After the technology exuberance of the late 1990s, the current conservative approach to IT spending seems like a hangover after a big party. But IT spending by carriers in the coming year isn't all that bleak.Depending on whom you ask, carriers on average are expected to increase their IT spending by up to 8% each year over the next few years, including this year. Last year, property/casualty and life/health carriers together spent approximately $18 billion on information technology, and they will spend $19.3 billion this year, according to Celent Communications, a Boston-based research and advisory firm.
Celent's prediction for a 7% annual increase in insurance IT spending from 2003 to 2005 is slightly higher than forecasts for IT spending overall. Worldwide IT spending is expected to increase between 4% and 5% each year from 2003 to 2006, and U.S. IT spending will grow at an annual rate of 5% to 6% over that same period, according to Aberdeen Group, a Boston-based market research firm.
Although IT spending began to recover in the third quarter of 2002, Aberdeen does not forecast a return to the double-digit growth rate of the 1990s. U.S. IT spending grew 1.3% in 2002, and is expected to grow 3.6% this year.
Despite the general, economywide pullback in IT spending in 2000 and 2001 and the many financial challenges faced by the insurance industry, "we found that IT spending is increasing cautiously," says Matthew Josefowicz, Celent Communi-cations senior analyst.
Leaner investments may be bad news to vendors who would like IT spending to grow at pre-2000 levels-when Y2K, the Internet, and a booming stock market drove technology budgets upward. But cautionary investing is not unusual, according to William Friel, CIO of Prudential Financial Inc., Newark, N.J. Rather, the business environment of the 1990s was aberrant.
"In the '90s, everybody thought an 18-year-old with a pack of cigarettes sitting behind the door was going to build the next great Web portal, and everybody had all these giddy ideas," he says. "But that's the only time in my entire career that I've ever seen that-and I'm happy to say we didn't do that."
Indeed, like most insurers, Prudential didn't have giddy ideas during the dot-com frenzy. In fact, insurers typically were criticized for being too conservative. Still, carriers did made considerable IT investments during those years. For example, Prudential equipped its entire field force of 12,000 with "LaunchPad" laptops-a $130 million program. It established a technology subsidiary in Ireland. It revamped its IT systems for demutualization, which occurred in 2001. It launched several Web sites. And it invested in data warehousing, wireless capabilities and voice recognition technology.
This year is different. Prudential will spend less on IT than it did last year-and its IT budget decreased in 2002 as well, Friel says. "Our overall priorities are expense saves, revenue generation and customer service."
For example, Prudential closed one of its three major data centers late last year. "Those are the kinds of initiatives we'll continue to identify, review and implement in 2003," Friel says.
Nationwide Mutual Insurance Co., on the other hand, will spend slightly more on IT this year than last year, according to Michael Keller, executive vice president and CIO for the Columbus, Ohio-based insurance and financial services firm. Nationwide's IT priorities include: applications with a high impact on the businesses-such as agency sales, policy management, pension administration, and client relationship management-as well as core IT capabilities.
Short-term projects
The difference between Prudential's and Nationwide's IT spending plans this year illustrates the difficulty in making too many generalizations about the industry as a whole. Not only do IT budgets vary from company to company, but large carriers do the bulk of the spending-two-thirds of the total (see "Large Carriers Spend Most," page 26). In addition, carriers that have already committed to large, strategic initiatives are not cancelling those plans, sources say. And, of course, spending differs by market segment.
Equity-based product providers, such as variable annuities firms, for example, are retrenching this year, planning 5% to 10% reductions in IT spending, says Rich Carreau, executive vice president, financial services group, Computer Sciences Corp. (CSC), a consulting and IT services firm in El Segundo, Calif. Life insurance spending is flat to marginally lower-to maintain operational stability. And property/casualty insurers are increasing budgets from 2% to 5% above inflation expectations, Carreau says.
In keeping with a cautionary approach, many insurance companies are committing their dollars to short-term projects-those with a 6- to 12-month return, sources say. With a few exceptions for large, planned capital expenditures-such as MetLife's massive client information file program-most insurers are investing in tactical initiatives in 2003. Their priorities include: reducing delivery time, improving customer service and cutting costs.
"For the next 24 months, it's all about execution, not strategy," says Judy Johnson, former Meta Group analyst and current vice president of insurance strategy for Sapiens Americas Group, an insurance IT supplier based in Research Triangle Park, N.C. "If you go into a CIO's, CFO's or CEO's office in an insurance company, and say 'strategy consulting,' watch their eyes glaze," she says. "They're not interested."
Compared with the past few years-when carriers were Web-enabling their systems and implementing customer relationship management (CRM)-insurers are experiencing "a little breather now," says Michael Bernaski, managing partner of the North American Insurance Industry Group for Bermuda-based Accenture.
CIOs have no dominant new technology to be concerned with, Bernaski says. Therefore, they're getting "back to basics." And one of those basics is infrastructure. "Many back-end problems were exposed when carriers built their Web or CRM front ends," he says. This is causing many companies to assess their core infrastructure and core processing capabilities to determine their alternatives.
Infrastructure investments will drive some IT spending over the next few years because carriers are at the point where the rubber meets the road, says Sapiens' Johnson. "There are some serious architectural things that need to get done," she says. "So more money will be spent, but we're going to see a continuation through 2003 of a tactical, short-term ROI focus."
A recent study by Forrester Research Inc., Cambridge, Mass., confirms that carriers will open their wallets in the coming year to improve IT infrastructure. Of the 105 carriers Forrester surveyed in September, 43% had budgeted more IT dollars for infrastructure software, such as database, security and operating systems software.
Forrester also found carriers plan to spend more on Internet-based commerce and collaboration initiatives (43%) and less on outside consultants (31%). Furthermore, a full 69% do not plan to purchase CRM software in the coming year (see "Insurers' 2003 IT Budgets," left).
In fact, CRM has become an acronym that people don't even like to use anymore, sources say. "CRM became a catch phrase to CEOs as a big hole into which I throw money and nothing ever comes out again," Johnson says. Carriers are investing in smaller CRM components, such as the call center and data marts, she says. But "the big, all-encompassing CRM system is definitely off their radar screens."
Huge, enterprisewide IT initiatives are generally out of favor in the current business environment, with some exceptions, says Jamie Bisker, research director at the TowerGroup, a Needham, Mass.-based research and consulting firm. "The big change I've heard from CIOs this year is that they're not going to budget $10-million technology projects. That's not going to happen."
Instead, "they're going to work on smaller projects so they can see the results. They're tired of being led down the path by CRM and ERP (enterprise resource planning) vendors," he says.
A bad rap
CRM has gotten a bad rap, says Celent's Josefowicz, because a lot of companies spent blindly on the technology without determining what they wanted to achieve with it. "Wasteful IT spending leads to a lot of disappointment," he says. "The great example of that is CRM. A lot of companies got caught up in the whirlwind. They started pouring a lot of money into a CRM solution that they didn't have any clear goals for.
"And when it didn't make everything better, they were disappointed. And they blamed the vendor and they blamed the IT department. So it's good that there's a little more caution and a little more thought going into IT initiatives now."
Topping the list of smaller, conservative projects with 6- to 12-month payback periods are those involving Web-enabled tools for distribution. "We are seeing IT spending centered on areas that help carriers on the marketing front," says Shane Chalke, founder and CEO of AnnuityNet, a Herndon, Va.-based provider of online technology for annuity transactions. "In times like these, sales are at a premium, so carriers will spend money on anything that gets them additional shelf space."
Carriers are funding e-commerce initiatives for their distribution channel because they can easily quantify the savings-in printing and mailing costs, and a reduction in call-center volume, says Celent's Josefowicz.
By supporting their producers with cost-saving technology, insurers are also addressing their priorities: to compress delivery times and improve customer service, he says. As a result, carriers are looking at the larger internal projects that have a longer term benefit, but they're not signing a lot of contracts, says Josefowicz.
Some recent examples of IT projects carriers are implementing to support distribution include The Hartford's quote-to-issue agency interface for homeowners insurance and the premium audit search tools that the company has made available to agents via the Internet (see "Agents Are The Crux of Hartford's Web Strategy," page 29). Another example is Allstate Financial's Web services-based producer Web site-which the company designed to enable its diverse producer network that includes banks and brokers-to service clients more easily (see "Allstate Financial Takes The Hybrid Approach," December 2002, page 29).
In fact, Web services, XML and middleware were among the top five technologies cited in a recent survey conducted by Insurance Networking News, which indicates carriers are still concerned about legacy-to-Web and systems integration. (See "Internet Focus Sharp As Ever," December 2002).
Despite its potential to simplify integration, Web services is still in the early stages of adoption. "Web services is this year's EAI (enterprise application integration)," says Accenture's Bernaski. "There's a lot of buzz. A lot of IT departments are getting educated about their alternatives." But few carriers are developing Web services capability yet, he says.
In a recent survey of senior insurance executives, Sapiens found that 26% anticipate "modernizing key business processes" as the most pressing concern, while 20% said "IT budget constraints" was their greatest concern. The top technology-related issue facing the industry was legacy policy administration systems with 29% of respondents ranking it as their top challenge.
Many insurers are interested in legacy replacement, says Celent's Josefowicz. But only 15% to 20% actually will embark on that path over the next three years. "It goes against the short-term ROI trend we're seeing." Carriers are waiting for the markets to get better, so they'll have more investment returns to commit to large-scale projects, he says.
Overall, insurance carriers are trying to use their technology dollars more wisely, Accenture's Bernaski says. More technology-savvy executives are moving to the C-level, and they are questioning the old model of accounting for the IT budget as a percentage of premium, he says.
"A newer model is to look at IT as one element of the expense structure, and if it can displace other elements of the expense structure, you can afford more technology," he says.
