The Case for Deploying Enterprise Architecture in ILS
Does innovation receive the attention it deserves in your company? Are you able to scale your business? Do you have business ideas but don’t see how IT can support or enable them? If so, this article is definitely for you!
ILS managers are technology companies that happen to work at the intersection of (re)insurance and capital markets. Such a statement is increasingly adopted by companies seeing innovation as a key driver of their comparative advantage. Whether this involves creating new business products or business models, innovation and technology must be central to strategy and managed as a fundamental capability.
To gain such a competitive edge, ILS managers need a front-footed, strategically aligned innovation and technology organization. In reality, however, many lack such an organization, and experience significant challenges in their IT architecture that detract from the desired strategy instead of reinforcing or even shaping it. What is needed is the capability to manage the company’s IT assets and drive the discovery and adoption of innovative solutions that advance the business strategy.
Enterprise architecture can play a central role in orchestrating this. As a function, enterprise architecture can steer a company’s innovation and technology organization in such a way that it can enable and drive the business strategy while remaining flexible enough to accommodate the continuously changing nature of technology.1 This article will detail key ILS-specific pain points and the role enterprise architecture can play in recognizing and either avoiding or alleviating them − while maintaining focus on business outcomes.
The City Planner Approach
Enterprise architecture encourages ILS managers to think like a city council. The leadership can take different approaches to constructing, maintaining, and expanding the city for which they are responsible.
A straightforward but perhaps faulty approach is to give citizens latitude to independently build whatever structures and infrastructure they like wherever and however they want (e.g. houses, offices, train stations, schools, roads, libraries, waste management facilities, etc.). Let’s call this the «Urban Sprawl» approach. Such an approach has the advantage of speed in the build phase if the city and its components are assembled by separate teams; however, a closer look would show the city lacks a systematic, cohesive layout and could be prone to challenges in the future. The Urban Sprawl approach can prove particularly wanting as the city needs to expand and update. Without a strong foundation or cohesive structure, the city is prone to setbacks when faced with adversity.
A more methodical, alternative approach is to build and maintain the city in a systematized way with interconnecting systems and structures. Let’s call this the «Moon Wheel» approach.2 The Moon Wheel approach requires an overarching plan and design along with coordinated effort among teams in the design, build, and maintain phases. If sound architectural principles are applied, the city will be both structurally sound and have the flexibility to accommodate future changes that will inevitably be required.
Implications of Urban Sprawl in ILS
Often we see ILS managers living the Urban Sprawl instead of the Moon Wheel approach. As a warning to newly-minted ILS managers or those looking to enter the market, this often manifests due to the cross-industry nature of the business, overreliance on legacy systems stemming from underinvestment and lack of innovation, and/or as an unintentional by-product of change aversion. For some ILS managers, this happens because strategic decisions (e.g. transition from pure ILS advisor to ILS fund manager, from rented reinsurer to self-owned, from unrated reinsurer to rated, etc.) are not matched in operational execution—or because there is an outright lack of planning from the get-go—creating impediments to scale the business to new markets and customers, to deliver new products, and other areas.
One outcome of this is that business units can be siloed along functional lines. Cross-functional interactions to conduct standard business processes occur via email, in meetings, via printed sign-off sheets built with Excel tools, etc. This is reinforced by industry deficiencies in the availability of dedicated ILS IT systems. For instance, we are not aware of a market solution that exists today for ILS managers covering end-to-end processes or even core processes. The market solutions used are often ‘borrowed’ from related industries and do not account for the nuances and unique complexities of ILS. Traditional core reinsurance systems lack functionality to support insurance-to-financial-instrument transformer capabilities. Asset management systems fall short when it comes to capturing and assessing ILS instrument structures, particularly illiquid assets. This means that a mosaic of systems and applications is often required, but in practice ILS managers often over-rely on tactical solutions that become strategic by default (e.g. user-created Excel tools). This often then translates into data stored in a federated, siloed manner, which introduces operational risk, impacts reporting capabilities, and ultimately decision making. It also makes the whole system less scalable and increases maintenance costs.
As a band-aid fix, some ILS managers deploy a human approach to «bridge the gap» between functional areas. Too often this setup is ineffectual, as the bridge function struggles to understand enough of the nuances of both sides to enable the process.
These challenges lead to significant urban sprawl, and, if not tackled, result in significant consequences that are difficult and expensive to patch over.
Take up an Enterprise Architecture Landscape Assessment
The most important resolution an ILS manager can make is to take the Moon Wheel approach and ensure innovation and technology have a seat at the strategy table.
One way to do this is to embed enterprise architecture within the company. This enables organizations to identify pain points in their current setup, define the target architecture that supports or further shapes company strategy, and determine the roadmap for achieving the vision. With the pain points mentioned above (lack of a coherent system landscape supporting business functions and lack of information continuity), enterprise architecture provides a systematic, enduring approach for understanding and addressing them.
This can be done via an enterprise architecture landscape assessment. Taking stock of what you have is the first step to developing meaningful business and IT landscape management mapping existing systems, processes, and information flows against defined business capabilities. This is used to identify, visualize, and prioritize pain points. From here a target landscape can be determined along with a gap analysis. Defining a roadmap to reach the target landscape helps the organization to navigate the challenge of managing complexity while maintaining a flexible architecture to incorporate new solutions down the road.
Landscape assessments need to be focused on need areas. For an ILS manager, focus areas for investigation might be around enabling cross-functional interactions with workflow and collaboration systems. Another example area for potential investigation would be in data management and analytics. Indeed, defining an underlying data strategy would be a meaningful starting point to enable your company to best ingest, transform, analyze, share, and store information. Establishing reference architecture and instituting data management from the top down can enable the organization to best leverage information.
As ILS managers face increasing competition to attract and maintain investors, they are under enormous pressure to justify their management fees along with demands for increased transparency, timely information, and quality for value. Deploying enterprise architecture to support leadership can be a key enabler to address these market demands and best position the company for the future.
A clear documentation of enterprise architecture and an executable data strategy yield increased operational efficiency, decreased operational risk, and an enduring dedication to exploring and incorporating innovative solutions that support business outcomes.
Synpulse’s service offering can help you on your journey to turn the use of technology into a competitive advantage. It includes an enterprise architecture landscape assessment examining capabilities, processes, systems and information; the definition of business and cost drivers and enterprise architecture principles; an enterprise architecture functional setup concept; training; implementation; and other related services. Interested? Reach out to us for a nonbinding discussion.
In future articles we’ll be exploring best practice architecture principles to consider, as well as deep diving into particular challenge areas that ILS managers face.