The insurance industry is forced to adapt to changing market needs and switch to digital solutions. Especially for insurers who work with sensitive data, the question arises time and again in terms of data protection: Cloud or On-Premises? In this article, you will find out how insurance companies are currently positioned digitally and which advantages and disadvantages the on-premises or cloud strategy entails.
Cloud Computing in insurance companies
Digitalization offers new opportunities to increase employee and customer satisfaction. This can be achieved, for example, through the automation of processes or the fast, digital processing of claims. Cloud technologies in particular are becoming increasingly relevant for technical implementation in the German insurance industry.
In the PwC study from 2022, 61% of insurance companies stated that they were already relying on the cloud, but only 13% of the insurance companies surveyed already had a cloud-first strategy. Despite the supposed data protection risks that are repeatedly discussed in the context of cloud applications, a full 95% of insurance companies rate their cloud services as secure. Every second insurer (47%) sees uncertainty regarding regulatory requirements as a potential risk with cloud services and around half (45%) also see compliance violations as a challenge.
Source: PwC, Cloud Computing in der Versicherungsbranche, 2022
What is On-Premises and Cloud Computing?
But now let's start from the beginning. What exactly does "On-Prem" or "On-Premises" actually mean and what distinguishes this approach from cloud solutions?
On-Premises
On-Premises (short version: On-Prem) refers to an operating model in which the IT infrastructure is operated within the company's own facilities. The company therefore has its own servers on which systems and data run. This means that the company itself has full control and responsibility over the software and hardware.
Cloud Computing
With cloud computing, the IT infrastructure is provided by an external cloud provider. The servers and their maintenance are therefore outsourced. The most common concept is Software as a Service (SaaS), where applications are accessed via a browser. Responsibility for maintenance and updates lies with the external cloud provider.
Private Cloud
Besides public cloud environments, there is also the option of a private cloud. A private cloud is hosted internally within the company, with control and management being handled internally like with the on-premises solution. Resources and infrastructures are available to the company in virtualized form, ensuring scalability and flexibility as in the cloud.
The hybrid cloud takes advantage of the best of both worlds. This strategy provides the flexibility and services of the cloud while maintaining full control over data. The hybrid cloud has the benefits of different models while minimizing the risks.
So what is the right strategy? Both approaches, cloud and on-premises, have different strengths and weaknesses.
Advantages and disadvantages of On-Premises solutions in the insurance industry
Having in-house servers to run applications and systems provides the following benefits for insurance companies:
- Security: The insurance industry deals with sensitive data, so companies must comply with strict regulatory privacy and security requirements. On-premises provides complete control over data, ensuring greater data security.
- Service and control: Users have sole control over data, decisions and access rights and are independent of third-party providers and external service providers. The design and expansion of the systems is self-determined and is based on the individual requirements of the company.
- Data access: As the infrastructure is located within the company, Internet access is not required to access data and resources.
In addition to the advantages, there are also challenges and disadvantages associated with the On-Premises solution:
- Responsibility: The availability of data, maintenance and updating costs and the provision of backup solutions are the responsibility of the company itself.
- Acquisition and maintenance costs: Initially, high investment costs are to be expected and the maintenance and expansion of the systems can also be associated with increased effort and costs. However, the running costs are low.
- Costs: For On-Premises, more labor costs are necessary to carry out maintenance, support and updates independently.
- Scalability: The system is only scalable to a limited extent and can turn out to be costly and time-consuming.
For insurance companies, the use of on-premises software or hybrid systems can make sense in many areas of application. In addition to protecting sensitive data, a company's own infrastructure can also offer economic benefits by maintaining and expanding existing resources.
Advantages and disadvantages of Cloud Computing in the insurance industry
As described earlier, digitally enabled insurance companies are relying heavily on cloud solutions. This is because of the many benefits that cloud services provide.
- Responsibility: The cloud provider is responsible for maintaining and updating the systems, so there is no need for infrastructure maintenance. A certain degree of reliability is also guaranteed.
- Availability: By transferring resources to the cloud, data and applications can be used from any location, as long as there is an internet connection.
- Scalability: Resources can be quickly and flexibly adjusted to meet individual needs. For example, server performance is only obtained as required and is not kept available all year round. Seasonal business, such as changing car insurance in the fall, can then be operated more efficiently.
- Low infrastructure costs: Companies only pay for the resources they actually use and can expect low or no investment costs.
- Costs: There are no extra costs for server maintenance. Updates and new releases are often included in the cloud service.
- Compatibility: Cloud services usually have a large number of interfaces, which makes them more compatible with other systems.
But the cloud has its downsides and there are some risks to be aware of.
- Comprehensive transformation:Implementing a cloud solution can be a challenging project in terms of selecting suitable services, data availability and quality, and cyber security.
- Tied to a provider: With cloud computing, there is a certain degree of dependency on the external provider. For example, access to data and applications may be impaired in the event of downtime or technical problems.
- Security: The servers and therefore the protection, storage and processing of the data are located at the external service provider. This can considered a risk in terms of information security and data protection.
- Data access: A reliable internet connection must be guaranteed to ensure smooth retrieval of resources from the cloud.
- Generic services: Cloud solutions are often standardized solutions that are not customized to the company's individual needs.
- Loss of control: Cloud users never have full control over their data. The alternative approaches of the private cloud or the hybrid cloud would have to be used for this purpose.
Insurance companies can benefit from the use of cloud solutions by digitally controlling and supporting processes and thus increasing their efficiency. This can be in the form of data-driven lead management or customer-centric online communication.
According to the PwC study, regulation, compliance and data security are still the biggest challenges for a complete shift to the cloud. Almost half of companies in the insurance industry currently use a private cloud on their own server. Cloud providers now take into account the high data protection and security standards and offer corresponding cloud services.
Conclusion: Cloud or On-Prem?
The debate between cloud and on-premises shows clear advantages and disadvantages for both approaches. The choice between the two should always be based on the specific requirements and individual circumstances of the insurance company. When selecting service providers and applications, it is therefore crucial that they can respond flexibly to the requirements of insurers and that the tools provided meet compliance and data protection guidelines.
Due to the combination of flexibility and control, many insurance companies rely on the hybrid approach, that blends legacy systems, on-premises solutions, and private and public cloud structures.
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[1] https://www.pwc.de/de/finanzdienstleistungen/versicherungen/cloud-computing-in-der-versicherungsbranche.html
[2] https://www.alexanderthamm.com/de/blog/cloud-vs-on-premises/
[3] https://fio.de/lexikon/on-premise-software/
[4] https://www2.deloitte.com/de/de/pages/industry-operations/articles/cloud-technologie-in-der-versicherungsbranche.html
[5] https://mpmx.com/process-mining-versicherung/