Touching the Cloud

The technology world loves its buzzwords and ‘cloud computing’ is the latest in a long line of trends that promise the next big thing in cost reduction, greater efficiency and productivity boost. Burdened with myriad definitions, replete with confusion and ubiquitous thanks to a bevy of marketing hype, the ‘cloud’ is an IT phenomenon of which many have heard, yet few have actually applied – at least in the insurance industry.

Nailing a “Cloud’ to the Wall

One of the elusive traits of cloud computing is a precise definition. “Ask 10 people and you will likely get 10 different definitions of the cloud,” says Doug Johnston, vice president of partner relations and product innovation at Applied Systems.

“I think there has been a lot of marketing around the whole concept of the cloud,” says Shannon Major, marketing and communications manager at Keal Technology. “But when you strip it away, does it mean a whole lot more than Web hosting?”

Other questions emerge. For example, does the cloud simply refer to remote access to a network from mobile devices? Is it software-as-a-service (SaaS) or infrastructure-as-a-service (IaaS)? Is it the use of free or nominally priced Web-based software or servers for functions like email, customer relationship management or conferencing?

Many large technology firms believe key distinctions and characteristics define cloud computing. Aldo Gallone, cloud leader for IBM Canada, acknowledges that some of the “noise” surrounding the cloud has led “to a lack of clarity in some situations.” He says his company adopts the same criteria as those of the National Institute of Standards and Technology.

The U.S.-based organization lists five essential characteristics of cloud computing:
•on-demand self-service (computing capabilities provided without human interaction);
•broad network access [location-independent access through thin or thick client platforms such as mobile phones, laptops or personal digital assistants (PDAs)];
•resource pooling (a ‘multi-tenant’ model that dynamically assigns resources according to consumer demand);
•rapid elasticity (capabilities can be scaled up and down quickly); and
•measured service (a transparent ‘metering’ capability that monitors and charges based on type and amount of service required).

“If you have only some of these, you are really getting into semantics and religion as to whether it is a full cloud computing solution,” notes Gallone. “An ASP model [an application service provider model, which supplies computer-based services to customers over a network] may be a really good hosting service, but it is not cloud computing in that it is not truly on-demand, self-service and pay per use.”

Consultants say the cloud computing space is slated for significant growth in the years ahead. Gartner predicts investment in cloud computing will increase from its current rate of $59 billion to $149 billion in 2014, adding that companies will invest more than $112 billion over the next five years. Research firm IDC suggests worldwide IT spending on cloud technology will reach $42 billion in 2013, accounting for 10% of overall investment in technology.

Technology giants such as IBM, Microsoft, Amazon and Google have all embraced this trend. They offer cloud-based services, software and infrastructure to a wide range of industries and government. Other popular cloud providers include salesforce.com, which offers a Customer Relationship Management (CRM) and sales application, and Dropbox, a free service that lets users share files, photos and video. In Canada, IBM invested $42 million in a cloud computing centre that went live in January.

Insurance and the Cloud

The big question, of course, is what does cloud computing hold for the insurance industry? Predictably, many sources note the cloud is still in the early stages of development for insurance companies and brokers.

A report from IDC Financial Insights in December 2010, entitled, Business Strategy: Cloud Computing in the Insurance Industry, surveyed insurers in North America and observed “the importance that insurers are placing on cloud services both today and in the near future. While we are still in early days, cloud services will be a critical element of competitive success for the insurance industry going forward.”

Accenture also released a study in October 2010, How Cloud Computing Will Transform Insurance. “At a fundamental level, cloud computing can enable insurers to re-use IT resources more efficiently, whether these are purchased up-front or rented without any long-term commitment,” the consulting firm noted. “In fact, the capabilities of cloud have implications across an insurer’s business. Its scope extends upwards and outwards to cloud-based platforms, applications and business processes, opening up new vistas of opportunity in terms of how insurers create and deliver products and services, reach and interact with customers, collaborate with partners, manage their value chains, assess and manage risk and generate revenues.”

Aviva Canada is one Canadian property and casualty insurance company currently tracking the cloud. Robert Merizzi is Aviva Canada’s chief information officer and executive vice president of business systems transformation. He says his company has made investments in the cloud in human resources, using a solution that offers software on demand. Aviva’s parent company in the United Kingdom has also worked with Microsoft and IBM on collaboration-based cloud technology.

“In the p&c industry, vendors have started to offer cloud applications and services for insurance carriers,” Merizzi says. “I expect to see cloud computing mature in the insurance industry in certain areas, such as claims processing, certain parts of policy administration, collaboration and document management.”

IBM’s Gallone also notes “collaboration tools, development and testing, and analytics will likely become application sets that can move to the cloud in the insurance industry. Collaboration between companies or organizations is an important point. This is a great way to get economic efficiencies and accelerate productivity, especially if you look at data-sharing over a supply chain.”

One key area meriting attention is the ability of cloud computing to relieve costs and resources dedicated to maintaining legacy IT systems, a longstanding issue in the insurance industry. “Many large companies have hundreds or even thousands of servers in their IT infrastructure,” Gallone says, citing an example. “The overall computing capacity of these servers is often very inefficient, sometimes used at only 10-20%. A cloud solution could ‘virtualize’ these servers: when users need the server, it will start up; when it is not needed, it can shut down. This can really improve return on investment from the IT infrastructure, as you only pay for the infrastructure when you use it. This is particularly true if you move into a cloud sharing infrastructure with other companies.”

ClearRisk Inc., an online provider of risk management solutions, is another example of an insurance organization reaching for the clouds. “We have gone completely on the cloud,” says Craig Rowe, the company’s president and CEO. “We expect to access our data in the cloud and we also expect our clients to access our product that way. All of our internal files are on the cloud, and I feel completely secure about it.”

Rowe says his firm uses Amazon cloud services, as well as file-sharing through Dropbox. This is not novel in other industries, but the insurance sector tends to lag behind in the use of new technology, he says. “This industry is a little slow to keep up, but I have seen more interest in the last two years in cloud computing,” Rowe says. “For example, you have an employee of an insurance company on her lunch break who uses all sorts of b2c [business-to-consumer] connections to share files through Web-ba
sed software and then goes to her desk in the b2b [business-to-business] office and it is back to the old world. That is starting to change a bit.”

salesforce.com is another example of the insurance industry’s practical application of cloud services. This cloud-based model offers a Web platform for custom applications and simplified integration of client information, market data and transactional activity. Aon has rolled out Salesforce’s CRM system to its 7,000 sales, marketing and support employees worldwide using the Web platform.

Indeed, Merizzi says the cloud could represent a potential opportunity for more brokers, although little evidence exists that intermediaries in Canada are using cloud services. “For brokers, I think the cloud and social media will offer them different ways of accessing their customer base,” Merizzi says. “The question is: How can they use services and software available in the cloud to reach potential customers?”

Gallone also sees advantages for brokers in cloud technology. “Brokers may be able to band together and have access to application sets and shared infrastructure in the cloud,” he says. “They could gain huge economic benefits if they are working in a cloud within a trusted membership base.”

For broker technology providers like Keal and Applied Systems, when it comes to Web hosting services, cloud computing is like old wine in a new bottle. They say their hosted solutions resemble a “private cloud,” in that brokers can access information, data and files through a secure network from any Internet connection. Also, they contend, their broker management system (BMS) software and hardware contain much of the same marketing data and client information as cloud services like salesforce.com to conduct effective sales campaigns.

“If the cloud equates to the Internet and hosting solutions, we have been doing that with our sigXP broker management system since 2001,” says John Brezina, operations manager for Keal Technology. “The pay-as-you-go, on-demand part, however, I don’t see any direct application that is widely adaptable to our user base.”

Johnston says Applied Systems has hosted its flagship Agency Manager broker management system in online data centres for roughly 10 years. “About half” of its clients use this hosted software solution, he says. “We didn’t call it cloud computing, which is a relatively new term,” Johnston observes. “But that is really what we have been doing – moving servers, components and maintenance out of the brokerage office and into an online space.”

Benefits of Cloud Technology

Cost-effective

Whether the cloud solution at issue is private or public, sources say several distinct benefits accrue to these new models. A major plus is cost savings, according to Merizzi. “A key advantage of the cloud is that it can be very cost-effective,” he says. “You don’t have to build your own infrastructure: you buy the service and access it on a pay-as-you-go basis. There is far less maintenance and fewer people to maintain IT infrastructure.”

Rowe concurs. “The benefits from our end include that it is very inexpensive,” he notes. “If you look at Amazon cloud server, it costs pennies to store large amounts of data. They charge a nominal fee. And it is not just data: you can use their servers.”

Accessibility

Accessibility is another benefit of the cloud. All employees of an organization, regardless of whether the organization has 10 or 10,000 employees, can access files and data from any location. “One great thing about cloud computing is you can get information from any computer or device in the world,” Johnston says. “You don’t have to be in a network or plug in software. With a hosted solution in the cloud, you can get your information from home, office or anywhere you have an Internet connection.”

Scalability

The ability to change the amount of computing capability you need quickly – defined as “scalability” – also represents a big advantage for the cloud, according to Merizzi. “When you need to scale up, it can sometimes take time as a large carrier,” he says. “With cloud computing, you can scale up more easily and quickly – especially if something requires multiple users.”

If a brokerage is acquiring other brokerages or growing its client base, it can easily move to ramp up its staff and resources using the cloud, echoes Brezina. “If it wants to add 20 or 50 more users, we can simply issue more licences and they are up and ready. There is no need for more software.”

Risks of Cloud Computing

Several risks come with cloud computing. People still sitting on the fence in the debate about whether or not to use cloud technology often cite security as a chief concern. “The main risk in cloud computing is data security and privacy,” Merizzi says. “We are a heavily regulated industry in terms of privacy – our primary concern is services offered in the cloud may not be ready for us in terms of full security and privacy. As a Tier 1 company, the cloud solutions would have to be pretty mature before I would look at moving core services in the cloud.”

The security risk is real, as evidenced by the massive data breach of Sony’s PlayStation Network in April 2011. That cyber attack compromised information on more than 100 million customer accounts, the largest security breach since online thieves stole credit and debit card numbers from Heartland Payment Systems in 2009. Press reports also note that Amazon’s Elastic Computer Cloud servers were used by hackers to attack Sony’ online entertainment system.

The issue of privacy and security on the cloud has attracted the attention of the Office of the Privacy Commissioner of Canada, which issued a report in May 2011 called Reaching for the Cloud(s): Privacy Issues related to Cloud Computing. “The nature of cloud computing appears, on the surface, to create possible tensions between data protection/privacy agencies, ISPs and customers due to the uncertainty about which organization should be responsible in the case of privacy violations and how to hold companies who are located ‘in the cloud’ responsible under Canadian legislation,” the report stated. One key risk identified in the report is a situation in which “the Privacy Commissioner has jurisdiction over the subject matter of the complaint but the complaint deals with cloud computing infrastructure and thus is not obviously located in Canada.”

IBM’s Gallone says his firm “did sense some hesitation from clients about data hosted across the border in the United States, which could be subject to the Patriot Act. “That is one of the reasons we built the Canadian cloud computing centre, in which confidential information is protected and kept securely resident in Canada and in accordance with Canadian privacy laws,” he says. “We hope this will be a catalyst for Canadian clients looking to the cloud and we have already seen that happen.”

Data security is an important issue for Rowe as well, but he has a different take on the best way to protect information. “I don’t care how large of an organization you are, it always amazes me that people think their data is safer in-house than in the cloud, ” he says. ” The IT firms spend millions of dollars a year on security, redundancy and back-up. Do insurance companies really think their systems are better or more secure?”

Rowe says his primary concern with cloud computing revolves more around issues such as downtime and the relationship with the IT provider. “I think the real threat is one of downtime, and you have to look at a hosting firm’s online reputation and service levels,” he says. “An emerging threat is what happens to your data if the cloud provider goes out of business. I think this is more real when you start to look at what is happening with the sell-off of some sites such as Friendster and MySpace. A lot of companies can fold. What happens to your data after the engagement stops? What are your redundancies and back-
ups?”

Johnston says companies going on the cloud should look carefully at the contracts and service level agreements of the IT providers. “The issue is not necessarily loss of data, but who owns the data and what is your right to the data in that environment?” he says. “One trend we are seeing is control of the analytics associated with the data. In other words, you might get something low-cost on the cloud, but the provider may be able to use the data or analytics for other purposes.”
Another potential concern relates to the shared technology model that invariably accompanies cloud computing services and application. “How do the solutions come together, particularly in terms of multiple vendors?” asks Merizzi. “You have little or no control over that shared technology model. As it evolves, we have to make sure that cloud model works for us as a company.”

Reaching for the Cloud

Even with these concerns and risks, cloud computing is capturing the attention of chief information officers at companies around the world. According to an IBM survey of 3,000 global CIOs released in May, 60% of organizations are ready to embrace cloud computing over the next five years. That figure is nearly double the result of a previous IBM survey in 2009.

“Cloud computing is absolutely real in terms of the shift in the technology paradigm,” Gallone concludes. “However, individual companies need to be very methodical and pragmatic when it comes to which applications can go in the cloud. There may be some areas of data sensitivity where a cloud solution will not work. There may be a need for a private cloud that goes behind a company firewall. Clearly, companies should not throw out their technology textbooks on data security, privacy and regulation. The issue is more how to decide which applications can potentially move out to the cloud now and what the economic benefits are.”

In terms of the future of cloud computing in insurance, Accenture offers this summation from its October study: “In a few years’ time we believe that cloud will simply become the way things are done. Those insurers who move more quickly to embrace it will gain a competitive lead that others may struggle to match.”