Build vs. Buy in Insurance: Navigating the Standard Software Dilemma for Digital Success
As an insurance executive or IT decision-maker, you face a critical choice that can define your company's agility and cost structure for years to come: Should you purchase standard insurance software or invest in custom development? This isn't just a technical decision; it's a core strategic one that impacts customer experience, compliance, and your bottom line. In a revealing episode of the Digital Insurance Podcast, Pavel Berkovitch, Board Member for Digitalization at Landeskrankenhilfe (LKH), sits down with host Jonas Piela to dissect this very challenge, drawing from daily practice in the German health insurance sector. For a US audience, the dilemma is equally relevant—whether you're managing a private health insurance portfolio, administering Medicare Advantage plans, or handling Medicaid claims, the build-vs-buy debate is universal.
Digitalization as a Continuous Journey, Not a Destination
Berkovitch, a mathematician by training, frames digital transformation not as a project with an end date but as an ongoing, integral part of business strategy. He makes a crucial distinction: a digital strategy is about thinking digitally, developing customer-centric products, and breaking down silos. An IT strategy, in his view, is more about formally meeting regulatory requirements. This separation is vital. Your core administration systems (like policy management or claims processing) are the "must-haves"—the compliance backbone. How you interact with customers—through portals, apps, or agents—is the "nice-to-have" that truly differentiates you in a competitive market like US health insurance or German private health insurance (PKV).
The Build vs. Buy Decision: Key Factors from an Insurance Leader
Faced with outdated legacy systems (an "investment backlog," as Berkovitch calls it), LKH conducted a thorough study. They concluded their current system could not adequately meet future strategic and regulatory demands. The path forward was a major transformation. LKH ultimately chose to purchase a standard software suite. However, Berkovitch offers a crucial warning: Implementing standard software does not automatically reduce IT costs for every company. A holistic Total Cost of Ownership (TCO) analysis is non-negotiable. You must account for all implementation, integration, maintenance, and operational costs over the system's lifespan.
Strategic Considerations: A Comparative Table
| Consideration | Standard Software (Buy) | Custom Development (Build) |
|---|---|---|
| Implementation Speed & Time-to-Market | Faster. Leverages pre-built functionality, accelerating deployment for core processes like claims administration or member enrollment. | Slower. Requires design, development, and testing from the ground up, delaying new product launches. |
| Upfront & Long-Term Cost | Predictable licensing/subscription fees. Beware of hidden TCO from customization, integration, and vendor lock-in. | High initial development cost. Potential for lower long-term costs if it perfectly fits unique, stable processes. |
| Regulatory Compliance | Major advantage. Vendors often build updates for new regulations (e.g., German insurance supervision (BaFin) or US CMS guidelines for Medicare). | Your team bears full responsibility for building and maintaining compliance, a significant ongoing resource drain. |
| Competitive Differentiation | Can standardize back-office "table stakes." Differentiation must come from front-end customer interaction layers. | High potential. Allows creation of unique, proprietary processes or customer experiences that competitors cannot easily replicate. |
| Flexibility & Scalability | May be limited by vendor roadmap. Customization can be complex and expensive. | Maximum control. Can be designed to scale and adapt precisely to your business model's evolution. |
Key Takeaways for Your Insurance Technology Strategy
Berkovitch's insights lead to several actionable conclusions for any insurance technology leader or CIO:
- Conduct a Rigorous TCO Analysis: Look beyond license fees. Model all costs over 5-10 years.
- Separate "Core" from "Competitive Edge": Use reliable, compliant standard software for mandatory back-end functions (policy administration, billing). Consider building custom solutions for areas that define your unique customer value proposition.
- Plan for Continuous Evolution: Digitalization is a journey. Choose a path (build or buy) that doesn't hinder your ability to adapt to new insurtech trends, regulations, and customer expectations.
- Listen and Learn: Engage with peer insights. The Digital Insurance Podcast with Jonas Piela is an excellent resource for hearing candid conversations from industry leaders. Find it on pielaco.com, Apple, Google, or Spotify.
Ultimately, the choice between standard software and custom development isn't binary. The most successful insurers will likely adopt a hybrid insurance technology stack: purchasing robust, compliant core platforms while strategically investing in bespoke development for key competitive advantages. Your strategy must align digital thinking with business outcomes, ensuring every IT dollar spent moves you closer to operational excellence and superior customer engagement.