70% of Insurers Plan IT Spending Increases Through 2015
More than 70 percent of insurers will increase spending on IT projects into 2015, according to “IT Budget and Spending Realities and Trends in the North American P&C Insurance Industry,” a report from Strategy Meets Action. And, 15 percent of those surveyed said additional spending for IT-related projects would exceed 10 percent of the total IT budget; another 5 percent said they expect outside expenditures to exceed 50 percent of budgeted IT spending.
“There’s the IT budget, the salaries and software costs and small acquisitions,” Smallwood said. “But when you do really big IT projects, like core systems, it’s outside the IT budget and more IT spending, and that number just keeps growing,” said Deb Smallwood, Strategy Meets Action (SMA) founder and author of the report.
Total IT spending in the North American P&C marketplace was $23.5 billion in 2013, according to the report, and will increase to $25.9 billion by 2016.
“IT budgets historically have run between 3 to 4 percent of direct written premium,” Smallwood said. “That’s still true, but 56 percent of the insurers actually are spending more. We are finding that there is the IT budget, but spending is actually bigger.”
Highlights from the report:
The average IT budget is 3.3 percent of premium and 56 percent of those surveyed said they spend more. Thirty-eight percent said more than 10 percent the IT budget is allocated to discretionary spending, and more than 20 percent allocate more than 20 percent. More than 70 percent said spending will increase from 2013 to 2015. Fifty-nine percent said spending outside the IT budget happens. Fifteen percent said investments outside the IT budget would exceed 10 percent of the total IT budget and another 5 percent said outside expenditures would exceed 50 percent of the IT budget.
The biggest challenges P&C insurers reported are budget limitations and the replacement of legacy systems. “The need for modernization of core systems and the transformation of the processes that surround them has never been greater,” SMA said.
Smallwood attributes the increases to better alignment between business and IT. “Project management is better, governance is better and there is more business participation, executive sponsorship, sophistication and experience. There is more trust that IT is delivering and business is participating,” she said.
According to the research, 51 percent of those surveyed said they were “becoming aligned,” 45 percent said they were “aligned” and 4 percent said they are “not aligned.”
Among personal lines carriers, 39 percent were becoming aligned, 55 percent aligned and 6 percent were not aligned. Among commercial lines carriers, 54 percent were becoming aligned, 44 percent aligned and 2 percent were not aligned.
Another reason for the increase is that core systems replacement projects, which continue to be a high priority, typically are not included in IT budgets and the same holds true for other large scale projects.
“These are all positive signs that show the maturity and the progress insurers are making,” Smallwood said.