The sad news about Montoux

The recent news that Montoux was being liquidated was sad to see. There are not many companies trying to innovate in the Actuarial modeling space and now there is one less. Innovation and disruption almost always lead to good things for customers and so the customers (Actuaries building models) are really one of the biggest losers with this news. Some people are reporting that this was "lawfare", see here.

From the link above it seems that Fidelity National Information Services, Inc. (FIS), the owners of the Prophet modeling system, who are a massive company brought a lawsuite against Montoux that they knew would bury them in legal costs. Maybe Montoux pushed the envelope too much (as startups sometimes do) and opened themselves up to this risk (i.e. they were in the wrong), you can decide this for yourself.

Regardless, Montoux going under is unfortunate and will set innovation in Actuarial modeling back significantly. Every small startup in this space is trying to find the one large customer that will take a chance on them. From what I heard Montoux did make some progress at cracking into larger insurers. However, now those insurers are left high and dry which will make them more risk adverse. This will lead to carriers playing it safe and larger monopolies when it comes to vendor supplied Actuarial modeling software. In turn this, unfortunately, will lead to less innovation and worse tools for Actuaries.

So, there is one less innovator and one more cautionary tale for insurers when they think about taking a chance on a small innovative solution. The real loser? Actuarial modeling.

The story within the story

This post is not about Montoux, FIS or who is right or wrong. For me, the Montoux story has another layer to it. According to the lawsuit Montoux got into trouble for a "Model Replication Module" that would aid potential customers in migrating off Prophet to Montoux. Switching costs in Actuarial modeling are very high so this technology would help existing insurers reduce these costs.

In Prophet there is a standard library of sorts. You use "indicators" to bring in product features when you begin building an insurance product. Based on these indicators you get a "template" for the product and then you customize from there. The thing that is interesting about Prophet is that you can edit all the code once a product is built.

In my experience, it's normal to heavily customize the code after first creating a product template. Then the question is "who owns the code you write?" Is this code written by FIS that you tweaked or did you start from some very basic template and build your product (I know some people that don't use the template at all)? Where you are on this spectrum depends on how you use the product. However, from the lawsuit that was filed it seems that FIS might believe that they own the code written in Prophet or at the very least that you can't separate the part they own (the DSL and the "template" code) from the part that users likely believe they own.

Why is "ownership" important?

I think this is a question that will become more and more important in the near future. I was very skeptical of the whole "AI will replace everyone" narrative, and to some degree I still am. However, something that is very clear is that software development is going to transform. Building software is fundamentally about solving problems, AI will not replace (good) developers but it will change the tools they use to solve problems and as a result the cost of software development will reduce (potentially dramatically).

I believe this could completely change the "Build vs Buy" trade-off when it comes to Actuarial modeling. The biggest downside to the "Build" option to this point has been the cost of engineers to build and maintain the software but with this cost reducing this will become less of a downside. This process could also be accelerated if some strong open source modeling libraries take off or if we, as a community, can agree on some open standards.

Add to this that the negatives of the "Buy" side will become more pronounced also. There are many tried and tested solutions to problems encountered in building software, things like version control, CI/CD, cloud management, etc. However, due to the incentives at play, vendors are more likely to try and build their own custom solution (and charge you for it) than to integrate with industry standard solutions. However, the new wave of AI enabled tools will likely be designed to integrate with these industry standard solutions as many of them are open source. This means there is a lot of data on how to use these tools freely available, i.e. training data.

Vendors will try to add the same AI enabled productivity gains to their software and hope the switching costs are too high. They do have some advantages. One is that they could specialize their AI solution to the insurance domain via fine tuning their AI models. It's easy to see that an AI that understands insurance product design could be better for Actuaries than one that knows how to "just code".

Now we can get to the important point. If vendors believe they own your code or it's not clear you own it, can they use it to fine tune their AI solutions? I'm not saying they will, I'm just saying that it's not something people were thinking about when they signed contracts, potentially years ago. Also, there would be no "smoking gun" as there was in the Montoux case. Software communicates back to the vendor for all kinds of reasons, license servers, telemetry, etc. In this case, there will be no evidence that your code was used, no marketing material to point to like the Montoux case. Just millions of trained parameters.

Conclusion

Things are changing very quickly on the AI front and companies need to foresee the challenges that are coming because when change comes it will be rapid.

In the new world of AI solutions the foundation models will become commodities, available from the big tech companies, and fine-tuning for specific domains will become the differentiator (some companies recognise this and are targeting the fine tuning step of the process). When this becomes the case, having access to the domain specific data to fine tune on will be the competitive advantage.

Actuarial modeling software is generally slow to adopt new technology and the agreements you originally signed might not be considering where the industry is going...

Disclaimer

To be clear, I am not anti vendor supplied Actuarial software. I am pro user centric software. I have used many vendor supplied solutions and can see the value they bring, including Prophet. However, I also think that larger vendors need to be pushed by smaller innovators to ensure the best outcomes for end-users.