This case study from the insurance industry is taken from my book, Going Global on a Shoestring. It represents a scenario in which crossing a national border requires substantial investment in localisation. It also illustrates that shoestrings come in different lengths—and this one is relatively long.

The customer problem

Life insurance and pension providers—whether commercial or publicly owned—are not found on every street corner. Each country has a limited number of them, they tend to be fairly large, and they are heavily regulated. Because insurance is primarily about processing information, the industry was among the first to introduce computer systems. Over the years, most life insurance and pension providers have developed—and continue to maintain—their own proprietary IT systems.

Like all other businesses, these companies must continually reduce their administrative costs. If they fail to do so, their customers will feel the consequences through reduced insurance cover and lower pension payments. Neither regulators nor customers will accept that, adding further pressure to reduce costs.

The main source of cost savings in the insurance industry is the optimisation of business processes, including the automation of payments and the introduction of customer self-service solutions. Every such improvement also requires changes to the supporting IT systems.

Since continuous business-process optimisation and cost reduction are at the top of the agenda in the life insurance and pension industry, there is a corresponding need to modernise proprietary IT systems, many of which are based on obsolete technology. The solution is to use standard systems that are easier and less expensive to implement, modify and maintain. As the insurance industry increasingly ceases to regard its internal IT systems as a source of long-term competitive advantage, a market has gradually emerged for software companies offering standard solutions.

The liptech industry

Within insurance, life insurance and pensions rank among the most complex and heavily regulated areas. This is not a market populated by many agile, fast-moving start-ups. Nor is its IT supplier infrastructure characterised by short-lived ventures. In fact, this part of the insurtech industry may deserve a name of its own: “liptech”.

There are two main types of liptech providers:

• Established software companies seeking to expand beyond the borders of their home countries.
• IT consultancy firms specialising in bespoke development and the implementation of standard software supplied by companies in the first category.

Every country has its own national infrastructure of liptech companies. The smallest countries may have none, smaller countries may have one or two, and larger countries generally have several. North America has the greatest number.

The picture is of an industry that remains dependent on proprietary systems but has reached a point where demand for more standardised solutions is creating opportunities for liptech companies with international ambitions. Although the principles underlying life insurance and pension schemes are universal, the legislative and regulatory frameworks within which they are implemented vary considerably from one country to another.

The main reason the liptech industry remains highly national is that its market is as well. Few life insurance providers—and scarcely any pension providers—operate across national borders. Unlike in industries where IT companies can expand internationally by following their customers, there is virtually no opportunity to build a global liptech business in this way.

Liptech companies with international ambitions must therefore begin by making substantial investments in preparing their platforms for multiple languages and country-specific requirements. They must then decide how much localisation is required before the first customers will be prepared to come on board. The cost of entering a new country can easily run to several hundred million Danish kroner. Taking a liptech company global requires both deep pockets and visionary customers.

Internationalisation

There is no global market for life insurance and pension products. Each country has its own national providers, while local traditions, legislation and regulation determine the conditions under which its liptech industry operates. At some point, life insurance and pension providers worldwide will replace their existing proprietary systems with standard platforms. Predicting how quickly this will happen, however, is extremely difficult.

“Core operational IT systems are the backbone of every life insurance and pension provider,” says Morten Steiner, CIO at PFA Pension in Denmark. “Leaving a proprietary but functioning platform and placing your future in the hands of an external software company is not an easy decision—particularly if you are to be the first customer to do so.”

The principal challenge facing software companies considering entering this market is the enormous investment required before the first customer feels confident enough to commit.

“Hardly any life insurance or pension provider today is prepared to participate in developing a core system from scratch,” Morten Steiner explains. “The risk is too high. We expect our software suppliers to demonstrate a strategic commitment and present an operational solution that meets at least the most fundamental requirements.”

Edlund A/S

Denmark’s life insurance and pension providers, comprising 14 administrative entities, began replacing their internally developed proprietary IT systems in the 1990s. Edlund was one of the liptech companies that recognised the market opportunity.

Today, Edlund employs 275 people and has annual revenue of almost DKK 300 million, based on its 2018/19 figures. It is the undisputed leader of Denmark’s national liptech market.

The company serves 10 of the country’s 14 operators and supplies the IT solutions used to manage more than 60 per cent of all pension payments in Denmark.

Edlund was acquired by KMD in August 2016 but continues to operate independently under the Edlund name. KMD, one of Denmark’s largest IT service providers, acquired the company as part of its international growth strategy.

Following the acquisition, Edlund began seriously examining the opportunities for international expansion. In the spring of 2017, it engaged one of the major management consultancy firms to assist with market analysis and recommendations. This led to a decision to invest first in redesigning the software and then to explore opportunities in neighbouring markets.

Redesigning the solution

“In the past, we were an IT consultancy firm that developed software,” says Gert Bendsen, CEO of Edlund. “We are changing that. In future, we will offer a much larger standard core shared by all customers, with a corresponding reduction in the amount of customisation required. The result will be a much more attractive proposition for our customers: they will receive more and pay less.”

By providing a more comprehensive standard core, Edlund can reduce both the initial implementation cost and its customers’ ongoing maintenance expenses.

“The life insurance and pension industry is affected by demographic change and steadily increasing regulation,” Gert Bendsen emphasises. “Sharing the cost of developing and updating operational software systems will generate substantial savings for each individual customer.”

Although regulation has so far been predominantly country-specific, other changes apply across national borders. New standards for operational procedures and customer service—and, not least, the opportunities for optimisation created by technological development—are largely universal. It therefore makes good sense to develop an IT platform capable of serving multiple customers across national borders while ensuring compliance with local legislation.

“The only way life insurance and pension providers can benefit from advances in IT technology without facing constantly rising costs is by using more standard components,” Gert Bendsen says. “At Edlund, we have chosen to become the strategic IT technology partner that provides both the standard software required to operate the core business and the IT consultancy needed for individual implementation and ongoing support.”

The transition from an IT consultancy to a software company means that the revenue split between licences and professional services will change from 10:90 to approximately 60:40. Edlund is currently at 50:50 but believes there is scope for further standardisation.

“Software for life insurance and pension providers will never be plug and play,” says Gert Bendsen. “Nevertheless, it should be possible to reach a point where software accounts for 60 per cent of the total solution price and consultancy hours account for only 40 per cent. That ratio represents a desirable scenario for our customers.”

Norway

The Norwegian market comprises six potential customers, each of which operates an internally developed proprietary IT system. There is no direct national competitor, although a handful of consultancy firms serve the industry by providing specialist advice and software development.

Edlund’s analysis showed that, in life insurance and pensions, Norway is the neighbouring market most similar to Denmark. It also concluded that all six potential customers could benefit from moving to Edlund’s new standard platform. What was difficult to assess was when they would be ready to begin the process. One Norwegian pension provider had already embarked on a project with another foreign supplier. Three years into the project, however, it pulled the emergency brake and brought the initiative to an end. The example illustrates how difficult it can be for a foreign supplier to understand and implement local market requirements. It has also made the entire industry even more cautious.

Edlund is not the only liptech company to have set its sights on Norway. Sweden’s Itello AB recently acquired Eikos AS, a Norwegian actuarial consultancy that supplies systems and services to pension funds and financial-sector providers in Norway and abroad.

There is a strong likelihood that the first liptech company to win a project and demonstrate a successful implementation will also become the preferred choice of the remaining providers. Only by using the same supplier can they share the continuing burden of adapting their systems to changes in Norwegian legislation. This potential “winner takes all” scenario makes Edlund cautious.

“Norway is an obvious market for us,” says Gert Bendsen, “and we are in very close contact with prospective customers. However, we need to get the timing right. A solution for the Norwegian market must be based on our new platform. Developing functions specifically for Norway requires tangible evidence of commitment from at least one customer. We do not expect the first customer to finance the entire investment, but without a live project, it would be difficult for us to justify the expenditure.”