The Benefits of Open Standards

December 22, 2014

Openness is trending high in the insurance industry lately and demands for efficiency, transparency, and flexibility are increasing. More tools and solutions that are either open source, open platform, or open standard are becoming available as a result.

Open signWhat is an open standard? Well first, a standard, as defined by the International Standards Organization, is "a document that provides requirements, specifications, guidelines, or characteristics that can be used consistently to ensure that materials, products, processes, and services are fit for their purpose." Examples of technical standards include data formats, system protocols, and programming languages.

When it comes to which standards are truly open, things get complicated since there are varying degrees of openness that a standards provider can choose to adopt.

A truly open standard is one that can be freely accessed, adopted, and improved upon. For example, ACORD, the non-profit standards developer for the insurance industry, has created multiple open data standards in collaboration with stakeholders that include (re)insurers, brokers, and model vendors, and publishes them freely. ACORD gives anyone who is interested the opportunity to submit requests for changes or enhancement. These requests then go through a review and approval process before they can be implemented.

AIR's CEDE and UNICEDE exposure data standards are also open since they have been made publicly available. We still maintain proprietary rights over them and can modify the format as needed without requiring input or consent from other parties. Even standards that aren't published freely and require payments to access and use them can be considered open, as long the licensing fees are reasonable and non-discriminatory.

So what are the benefits of developing open standards? There are many reasons organizations choose to open up, but here are some of the most important:

Facilitates broader adoption

There's nothing like giving your product away for free to attract users. In fact, apart from so-called "snob goods," or "Giffen goods," most economic demand curves have an inverse relationship between price and demand. Opening a standard eliminates one the biggest barriers to adoption-the cost of obtaining and using the standard.

Improves information transfer and usage

Open standards remove unnecessary barriers and give everyone access to the format's definitions. Little or no assumptions have to be made when implementing the standard. And since openness increases adoption, the transfer of information via an open standard is made more efficient and error-free because no interpretations or transformations are required. In addition, a clearer path is paved for those who still wish to map an open standard to a closed one.

Increases innovation

An open standard invites people of diverse backgrounds and goals to participate in its use. A standards owner looking to "think outside the box" can look to others to provide feedback and new ideas that can spur innovation. New products or services that piggy-back off an open standard can also come to life.

As with any decision, there are tradeoffs to consider when opening your standard. The most pressing ones that can come to mind for any business is increased competition and ensuring a return on the investment of developing the standard in the first place. Providing access to intellectual property may encourage copycat rival standards. To overcome this threat, organizations should ensure they have a large enough installed user base before deciding to publish a standard so that positive network effects can make it less attractive for the early adopters to switch to a competing standard. For companies looking to earn profits off the standard they are now considering giving away for free, complementary products that are enabled as a result of an open standard can be made available at a price.

Making a standard open has its pros and cons. Ultimately, each organization must evaluate their unique needs along with external market factors before making the leap and opening their standard.

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