In 2000, insurers rode an information technology investment wave that was largely fueled by ambitious dot-com providers eager to plant their flag in the online insurance market.A year later, insurers jumped off the wave. The dot-com shakeout that intensified in 2001 meant that more than $15 billion in technology demand had suddenly evaporated. Moreover, a sliding economy contributed to a significant IT spending spiral-reducing healthy double-digit growth in 2000 to a less-than-stellar 3% growth rate last year.
The tale of these two fiscal years yields to one pressing question: What does 2002 bode for insurers as it relates to IT spending? The consensus among industry analysts is that over the next six months, the IT investment landscape will resemble the modest growth of 2001 before making a dramatic upturn by the third quarter.
By most accounts, 2002 will be a transitional year-a bridge to what's expected to transpire in 2003. Twelve months from now, carriers should be firing on most IT cylinders, with growth projected to reach between 8% and 13% between 2003 and 2005, industry experts predict.
IT Leaders?
Ironically, last year, the same insurance industry that many pundits regarded as IT-challenged over the last decade actually outpaced many of the so-called IT pioneers. Industry experts believe that this is a good harbinger of things to come.
"Compared to banking and securities, insurance IT spending was actually quite resilient in 2001, because, while it only grew 3%, it still represented positive and not negative growth," says Susan Cournoyer, senior analyst, global industries, for Stamford, Conn.-based Gartner Dataquest.
"Securities firms, for instance, were hurt by a pullback of IT lending opportunities and by a volatile stock market," she says. "Carriers averted these obstacles. In 2002, IT investment growth for insurance is projected to be about 6% over last year's performance, with an emphasis on basic e-business infrastructure solutions and outsourcing."
Several other industry organizations corroborate Gartner Dataquest's IT spending projections, except with their own customized spins on the activity:
* Tillinghast-Towers Perrin's e-Track report on insurance technology investments, which polled 248 large and mid-size carriers across North America, learned that 31% of executives believe that over the next three years a "revolutionary change" will occur with internal IT programs (see chart, page 35). "Despite a reeling new economy and technology investments that have delivered mixed results, many financial services companies-particularly insurers-are preparing to embrace new technologies," the Stamford, Conn.-based consulting firm reveals.
* Greenwich, Conn.-based IVANS, a provider of data networking and e-commerce solutions to the insurance industry, reveals in its "Emerging Strategies in Insurance Technology" report that the "practical" approach carriers have adopted toward IT strategies is yielding to a more aggressive approach (see chart, page 34). In fact, only 8% of the 750 IT executives surveyed indicated they will not replace existing legacy systems; 30.2% are currently re-writing their systems to make them Web-based, and 53.5% are implementing Web-based front ends for existing systems.
* With a volatile economy casting doubt about IT spending programs, New York-based Morgan Stanley & Co. Inc. repudiated the belief that IT will suffer if the economy continued to slide. In its CIO Survey on Enterprise Software, a poll that was not specific to only insurance, 39% of CIOs stated that the economy and the events of Sept. 11 haven't forced them to re-evaluate their IT budget/spending plans-yet.
Morgan Stanley found that when it came to the percent of the overall budget that has been reduced because of current economic and business conditions, the majority of CIOs (43%) felt that not any portion of the budget had to be reduced for this reason. Only 2% of CIOs said that 30% or more of the budget had to be cut for this reason.
* Boston-based Celent Communications Inc. anticipates that over the next five years, domestic and international insurers will spend $1.65 billion implementing Web-enabled, next-generation policy administration systems. "Enterprise computing, workflow engineering, and database design have made huge strides in the past 10 years," Matthew Josefowicz, a Celent analyst, points out. "A growing number of carriers of all sizes are willing to take the risk of replacing tried-and-true legacy systems to vastly improve distribution channels and workflow, and also add and update new products, and mine valuable customer data."
"By 2003, I don't think we're going to experience double-digit (IT spending) increases because of the heavy spending we did in 2001," says Robert James, CIO for CNA Corp. "2002 will see an increase in capital spending due to desktop upgrades for Windows 2000. By 2003, I think we will continue to spend more, particularly in the software development areas and in legacy systems migration."
In the past, when insurers faced criticism for their approach to IT, the top culprit supposedly was executive management's lack of vision and overall support for technology.
This condition made it difficult to bridge a gap that separated an IT unit from a business division in developing an effective automation strategy, critics argued. Other conditions also plagued carriers, including fear of alienating agents and reluctance to embrace outsourcing.
For instance, outsourcing ventures have been eschewed by many carriers largely because carriers have been reluctant to trust a third party with their hardware and/or software assets, Gartner's Cournoyer says.
moving It Back in-house
Or, insurers are finding that while they endorse outsourcing, it's actually more operationally effective to bring a program back in-house.
Schaumburg, Ill.-based Zurich Life Insurance Co., for instance, is "moving to a higher percentage of IT work being done by in-house staff-we had relied heavily on outsourcing-and this is slowly lowering our capital spending requirements," says Russell Bostick, CIO of Zurich Life.
"For 2002, we plan to increase our IT budget 5%," he says. "But by bringing projects in-house this in effect will generate more than 5% in capital value than the simple financial math would indicate."
Still, many carriers are relying more heavily on outsourced solutions. One case in point: In October, Novato, Calif.-based property/casualty insurer Fireman's Fund Insurance Co. inked a 10-year outsourcing agreement with Montreal, Quebec, Canada-based CGI Group Inc.
CGI, which provides end-to-end IT services and business solutions to clients worldwide, will assume control of Fireman's Fund's 40,000-sq.ft. Phoenix-based data center. In the process, more than 300 Fireman's Fund technology employees will convert over to CGI (see "Fireman's Fund Establishes A Unique Technology Maintenance Arrangement," November, page 6).
"This is a major development that's based largely on trust," Cournoyer notes. "But also I think it's because insurers realize that to become broad financial services providers, they need to clear their plate of some internal responsibilities. Outsourcing accomplishes that."
From a sales standpoint, one reason many carriers have been unwilling to embrace IT was that "they didn't want to rile up their agent force by even showing they had the ability to sell direct," Celent's Josefowicz says. "It was a hard-headed approach that produced negative results."
Insurance carriers also have made mistakes implementing IT projects, which made them hesitant to embark on a second round of implementation. One example has been data warehousing projects. Many of these projects have been beset by poor vision and lack of execution by carriers. The result was that several data warehousing projects had to be aborted in midstream.
The axiom "if you build it they will come" proved to be a flawed strategy because "a system that was installed for $3 million might have originally been regarded as a business imperative, but on second review might have turned out to be overkill-the system didn't provide the results of what the carrier had hoped," Jenny Emery, global e-business leader for Tillinghast Towers Perrin, says.
Unleashing IT
Carriers have made their share of technology mistakes, but they appear ready to atone for them. Similar to anything that's explored for the first time, carriers have exhibited a resiliency amid the trial and error, industry experts agree.
For starters, insurers have conceded that "Internet service and sales are here to stay," Tillinghast reports in e-Track. IVANS echoes this declaration in its "Emerging Strategies" report, indicating that while only about 15% of carriers use the Web to sell policies, 68% of them perceive their Web sites as a "sales vehicle."
As carriers mull Web selling programs, many conclude that the route best traveled is investing in tools that Web-enable their intermediaries, such as agents and brokers.
The IVANS report points out that one of the motivating factors behind carriers Web-enabling their legacy systems is to make their Web sites more useful to agents, with more than half of respondents to its survey indicating such a move. This movement has involved migrating from a leased-line connection that enables agents to access a legacy system, to a 100% Web-enabled process for agents to obtain a quote, check claim status and update a policy.
The development of agent extranets, either transactional or more basic by design, will be the most effective vehicle to arm an agency force going forward.
As many financial services providers expand their wealth management product line, they are pushing these products through independent producers rather than through career agents. These producers run their businesses on a number of agency management systems.
Launching robust, intuitive extranets will be essential as these independent producer ranks grow. In a survey of large-size carriers in both property/casualty and life/health sectors of insurance, Celent found that about 50% of carriers offer their agents an extranet portal to communicate with the carrier.
"The ability to improve the turnaround time on processing a life policy often means the difference between actually binding the policy or having it revoked by an impatient prospect," Celent's Josefowicz explains. "Agent extranets are an excellent tool to expedite policy issuance. And from an operational standpoint, a well-deployed extranet portal can save insurers 90% on printing and distribution costs."
The flipside of cultivating sales via an IT strategy is to streamline the claims process, and for two reasons: Efficient claims management keeps policyholders happy. But equally as important, making claims more efficient enables carriers to devote internal resources to other business imperatives.
"They won't be effective financial services providers if they are mired in claims settlement issues," says Gartner's Cournoyer.
Some of the outsourcing ventures that carriers have embarked upon are being executed from some unlikely sources. "Consulting firms that might have once specialized in providing a carrier-client with business strategy consultation are now engaging in systems integration to augment their primary competencies," Cournoyer explains.
Global management and consulting firm Accenture, for example, released a study last year, "Unlocking the Value in Claims," which contains compelling reasons why carriers cannot allow claims management to flounder. (In addition to providing the insights, Accenture can perform the systems integration duties.)
Of the 3,000 claims personnel in North America and Europe that were interviewed about their claims functions, Accenture's team discovered that all companies in the study run claims systems between 10 and 15 years old.
"Historically, few insurers have been able to durably unlock the value in claims because they are caught between the conflicting priorities of expense management and quality claims handling," says Victor Guyan, partner, Accenture's claim solution group.
"But because 80% of every premium dollar flows through claims, this part of the business is 'the moment of truth' for carriers," he says. "With the exception of a few PC front-ends or client-server workstations, these systems largely have their roots in the late 1970s and early 1980s, and they are largely disconnected from the actual claims handling process."
Archaic systems
The archaic systems means many claims handlers must work manually and then use a workstation "after the fact to code and record data, set up financial reserves or process payments," Guyan explains.
"In no instance did a claims handler find the existing technology to be highly-supportive of the business process," adds Michael Costonis, senior manager, Accenture's claim solution group.
"These systems were inhibitors to innovative business practices, including vendor management, creative workflow, distributed work processing or even the capture of accurate claims information," he says.
But Accenture found that despite these inefficiencies, there is a tremendous opportunity to improve results. It cited two main reasons:
* Claims settlement can be reliably reduced by up to 15% and still be fully compliant with good market conduct and high quality customer service practice;
* More than 40% of the time spent handling claims is associated with routine overhead functions that have little or no impact on the outcome of a claim. This time can be reduced by up to 50% and reallocated to core claim activities.
"Technology is an essential component of a total solution that will simultaneously improve the outcome of claims and reduce the time consumed by these low value functions," Guyan says. "Thin-client, browser-based applications will be needed to replace client-server technology."
Guyan believes that most carriers have identified claims-based technologies as ones on the high-priority list, along with investments that enhance distribution, underwriting, sales and products. CRM, on the other hand, is viewed as a lower priority investment, in part because the return on investment is uncertain and the measures are nebulous.
potential distractions
Despite a shift to embrace IT, carriers will continue to face obstacles as they examine IT investment initiatives, Tillinghast admonishes.
One ongoing challenge is that "other business priorities could take precedent." There are also concerns about the return on investment schedules with IT, and a "sense that customers, intermediaries and the marketplace" might not be ready for various automation solutions.
The most essential motivator that will guide carriers to expand the scope of their IT investments will be "customer demand," while internally the most important factor is achieving "good business results," Tillinghast reports.
Indeed, carriers around the world have identified the specific IT spending areas that need to be addressed in the coming year or two. At Zurich Life the emphasis will be on "Web-friendly underwriting systems, middleware and security infrastructure," Bostick explains.
"In 2003, I expect that we'll shift our focus to commissions systems," he says. "We are not spending major incremental dollars on customer relationship management (CRM) because we have been spending at a steady rate for the past three years following major one-time investments to get up to par. In 2004, they will likely require more of a major refresh."
CNA plans to boost IT spending to upgrade three components: "Desktop hardware to move to Windows 2000 or Windows XP, Unix hardware and some Web-server hardware and mainframe capacity," says James. "I think as wireless takes off, we'll see some other capital expenditures for wireless devices."
Despite all the rhetoric, many observers will be eager to see whether the IT wave can ever achieve the high-water marks of 2000.
"The executives that regard the next three years as a 'technology revolution' is a significant development because the insurance industry doesn't often engage in hyperbole," says Emery of Tillinghast. "And the fact that it was business executives carrying this sentiment makes it even more meaningful."
But some analysts counter the revolution rhetoric. "I don't think you can say there will be a technology revolution in the insurance industry, but it will be a very important evolution, and those that aren't part of the evolution will be in for a difficult time," Josefowicz concludes.
