Despite the hype around new areas like mobile, social media, and cloud, the story of insurer IT budgets and projects for 2012 is one of continuity. Insurers are investing, through replacements and enhancements, in delivering the business capabilities needed to support growth, achieve competitive parity and improve operational effectiveness. But most insurers still think of IT as a self-contained area. And few have truly integrated it into operational planning in the way that companies will need to as the broad changes in information technology sweeping through the economy start to drive change in the basic assumptions of the insurance industry.
Insurer CIOs have a clear-eyed self-assessment of the state of their IT capabilities. In a recent Novarica survey of 132 insurer CIOs, insurers rated nearly half of their systems below the level of "acceptable" on average. While insurers are confident in their IT security capabilities and undifferentiated systems such as financials, most core systems were rated just barely acceptable and customer-focused systems such as portals and customer relationship management (CRM), were rated between poor and acceptable on average.
This historical underinvestment in customer-facing systems is in many cases a result of insurers having outsourced their customer relations to their distribution partners. But as more customers demand direct interactions (if not yet direct purchases) with their insurers, and insurers realize the importance of rich customer data for business intelligence and analytics purposes, the importance of these systems is being felt more keenly.
The most common top priority project for insurers is policy administration systems, followed by claims (for P&C), agent portals, and business intelligence. More than one-third of insurers are either in the middle of a core policy administration system replacement, or planning one for 2012. This level of activity is nearly unprecedented, and reflects both the maturation of the solution provider marketplace and the criticality of modern flexible core systems in enabling speed to market, ease of doing business, business intelligence and optimized internal workflow.
Mobile, tablets, social media and cloud continue to consume column inches and conference agenda slots, but they are still primarily in limited deployment or pilot programs for most insurers, where they are deployed at all. Fewer than 10 percent of insurers have extensive deployments in any of these areas. The most common areas are software-as-a-service (SaaS) systems and social media for marketing, both with at least some level of deployment by nearly 25 percent of insurers. While there is significant planned activity in these areas, most of these are ancillary to the major strategic projects that consume IT budgets and management bandwidth at insurers.
In terms of overall budgets, the majority of insurers expect to increase their IT budgets slightly in 2012. The exception is large life/annuity insurers, who are more likely to hold steady or decrease their spending as they face the double-whammy of a low interest rate environment and weak economy that depresses demand for their products. Average IT spending ratios continue to hold in the 2.5- to 5-percent range, and most individual companies' ratios range from 1 percent to nearly 10 percent.
Looking Beyond Short Term
I have been tracking insurer IT spending ratios for more than a decade, and I'm looking forward to the day when it is no longer an important metric. While it is important for insurers to understand their technology expenditures, it is far more important for them to understand the impact of technology on their overall operating expenses. An insurer with a 7-percent IT spending ratio and a 15-percent operating expense ratio is much better off than one with a 2-percent IT spending ratio and a 20-percent operating expense ratio.
As examined in my previous INN column, insurers' deployment of technology has expanded eight times faster than the average IT spending ratio. Information technology permeates every element of insurers' operations, and segregating IT as if it were ancillary and not a core part of operations makes it difficult for many insurers to realize the potential values of full automation.
Beyond that, close collaboration between business and IT is required to truly optimize the operations to meet the challenges of instant information accessibility and super abundance of data that is transforming an industry built for a world of slower communications and data scarcity. Insurers that rate their rating or business intelligence capabilities as barely acceptable are unlikely to be well positioned to fully leverage predictive analytics capabilities in the new world of "Big Data."
In summary, insurers are investing heavily in IT in 2012 to make darn sure they can walk, because they know they will need to start running soon.
Matthew Josefowicz is a partner and managing director at Novarica, an advisory services and research firm focused on insurers and information technology strategy.
