Today's insurance marketplace is anything but "business as usual." Competition from new market entrants, deregulation, and fast-changing consumer expectations are challenging insurers' historically risk-averse corporate cultures.Traditional strategies and processes will not be successful in this market. To succeed, insurers must develop new business strategies and apply new technologies that will support business transformation.

Some insurers are, in fact, breaking out of the traditional mold, reinventing business processes and strategies to match consumers' demands for speed, efficiency and service. The key to achieving these goals is information technology.

The insurance industry has always invested heavily in IT. Gartner Inc. research shows that the U.S. insurance industry will spend approximately $40.9 billion on IT - including hardware, software, external services, internal services, and networking equipment (see chart, page 34) in 2002.

The unstable economy and the events of September 11 hurt the industry, but did not keep it from moving forward with IT projects. They did, however, drive a stronger reliance on metrics, such as cost/benefit analysis and return on investment (ROI) justifications, and in many cases made the buying process longer and more complex.


The time cycle for sales is now generally longer, expected ROI cycles for implementations are shorter, and more buy-in within the organization is expected before purchases are approved. However, none of these factors will prevent the industry from reaching a projected $54 billion in IT spending in 2005.

Although IT expenditures will continue to increase, the rate of increase is less than many IT vendors-and indeed many insurers-have hoped for.

Insurers have not kept pace with other types of enterprises, especially those in financial services. This leaves them at a significant disadvantage when competing with these organizations, which are typically more efficient and have lower costs of operations.

Insurers must continue to seek technological advancements at a pace equal to their competitors'-both traditional insurers and newer competitive entrants. For most insurers, business transformation and advancement in IT will be challenging-given the roadblocks and cultural resistance to change. As a result, IT investments for most insurers will be limited to tactical, or survival, types of projects.

Front-office focus

Recent business trends, such as the movement toward customer-centricity and the growth of the Internet, have led insurers to invest heavily in front-office initiatives.

In the past two to three years, significant investments in portal development, channel-specific operational customer relationship management investments (for call centers, for example) and e-commerce site building (adding quoting capability and online applications, for example) have been commonplace.

However, few insurers have rounded out their offerings to include Internet-based sales completion. While these investments enabled insurers to promote their images in the online world, and possibly gain public attention, they have not achieved the hoped-for front-office efficiency, revenue generation and operational cost containment.

Many insurers are beginning to reduce the focus on front-office initiatives as they realize the limitations of these investments without back-office modifications that support delivery channels.

The industry's heaviest IT investment continues to be in back-office policy, claims and other legacy systems. Due to the age of most of these systems, maintenance costs-for both systems and IT resources-continue to consume the majority of IT spending.

According to a 2001 Gartner study, life/health insurers on average spent $7 million and property/casualty insurers on average spent $9 million in 2001 on comprehensive insurance systems-systems that support both policy administration and claims. Spending was similar for insurers with independent or stand-alone policy and claims systems.

Most insurers continue to maintain their installed systems, instead of replacing policy and claims systems-which means this spending trend will continue through 2007.

For insurers that choose not to replace their systems, investments in legacy extension and updates will be crucial to meet performance demands, provide optimum customer service and support straight-through processing. Projects that support systems and data consolidation as well as application integration will be critical in supporting business transformation in the upcoming years.

Through the end of 2002 and into 2003, insurers must continue to invest in IT systems and solutions that support customer-centricity and seamless policy issuance and claims processing, and those that enable Internet applications and focus on process efficiency.

Best Practices

IT investment decisions will continue to be difficult, but balanced prioritization-based on market demand, impact on business (both short- and long-term) and speed of adoption-can make it significantly less so. Best practices for technology prioritization include:

* Avoiding the trap of focusing only on short-term ROI, which places the insurer's long-term viability at risk.

* Identifying "low-hanging fruit"-opportunities that can be achieved easily and rapidly.

* Evaluating emerging technologies in terms of the insurer's tolerance for risk.

* Establishing ROI expectations and time schedules for emerging technologies based on both technology maturity and market impact.

* Implementing multiple projects simultaneously, rather than in a strictly linear fashion.

While insurance IT investments have focused on survival tactics to date, the future is promising. Insurers have a tremendous opportunity to take control of their organizations and business processes and make the critical transition to becoming strong market players. Their IT investments must be smart and strategic, however, and must closely match their business needs and strategies.

An insurer that makes the right IT choices will be well positioned to accomplish its business goals. Organizations that do not choose well risk being left behind in an intensely competitive marketplace.

Kimberly Harris is research director, financial services, at Gartner Inc., Stamford, Conn.

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