Barring another terrorist attack on U.S. soil, or some other catastrophic event, U.S. insurance companies are cautiously optimistic about the economy in 2004. As a result, IT budgets in the industry on average are increasing slightly this year.Research from Celent, Datamonitor, Forrester and TowerGroup suggests insurers will add as much as 10% to their IT budgets this year, with an average increase between 2.5% and 6.7%.
"Insurance is one of the sectors expecting above-average growth in IT budgets for 2004," says Andrew Bartels, vice president at Forrester Research Inc., a Boston-based research and advisory firm that recently conducted a survey of 900 companies across all industries.
According to Forrester, approximately 40% of insurance companies surveyed are increasing their IT spending this year, while 22% plan on spending less in 2004. The average change in insurance is a 3.4% increase, while IT budgets across industries are increasing 2% on average.
Back in June 2002, Boston-based Celent Communications Inc. predicted the insurance industry would spend $20.6 billion on IT in 2004-a 6.7% increase from 2003. "We're still confident in those numbers," says Matthew Josefowicz, senior analyst. In fact, a recent Celent survey of insurance CIOs revealed that most are increasing their IT budgets between 5% and 10% this year, he says.
Datamonitor anticipates U.S. insurance companies will spend $27 billion on IT this year-up 3.8% from the $26 billion Datamonitor predicted insurers would spend last year.
In addition, IT spending in the property/casualty sector is expected to grow faster over the next few years than in the life and health sector, according to Marc Smookler, insurance analyst at Datamonitor USA in New York.
TowerGroup, a Needham, Mass.-based research and advisory firm, also foresees a difference in IT spending between the property/casualty and life sectors of the industry in 2004.
"We're seeing a slight increase in IT spending of 2.5% overall in 2004," says Deborah Smallwood, practice leader in insurance at TowerGroup Inc. "On the P&C side, however, we're seeing up to a 10% increase in some companies, while IT spending in the life and annuity sector is relatively flat," she says.
Over-capacity in life market
Why the discrepancy between P&C and the life sectors? Over-capacity in the life market, according to Datamonitor in a recent report titled, "U.S. Insurance Technology Opportunities."
Furthermore, life insurers have been over-reliant on investment income as the engine of profitability over the past few years. Added to that, deregulation in the form of Gramm-Leach-Bliley is pitting life products against those in the mutual fund and banking industries, Datamonitor notes.
These and other factors are causing life carriers to hold back on significant increases in IT spending this year, industry experts say. But life insurers are focusing their IT dollars on technologies that promise to improve profitability and their competitive position in the marketplace.
"Actually, both life and non-life companies are finding they need to offer more finely grained products and deliver those products to the market in 30 days or 60 days instead of six months or nine months," says David Hollander, managing partner in the insurance solution group at Bermuda-based Accenture.
Indeed, core policy systems that can enable insurers to fine-tune product design and reduce policy processing time and speed to market are an investment priority over the next few years-across the insurance industry, researchers say.
For example, property/casualty insurers will spend $4.6 billion on policy systems this year, according to Datamonitor, and life insurers will spend $6.4 billion in this area .
On the P&C side, core claims processing systems will also receive considerable attention over the next few years. Datamonitor projects P&C carriers will spend $3.1 billion on claims systems this year. And, Guidewire Software Inc.-a San Mateo, Calif.-based provider of Web-based claims systems-found in a recent survey that 76% of P&C insurers are engaged in significant claims system projects.
"Claims and the entire claims supply chain is a major emphasis for virtually all the top P&C carriers," Accenture's Hollander concurs. "They're thinking about it broadly-from internal claims processes to the associated supply chain. I don't know of any (large) P&C carrier that is not investing there," he says.
Modernizing core processing systems and rationalizing infrastructure surfaced as important IT issues in Celent's CIO survey as well. Carriers are investing in infrastructure this year more than last year, Josefowicz says.
Infrastructure includes policy administration, business intelligence and data mastery, he says. "They're also investing in systems integration projects. They're making sure their infrastructure is rationalized."
TowerGroup also noticed carriers investing in data projects this year. "Insurers are really trying to leverage the amount of data they have," Smallwood says. "So they're either resurrecting a warehouse project or applying analytics," she says.
Insurance companies are interested in financial systems, particularly performance management modules, such as analytics, because they're more focused than ever on aligning IT with business strategy, according to Tim Plunkett, CPCU, and global industry consultant in insurance at PeopleSoft Inc., a Pleasanton, Calif.-based enterprise application firm.
Accenture's Hollander also notices insurers are more driven than ever to align IT and business results. Carriers are making important strategic technology decisions right now, he says. And, although they are not spending as much on IT as they did in 1990s, they are carefully targeting their investments to pull ahead in the marketplace. "Winners accelerating out of tough times is a theme this year," he says.
Large carriers, in particular, are thinking about consolidating software platforms, he says. "We had this heterogeneous world of the 1990s, but now everyone realizes that the cost of those heterogeneous platforms is different data models, different business processes, and different IT skills."
Insurers are formalizing their legacy system strategies as well, says TowerGroup's Smallwood. "We're starting to see both life/annuity and property/casualty carriers saying, 'What are we going to do with our core systems?' They could decide: We're going to keep our legacy systems; we're going to unplug them all; we're going to replace some of them; or we're going to unbundle them and make them into components. But they all know they have to do something with it," she says.
Publicly traded insurance companies also know they have to do something about Sarbanes-Oxley (SOX)-the federal law that requires them to ensure the accuracy of their financial reports. .
"We see more attention being paid to compliance in 2004, especially Sarbanes-Oxley and the Health Insurance Portability and Accountability Act (HIPAA), and to a lesser degree, the USA Patriot Act," notes Celent's Josefowicz. "Basically, security and compliance were the top two initiatives we see moving forward."
TowerGroup's Smallwood agrees: "Several federal mandates are coming down the pike, and at some point they all address privacy or security," she says. In addition, IT spending on Sarbanes-Oxley is difficult to track because many insurance companies are allocating SOX expenses at the enterprise level, rather than as part of their IT budgets, she says.
"For non-mutual companies, SOX is a big initiative," says Smallwood. And when you look at IT budgets, SOX often isn't showing up. "The money will be augmented to the budget as needed. Insurers don't know how much they'll have to spend on SOX compliance. They're all still working on that."
Most insurers also are still working on optimizing their distribution channels and improving customer service. "Property/casualty and life/annuity insurance companies are absolutely looking at distribution in 2004," says Smallwood.
In a continuation of last year's IT spending priorities, "we're going to see a lot of insurers investing more in their agent portals," Celent's Josefowicz says. This year, they are also investing in sales force management, commission management and compensation systems.
"We're seeing more interest in sales force automation and driving profitability for producers," Peoplesoft's Plunkett concurs. Insurers are demanding more from their marketing and sales campaigns. "There was always this disconnect; you couldn't measure the results of your sales campaigns. Did a lead really come as a result of this campaign or was it something else?" he says.
Now, however, when a customer relationship management (CRM) system is integrated with an insurer's financial system, those metrics are available, says Plunkett. "One of the biggest drivers with CRM is the metrics. If you can't measure it, it's not real and you can't improve it," he says.
Renewed interest in CRM
In fact, renewed interest in CRM is a shift this year from insurers' IT priorities in 2003, when the CRM acronym was uttered with groans.
Peoplesoft has experienced an increased demand for CRM applications, according to Plunkett.
"Companies are starting to implement," he says. But they're using CRM for profitability-customer renewal and retention. "They know that once you identify your profitable customers, the more options you offer them, the less likely they're going to leave. It's a better way of controlling your business."
For the good of everyone, CRM has morphed into the business areas of underwriting or policyholder services or claims, says Accenture's Hollander. "CRM has become much more specific. If you try to sell a CRM project to a CIO in insurance, appropriately, he will ask, 'Where's the business value?'"
Similar to last year when the focus of IT spending was on tactical projects with six- to nine-month returns, insurers still have no appetite for extensive projects, says TowerGroup's Smallwood. "It's absolutely about cost-benefit analysis and ROI," she says.
In fact, CIOs are putting procedures in place to review the costs and benefits of projects when the projects end, and to make people accountable for them, she says. "Previously, it was written on paper, you got the funding, and that was the end of it."
Other sources say insurers are considering long-term projects again this year, but with their eyes on short-term milestones. "We're starting to see attention to longer term projects coming back," says Celent's Josefowicz. "The difference is: Where you used to have long return windows, now the projects are more carefully quantified and evaluated. There's a lot more focus on internal milestones and project management," he says.
Indeed, program offices are much more aggressive at ensuring business/IT alignment, he says. "Very few of them are primarily concerned with cost containment. They are concerned with making sure the money is being spent in the right places-and in the right ways," he says. "And that's a change."
Accenture has at least 15 deals around the world, says Hollander. "These are nine- to 18-month transformation projects, with big business outcomes attached," he says.
"These companies realize if they're going to accomplish anything significant, they always have to break (a long-term project) into manageable pieces. But you can't build a tall building with just two floors," he says. "When you're replacing a policy system or a billing system and changing the business process in claims, there's no way you make that a six-month project."
Insurers will continue to be reluctant to make big investments in the first part of 2004, according to Forrester's Bartels.
"However, I would not be surprised-as 2004 progresses and the economy is in fact stronger-if we start to see more insurance companies decide that now is the time to do that major upgrade or replacement of their core transaction systems."
Insurance IT vendors are also reporting more requests for information, says Celent's Josefowicz. "That's an indication that IT spending is moving up again."
Relaxing the purse strings
"In the last 30 days, we've had three major deals come through," says Accenture's Hollander. "In 2003, that would have been the sum of all the big deals we had for the entire year. So things are starting to break. Not only is our pipeline strong, but deals are beginning to close, which is a clear indication that the strongest carriers will accelerate out of this difficult time."
The recent economic data is showing that the economy has turned up and it has turned up fairly strongly, says Forrester's Bartels. "If that carries through into 2004, as we're expecting, that's going to drive more relaxation of the IT purse strings."
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