16. October 2024 By Lotta Jaenecke
Cloud transformation in the insurance industry: a comparison with the High Line in New York City
Insurance companies are also increasingly relying on cloud environments, such as those offered by the hyperscalers Amazon, Microsoft and Google, to modernise their IT infrastructure. Since 2010, global use of cloud services has increased approximately thirteenfold from 42.8 billion US dollars in revenue to 561.1 billion US dollars in 2023. By 2025, sales are expected to increase by a further 20 per cent to around 825 billion US dollars. In Germany, the annual growth of the market volume for cloud services is estimated to be around 20 per cent. The use of cloud environments has already become standard in recent years, so that one can speak of ‘cloud first’. What challenges do companies face and how can they be overcome in a meaningful way?
By using the cloud, virtual machines (VM) and applications, servers, databases and services that were previously provided in on-site data centres are provided on computing platforms with high availability. The main advantages are the high computing power, scalability and availability of the technologies. Overall, costs are reduced because services are no longer generally reserved for peak loads, but are shut down when not in use. In addition, the maintenance costs for on-site data centres are eliminated. FinOps also enables transparent cost allocation. The trend towards cloud computing has continued to gain in importance as it is the basis for data-driven business processes and AI.
The switch from on-premise systems to the cloud presents insurers with various challenges. The example of the High Line in New York City is used to illustrate how a transformation can pay off.
New York City's High Line: away from the concrete and into the park
The elevated railway High Line connects the Meatpacking District with the Hudson Yards in New York City over a length of 2.6 km. From the breathtaking view over Chelsea and the Hudson River to the park and event location - the versatility of the 7.5 m high facility is impressive. It was finally opened for freight traffic in 1932 to provide the companies located there with an optimal infrastructure connection and to ensure the safety of pedestrians. These had previously been endangered by the increasing truck traffic. However, after the railway line was used less and less in the following decades and the last freight train rolled over the rails in the 1980s, the gradually decaying route was to be demolished. However, local residents, who saw the old railway line as a local recreation area and became aware of the diversity of nature that was emerging, opposed this.
In 2023, the converted railway line was opened and has since been open to New Yorkers and visitors along its entire length for walking, looking and enjoying art and nature. What a symbol of change!
Companies also see it as a major advantage and are choosing the area as a new location. The satisfaction of not only the residents, but also the neighbouring companies, has increased as a result of the new development, with new requirements being met and a modern infrastructure being created.
Cloud transformation: from the server to the cloud
Insurance companies are also facing the challenge of modernising their existing infrastructure, in particular, of moving away from the ‘sheet metal’ that has been in use for decades and migrating from on-premise data centres to the cloud. Perhaps they are even already thinking about switching from one cloud to the next. The basic offers of cloud providers are very similar in terms of network, storage capacity and computing power. There are gradations in the advanced services.
From a company perspective, it is worth scrutinising old infrastructures and processes to make way for modern technologies in IT operations. After all, the demands on IT operations and software development have increased rapidly in recent years, to the extent that a scalable and fast infrastructure in the cloud has become standard. Resource- and data-intensive applications, as well as machine learning and AI solutions, require an infrastructure that enables rapid data retrieval. In addition, data-driven business processes can be introduced.
Cloud computing in particular offers the possibility of building a high-performance infrastructure while optimising resource utilisation. Finally, the availability of technology with high computing power in different regions is made possible, so that even data-intensive applications can be operated reliably and fail-safe. Ideally, resources are configured according to their utilisation: for example, databases in non-productive environments should be shut down at night to save costs. The ability to adjust services to the actual load required is a major advantage over on-site data centres. This is because no unnecessary capacities are reserved that consume energy. It also promotes more sustainable IT with lower CO2 emissions.
Every insurer should also ask itself how secure its own network, applications and databases are. Would data and critical applications still be available and restorable in a reasonable time in the event of a disaster? What are the Recovery Point Objective (RPO) and Recovery Time Objective (RTO), i.e. the maximum tolerable time of data loss and the recovery time of the applications? To optimally secure IT operations, disaster scenarios must also be considered.
Assess complexity levels and make decisions: the Cynefin framework
As demonstrated by the transformation of the Highline, the migration of on-premise hosted data centres to the cloud should also be checked ex ante for the individual internal and external requirements of the cloud environment, the corresponding services and the migration. In addition to the cloud, the migration strategy must also be planned. The following factors can play a role when selecting a cloud provider:
- Data protection and the transfer of personal data to cloud providers,
- Availability and access options that depend on an internet connection,
- Complexity of migrating data and applications to the new cloud and, if necessary, new databases (taking into account the existing infrastructure),
- Dependence on the cloud provider and its services (vendor lock-in).
The Cynefin framework is useful for understanding the complexity of the outcome (successful cloud migration) and the project environment when initiating the project. This enables a classification into the five domains
- obvious,
- complicated,
- complex,
- chaotic and
- untidy
executed, which facilitates a decision on the project approach. The evaluation includes an assessment of how the variables between the requirements behave: are the variables fixed or variable, still unclear or known? Are there obvious relationships between the requirements that can be managed with known expertise or emergent working methods, or do completely new techniques have to be used? Are we even in the fifth domain, disorder, and have no information at all about the variables?
In addition to the existing requirements and their interactions, the project team's experience also influences the decision on the approach. A joint evaluation leads to a correct determination of the degree of complexity.
Depending on the classification of the domain, different approaches are suitable in the project, from best practice in the obvious area to analysis and derivation of options in the expert context (best practice) to prototyping and rather short project phases with close review. It should be noted that a shift between the areas can occur during the course of the project. In this context, the approach regards the transition from the obvious to the chaotic as a fatal hurdle for the project that must be avoided. When crossing domain boundaries, it is necessary to decide how the further course of action in the project will be designed and how long the project phases will be defined.
When implementing a project in an agile context, the prioritisation of requirements can be based, for example, on the categories Must-, Should-, Could- or Won't-Have (MoSCoW approach). The MoSCoW approach should only be used when there is a time limit. The requirements are differentiated according to their urgency. A must-have feature must be implemented by the deadline. Should-have and could-have requirements have a lower priority and should or can be implemented. A won't-have requirement indicates that the requirement will not be implemented within the timebox, but will be discarded. In an agile context, the product owner prioritises the implementation of the requirements and discusses them in the team.
Panta Rei – Nothing is as constant as change (Heraclitus)
The modern infrastructure requirements of an insurance company should not be seen as merely a means of keeping pace with new technologies. By providing high-performance and scalable systems, the cloud can also be used to optimise business processes and promote the use of AI. In the context of FinOps, it is also possible to keep cloud costs under control and increase revenue.
Just as New York City embraced change and transformed the High Line into a modern park with a variety of uses, cloud transformation also offers a wide range of customisable options for individual companies. After all, various cloud providers offer scalable services that can be tailored to your own needs. The migration strategy to the desired cloud can also be designed and implemented according to the individual company. Agile methods can be successfully used to incorporate and evaluate new requirements when initiating and implementing projects. This way, insurers can meet the requirements of a modern infrastructure and optimally master the design of their infrastructure in the cloud.
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