Only five short years ago, insurers were scrambling to get their IT systems ready for Y2K. This year, they're at the cusp of implementing enterprise solutions that leverage component-based software across the organization, saving them significantly in both IT development and maintenance costs."Before 2000, I conducted approximately 100 Y2K risk assessments in the industry," says Deborah Smallwood, insurance practice leader at TowerGroup Inc., Needham, Mass. "The common themes were: What is your vision? What is your strategy? Do you have your arms around your portfolio? And they all failed. In the course of five years, insurers have come a long way."

This current assessment is based on Smallwood's recent qualitative, interview-based research of five large insurance carriers, which is published in a report titled, "Bridging the Competitive Gap: The Value of IT as the Insurance Business Transforms."

The study examines five major categories of the carriers' IT management: IT strategy, governance, organizational structure, business applications and enterprise architecture. Within those categories, the insurers' average scores ranked in the "leader" category for all but one-organizational structure.

Mastering the basics

"I was pleasantly surprised at the level of maturity of the industry," Smallwood says. "When it comes to mastering the fundamentals of IT management, such as project management and IT/business alignment, even the followers are at that level now."

In fact, all companies examined in the study had both a vision and an IT strategy, including priority-setting and oversight, she says. "If any insurer feels that IT alignment is a differentiator anymore, they are wrong. This is basic. This is blocking and tackling."

Only one carrier interviewed for the study has mastered the right ratio between maintenance and development spending, however. That company uses the same priority setting for both development and maintenance decisions, according to Smallwood.

Most insurers have two separate processes, often allowing for maintenance spending under a certain dollar amount regardless of the company's plans for that system, she says.

"This issue is tightly coupled with legacy migration plans. Insurers need to conduct a portfolio analysis and decide what systems they're going to keep and what systems they're going to unplug, and make budget decisions accordingly."

Smallwood's research also pinpointed the next big IT hurdle carriers face: Developing an enterprise view of IT strategy, planning, priority-setting and architecture. That's the next wave to position insurers for competitive advantage, she says.

"This includes having shared components and having an enterprise architecture. For example, if you're building an underwriting workstation, those components can be shared for both workers' comp and personal lines," says Smallwood.

Also important are rewards, incentives and penalties to promote the use of enterprise applications, she adds. "If you've got engineers whose livelihoods hinge on building software, what's the reward for them to build something that people can reuse? And what's the reward for people on those new projects to reuse them?"

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