Despite the slow economy and overall reductions in IT spending since 2000, U.S. insurance companies are continuing to increase their technology spending. That's according to a June report from Celent Communications, a Boston-based research and consulting firm.Budgets for 2002 are an average of 7% higher this year than last year-totaling $18 billion industrywide, according to the report, titled "IT Spending in U.S. Insurance."

Of that $18 billion, the 234 largest U.S. carriers (those with annual premiums more than $1 billion) account for $12.4 billion. The 931 mid-size carriers (with annual premiums between $100 million and $1 billion) are spending $4.3 billion (24% of the total). And the remaining 3,600 smaller U.S. carriers (with annual premiums under $100 million) account for 7% of the total IT spending, or $1.3 billion.

"As in IT generally, there is a renewed focus within insurance IT spending on short-term demonstrable ROI (return on investment,) says Matthew Josefowicz, Celent senior analyst and author of the report.

Priority list

Overall, Celent estimates that insurance IT budgets account for 12% of carriers' non-commission operating expenses. Within those IT budgets, $6.3 billion total (an average of 35%) is devoted to new projects, rather than ongoing support and maintenance.

Carriers are focusing new project spending in three areas, Celent finds: improving customer service, increasing delivery speeds and cutting costs, in that order. Increasing flexibility to enter new markets and introduce new products is also important, but not as high on the priority list as the other three.

To achieve these three primary goals, the industry is using technology not only for computation and data management, but also for improving communication, the report states.

For example, carriers are installing new policy administration systems with graphical-user interface product-definition tools to reduce IT bottlenecks and put more control in the hands of the business users.

In addition, insurers are investing in Web-based extranets for distribution; Web-based forms and electronic links to third-party data providers for underwriting; electronic distribution of policy documents for issuance; electronic billing and payment; Web-based claims systems; customer-centric policy administration and contact-center systems; and Web self-service.

In general, spending on internal staff consumes an average of 44% of insurance technology budgets, the report states. For new projects, internal staff also consumes the lion's share of the budget-an average of 37%. But software licensing fees account for 25% of new project budgets vs. 20% of overall budgets, suggesting a growing trend toward buying rather than building new systems, according to Celent.

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