of the addressable European market consisting of more than 2,000 organizations. This untapped market potential is one explanation for the large number of vendors in this market. Many vendors were attracted by the fact that European life insurers continued to run legacy core systems, often developed 20 or 30 years ago, on expensive mainframe platforms. Market observers, including Gartner, predicted a wave of system replacements, which hasn't occurred to the degree that was initially expected. Based on Gartner's experience, there are a number of explanations:

  • The emergence of service-oriented architecture principles in the mid-1990s led several life insurers to extend the lifetime of their existing core systems by exposing data via Web services to more-usable front-end applications, such as customer or agency portals.
  • Business process management tools allow insurers to build a more configurable abstraction layer on top of their existing core systems and to externalize business rules that used to be stored in the individual operating systems.
  • The vast majority of European life insurers and pension providers prefer gradual legacy modernization, in which they can, for example, replace only the policy administration component and keep the existing billing functionality. Many systems on the market are designed more on a suite approach and lack the functional and architecture capabilities to integrate seamlessly into any given IT landscape.
  • Legacy system replacements are generally a complex endeavor and require high investments, which are increasingly difficult to justify and create a significant risk of project failure. Many insurers lack the risk appetite and the business justification to embark on such a journey.

About 65% of the vendor client portfolio are Tier 3 insurers (less than 1 million policies under management), and another 32% are Tier 2 insurers (between 1 million and 10 million policies). Less than 3% of the customers are Tier 1 organizations with more than 10 million policies. This customer structure reflects, on the one hand, the market structure of the European insurance market, which is dominated by small and midsize enterprises. It is, on the other hand, an indicator that very large European life insurers and pension providers continue to bet on homegrown policy administration systems. Based on Gartner's experience, it is very common for large insurers to consider the build option during their system selection.

Gartner has also heard several other reasons why larger life insurers and pension providers in Europe pick the build option. One of the most common ones is the inability of many vendors to support multicountry installations. Another argument we often hear is that functional requirements for policy administration systems are too unique and that they are perceived as a competitive differentiator. These arguments often do not withstand a more thorough analysis, but they are often used to delay system replacements.

Long Purchasing Cycles

Purchasing cycles for life policy administration systems are often longer than one-and-a-half years. Actually, more than 50% of the vendors stated that the purchasing cycles are longer than nine months. One-third believed that purchasing decisions are made between six and nine months, while only 13% of the vendors claimed that decisions take less than three months (see Figure 1). As a consequence of the financial crisis, many tender processes were put on hold by European life insurers and pension providers. The vast majority of the vendors (64%) saw no change in the length of purchasing cycles, while 32% saw even longer purchasing cycles.

Figure 1. Purchasing Cycles for European Life Policy Administration Systems
figure 1
Source: Gartner (April 2011)

The most common reason for this delay is that European life insurers are requiring more senior executive buy-in before approving the purchase of a new policy administration system. Almost two-thirds of the vendors mentioned this in our survey. There are a number of additional reasons, such as an increasingly complex system selection process that typically consists of not only vendor demos but also test installations or benchmarking with other clients of the vendor. Clearly, European life insurers and pension providers want to mitigate as many risks as possible in this early phase.

Growing Interest in SaaS

Less than 10% of all reported European installations today are deployed on a SaaS basis, and almost two-thirds of the vendors confirmed that there is growing interest among their client base in this operating model. Almost 80% of the vendors told Gartner that they have invested or plan to invest further in the SaaS capabilities of their product and organization; however, very few are prepared to offer a truly multitenant system environment.

This interest in cloud computing or SaaS is, again, driven by multiple factors. One is the desire of customers to retain budget flexibility and avoid high upfront license fees and implementation costs. Purchasing a new policy administration system will lead to license costs of anything between 150,000 euros to several million euros � depending on the size of the organization. License volumes vary considerably, because many vendors charge their customers by gross written premiums or other metrics. On top of the license, European life insurers and pension providers need to plan for implementation costs (usually at least double the license costs) and maintenance fees of roughly 20% per year.

According to Gartner's CIO survey in 2011 among 33 European insurers (both life and general insurance lines of business), 44% expect, by 2015 at the latest, to run more than half of their transactions on a cloud infrastructure. About 38% expect that more than half of their transactions will be executed on SaaS-based applications. While these figures may be a bit ambitious, they show that cloud computing can become a transforming force for the industry.

Gartner predicts that the current structure of the European market for life policy administration systems will lead to further adoption of cloud computing and SaaS. Many vendors lack, for example, the financial and human resources to expand their presence across Europe, and cloud computing will allow them to create a more level playing field.

Market Overview of Life Insurance Policy System Vendors in Europe

Gartner considered 38 vendors of life insurance policy administration systems for this research. While 32 vendors responded, six vendors � Financial Information Technology (FIT), Liss Systems, Novum, Open Square, Profit Software and Sapiens � did not respond to our survey, so we had to use public information to include them. Table 1 provides an overview of the vendor landscape in Europe.

Table 1. Market Overview of Life Insurance Policy System Vendors in Europe

Vendor NameMain OfficeProduct NameNumber of Installations in EuropeNumber of New Wins in 2010 in EuropePrimary Geographical Focus in EuropeInstallations in the Middle East and Africa
AccentureU.S.Accenture Life Insurance Platform (ALIP)330France, Italy, Germany, Central and Eastern Europe (CEE � Turkey, Ukraine, Russia and Poland)N/A
Airas IntersoftU.K.iGas110CEE, Cyprus and MaltaKenya, Nigeria, Oman, Mauritius and South Africa (five customers)
aquilaU.K.administrator320U.K., Ireland, Germany, Switzerland and NetherlandsN/A
Bravura SolutionsAustraliaTalisLife4 0U.K.; Nordic region; and Belgium, the Netherlands and Luxembourg (Benelux)South Africa (1)
BSBBelgiumSolife227France, Benelux and GermanyTunisia (1)
ComarchPolandComarch Life Insurance71CEE, Benelux, Germany, Austria, Switzerland and Scandinavia N/A
COR&FJAGermanyCOR.FJA Life Factory and COR.FJA Life733Germany, Switzerland, Austria, Benelux, Nordic region, Spain, Portugal and CEEN/A
CSCU.S.GraphTalk A.I.A and LiFEGraphTalk A.I.A: 97 LiFE: 34N/AGraphTalk A.I.A: France, U.K., Ireland, CEE, Portugal, Nordic region and Benelux LiFE: France, CEE and U.K.N/A
eBaoTechChinaLifeSystem40Switzerland, Netherlands, Ireland and LuxembourgBotswana, Egypt and United Arab Emirates (3)
EdlundDenmarkLife.Net190Denmark, Faroe Islands and IcelandN/A
ElipsBelgiumLife Office91Netherlands, France and GermanyN/A
ExaxeIrelandLifeCycle Plus41U.K., Netherlands and Nordic region N/A
FadataBulgariaInsis111U.K., Ireland, France, Benelux and ScandinaviaEthiopia (1), Kazakhstan (1) and United Arab Emirates (3)
FDCDenmarkF2100132 Norway and DenmarkN/A
Financial Information TechnologyU.K.LIFEfitN/AN/AN/AN/A
FIS SoftwareU.K. Alis131U.K., Benelux, CEE and FranceIsrael (6)
HPU.S.Ingenium and Radience AdministrationIngenium: 8 Radience Administration: 10 U.K. and Western Europe N/A
IFDS PercanaIrelandPercana162Ireland, U.K. and other European countriesSouth Africa (1)
intersoftGermanylifestream30Germany, Austria and Switzerland N/A
ItelloSwedenInca82Nordic region and Baltic StatesN/A
LeanAppsNetherlandsLeanApps Life163Netherlands, Belgium, U.K. and GermanyN/A
LinedataFranceLinedata Master I141France, Italy and SwitzerlandN/A
Liss SystemsU.K.Lissia/eLissiaN/AN/AN/AN/A
MajescoMastekIndiaElixir30Eastern Europe, Scandinavia and ItalyN/A
MIPSouth AfricaMIP LifeN/A0Emerging markets in EuropeSouth Africa (16) and sub-Saharan Africa
NovumGermanyV'gerN/AN/AN/AN/A
Open SquareU.K.PactN/AN/AN/AN/A
Profit SoftwareFinlandProfit Life&PensionN/AN/AN/AN/A
RGIItalyPass/Assioma201Italy, France and IrelandN/A
SAPGermanyFS-PM40Germany, Austria, Switzerland and NetherlandsN/A
SapiensIsraelSapiens Insight for Life & PensionsN/AN/AN/AN/A
SchantzDenmarkSchantz Life61Denmark and Nordic regionN/A
SilverBridgeSouth AfricaExergyN/A0U.K. and emerging markets in EuropeFocus market is sub-Saharan Africa (22 customers in various countries)
SunGardU.S.iWorks Compass20U.K. and IrelandSouth Africa (7)
Tata Consultancy ServicesIndiaTCS BaNCS4 2U.K., Belgium, Germany, France and Eastern EuropeBotswana, Angola and Gulf Cooperation Council countries (6)
TCP LifeSystemsU.K.Copernicus SS/G71U.K. and ScandinaviaN/A
TietoFinlandLIS42Nordic region, Baltic States, Poland and RussiaN/A
WydeFranceWynsure101France, Spain, Italy and Eastern EuropeN/A

Source: Gartner (April 2011)

Recommendations
  • Develop a fallback strategy in case the vendor exits the market or fails to make a continued investment in its solution. Having an escrow agreement is not sufficient. Plan to set up your own internal competency center. Consider securing access to critical vendor resources, and insist on a joint bid of the vendor and a third party for the implementation.
  • Try before you buy. Request a test license, or conduct a model office scenario with the vendor to identify potential gaps of the solution. This investment will pay back at a later stage and will allow you to speed up the blueprint phase during the actual implementation.
  • Negotiate hard for additional license discounts. Use your brand and market influence to create a win-win situation for you and the vendor. Be aware of the highly competitive market structure, which will force vendors to be more flexible during the bidding process. Even if the vendor doesn't accept further license discounts, you may be able to negotiate additional benefits, such as delayed payments or additional complimentary implementation support.
  • Compare the costs and potential benefits of on-premises implementations with those of a cloud-based deployment scenario. Assess the costs of SaaS over a period of five years, and determine its discounted cash flow compared with that of a traditional deployment model. Evaluate the maturity within your organization for cloud computing, and verify the current or future SaaS capabilities of the vendor.
Gartner Industry Research Note G00212351, Juergen Weiss, 26 April 2011