In an announcement overshadowed by Hewlett-Packard's $13.9 billion bid for services provider EDS, Oracle on Tuesday announced it plans to buy AdminServer, a Pennsylvania company that makes policy administration software for the insurance industry, for an undisclosed sum.

The deal, set to close in the first half of the year, may be small compared to megabuys like Oracle's $8.5 billion purchase of BEA, but it represents a significant business opportunity and could even kick off a consolidation spree in the insurance software space, according to analysts.

"This acquisition is likely to shake up the status quo in the sleepy insurance software segment, and could possibly spark a fresh wave of mergers and acquisitions as Oracle's rivals take stock of the new technology dynamics in the sector," said Madan Sheina, an analyst with Ovum Group, in a research note.

Insurance software companies have been bought and sold before, but usually the deals were initiated by investment firms such as Bain Capital, Sheina wrote: "This is the first time that a leading enterprise software maker has bought a specialist insurance software firm in order to strengthen its position. In doing so, Oracle now becomes a direct competitor to traditional vertical insurance solutions providers that might have been partners last week."

AdminServer's employees will become part of a new global business unit at Oracle, led by the company's CEO, Rick Connors, according to a statement. The division will "focus on providing critical operational applications to the insurance industry."

The company's technology will work alongside Oracle's existing insurance-related products, such as Siebel Claims, as well as its business intelligence (BI) and E-Business Suite, according to a data sheet on Oracle's Web site.

The insurance software market is estimated to be worth between $2 billion and $4 billion, according to Matthew Josefowicz, director of the insurance practice at the research firm Novarica.

But the market has by no means topped out, Josefowicz said. "There's a major drive for legacy [system] replacement right now. There's just a high level of activity. There's definitely opportunity for Oracle to rack up significant share."

For example, there could be a "tremendous" opportunity in going after SMBs, according to Josefowicz.

"It depends how you define the [insurance] carrier market," he said. While there are 200 to 300 larger companies, there are also "1,000 others who are chugging away, but they're not Fortune 1000."

Insurance companies are known to develop software in-house, rather than buying it from a third party, but "in the U.S. market, the trend is overwhelmingly toward buy," he said.

Oracle will be competing with companies ranging from specialists like SunGard, to its rival in the business applications and middleware arena, SAP. The latter company has a more established presence in the European insurance market, and has chosen to build capabilities from its platform rather than buy companies, Josefowicz said. He also expects major vendors such as IBM and Microsoft will be "re-evaluating their own strategies."

The insurance software game has its challenges, according to Josefowicz. "The sales cycle are very long, the market is very fragmented."

"But it's a rich market," he added.