Technology budgets traditionally have been an easy target for firms looking to lob off expenses and improve their bottom lines. And, while carriers-especially property/casualty insurers-are experiencing tough financial times, they are not slashing their IT budgets, according to the findings of an exclusive Insurance Networking survey of 82 carriers, agents, brokers and services firms.Nevertheless, carriers and agencies are taking distinctly different paths this year, with carriers ratcheting up spending on internal development, while agencies are cutting back on custom software and increasing packaged installations.
Last year, insurers maintained spending levels they had budgeted for both packaged and internally developed applications. But in 2002, they plan to scale back somewhat on packaged applications and concentrate their IT spending on internal business software.
Much of this spending has been on traditional insurance applications and maintenance, rather than new technology approaches, the survey reveals, And, while carriers' IT spending plans remain healthy, agencies and brokers have slammed the brakes on spending.
Top priorities
Policy administration packages are the leading type of IT deployment occurring among carriers, cited by 54% of respondents. Last year's popular category, e-business software dropped from 63% of companies to 40% in the current survey.
Ohio Casualty Insurance Co., for example, is building-from the ground-up-a policy administration system, with object-oriented technology and distributed processing.
"We're positioning ourselves so we can have real-time rating for commercial and personal lines, and be able to leverage that into a state-of-the-art agency interface system," says Curt Nichols, project leader for Ohio Casualty, Fairfield, Ohio.
The company is also building an intranet internally for policy administration work.
"We've got four lines deployed in more than 40 states, and four more lines over the next year to finish development and deploy," Nichols adds. "Those are all working on browser formats on an intranet."
As a result, Nichols says Ohio Casualty has seen no slowdown in its own IT spending. "We have not slowed our development," he states. "In some cases, we have accelerated it.
"It wouldn't be prudent to back off from our software development," he continues. "Our business strategies are closely tied to our automation development over the next several years."
spending trends
This message is resonating across the industry, the survey confirms. Carriers on average have budgeted $1.3 million for packaged software this year, down by 3.5% from what they spent in 2001 (Insurance Networking's survey last year included responses from 73 carriers, agents and brokers).
However, planned spending on internal software development is up by about 21% over last year, to $3.9 million.
In many cases, changing regulatory environments may be spurring increased spending on back-end systems.
"We've increased our spending, particularly as applied to HIPAA," says Steve Course, president of BEST Health Plans of Irvine, Calif. "That's probably the bulk of our (information technology) development. The rest is upgrades and keeping up with technologies."
Many carriers rely heavily on their in-house development staffs to develop new software, in part because packaged applications don't fill the bill, some survey respondents note. Peculiar industry requirements, they say, make many packaged solutions untenable.
"We write in all 51 jurisdictions," says Tom Dials, senior vice president of Armed Forces Insurance of Fort Leavenworth, Kan. "When you start looking at premium taxes in Kentucky, and North Carolina rates, and fire districts in California, and brushfire zones in Texas, (software suppliers') eyes start rolling back in their heads.
"I have not seen a good generic solution that you can work with," he adds. "If you write in more than a couple of states, you're forced to build your own solution."
Status Quo
It appears that many carriers have scaled down their new technology initiatives and are focusing on basic software requirements and maintenance.
Along with policy administration, interest runs highest in developing systems for document workflow management (46%) and underwriting (43%).
The survey also finds that interest in analytical and business intelligence tools has dropped significantly among carriers, from 57% deploying last year to just 29% today.
Not surprisingly, business-to-consumer e-commerce initiatives have plunged from 49% to 17%. Interest in enterprise portals and customer relationship management (CRM) applications also has waned, with portal development dropping from 37% to 31% and CRM initiatives dropping from 29% to 23%.
"We're on the Internet, but we're not doing anything new. We're concentrating on more internal stuff," says Daniel Bitz, manager of programming and systems at Wolverine Mutual Insurance Co., Dowagiac, Mich.
"We're changing our billing system, accounts receivable and payable," he adds. Other major projects for the coming year include automated fax capabilities for agents, and backup and restore procedures.
Mixed Message
For agents and brokers, IT spending is more of a mixed picture. Actual IT spending in 2001 fell far below initial budget projections, the survey's findings reveal. For 2002, agencies and brokers plan to spend more on packaged applications, while slashing in-house development.
Although agents and brokers budgeted on average $120,000 for new packaged software applications in 2001, they actually spent on average $45,000.
Budgets for 2002 are about the same as last year, averaging about $126,400. And, while carriers are relying heavily on in-house development resources, agencies and brokers are dramatically cutting such efforts.
These firms report spending about $292,000 for in-house developed software in 2001- far lower than the $573,000 originally budgeted. The cost-cutting is continuing this year as agencies and brokers plan to spend on average $180,000 for custom software.
Tight budgets
With budgets tight, agents and brokers appear to be moving to packaged implementations en masse. "I'm not going to write anything if I can buy it," says Bill Schwieder, CLTC, an independent agent in the Washington, D.C. area. "Even if it's got some bugs in it, it's still better than starting from scratch."
This view may be amplified in struggling agencies. Schwieder's own business-writing long-term care policies-has grown through the current economic downturn.
"People are more concerned about the assets that they have left after the market slide," he relates. "The cost of long-term care can take away everything. Suddenly it makes sense to protect your retirement."
New technology adoption among agencies and brokers, however, is expanding for selected applications. The largest segment of firms in the agency and broker segment (36%) are concentrating on employee self-service systems-up from 29% in last year's survey. And, 34% of agencies and brokers are building enterprise portals, up from 19% last year.
More agencies and brokers are also getting into business-to-consumer e-commerce-34% indicate activity in this area, up from 30% last year. But e-commerce system development is still limited. Just 32% of agents and brokers surveyed have any business-to-business e-commerce deployments underway-the same level as last year.
In Schwieder's view, packaged software providers will increasingly be forced to offer more customization services to make up for the shrinking developer workforce among agencies and brokers.
He predicts there will be a "bridging gap" from the third-party software vendors that offer solutions to agencies. These solutions will increasingly include integration services, he says.
Integration issues
When asked for particular functionality they would like to see out of vendors' packages, a number of survey respondents cited the need for better integration capabilities between packages.
"Software vendors must start exposing their functionality as XML Web services!" pleads one participant with a Midwest property/casualty carrier who declined to be identified.
"We need full agency management system functionality through Internet interfaces with carriers and clients on one unified standard processing platform," adds a respondent with an East Coast-based agency and service provider.
This need is particularly acute, since many applications run on legacy mainframe systems, and probably will continue to run on them for some time to come.
Armed Forces Insurance's Dials relates that his company has had a client/server system under development to enable easier access to mainframe-based rating tables. However, smaller platforms simply cannot yet handle mainframe-size loads, he says.
"The company and product lines are growing and we handle it all through batch routines on the mainframe," he explains. "One of the concerns we had with client/server when we started looking at the size of the product files . . . was the performance in terms of running billing and renewal. I'm not sure there's any server out there that will handle that kind of load, particularly when it comes to processing quarter-end and year-end financials."
As a result, he says, "the challenge is to be able to modify the base architecture in the legacy system and putting the client front-end on a mainframe back-end."
Such an effort calls for extensive integration work-the most compelling challenge for the industry and vendors alike.
Joseph McKendrick is a freelance writer based in Doylestown, Pa.
