Negative stories surround the financial industry right now, yet, even in the face of economic upheaval, most insurers say they won't slash IT spending this year.

On average, property/casualty carriers anticipate single-digit increases in their IT budgets this year over last year, while life and annuities firms expect single-digit IT spending cutbacks, says Matthew Josefowicz, director of insurance at Novarica, a New York-based research and advisory firm. "Overall, property/casualty companies and some life companies are continuing to hold spend relatively stable even in a very challenging time," Josefowicz observes.

The difference in IT spending between the property/casualty sector versus the life and annuities segment mirrors the financial plights of the businesses during the current downturn, says Ellen Carney, a senior analyst at Cambridge, Mass.-based Forrester Research Inc.

"It's definitely been worse on the life and annuities side, compared to property/casualty, because they have different investment strategies," Carney says, noting that property/casualty insurers seek short-term liquid investments, while life and annuities executives invest for the longer-term.

Life and annuities carriers face "a double whammy" of investment woes on top of the challenge of selling discretionary products that consumers can forego, says Josefowicz, noting laws often require property/casualty insurance.

WHY SPEND AND WHERE?

Although the trends vary for lines of business, the industry's flat overall IT spending during a severe recession reflects well upon IT departments, the analysts agree.

In part, the reluctance to cut IT budgets reflects top management's recognition that IT has become intertwined with business operations, says Josefowicz.

However, the conundrum of how best to spend those dollars remains.

"Where we're seeing the biggest [budget] decline is in strategic projects we're working on-we're not stopping the projects, we're slowing down and using fewer resources," says Stephen Boyd, CIO at San Diego-based Arrowhead General Insurance Agency Inc. The company plans to spend 10% less this year than last on strategic projects, but budgets will remain flat in other areas, Boyd says.

Carriers hesitate to reduce the portions of the IT budget that help present a friendly "face" to consumers and agents, says Karen Pauli, research director in the insurance practice at TowerGroup, a Needham, Mass., independent research firm owned by MasterCard Inc.

Consumers expect to find customer-facing applications on insurance Web sites in much the same way they expect banks to provide ATMs, while independent agents who once viewed such applications as high-tech chores now appreciate them as vital tools, says David Lawless, SVP and chief administrative officer at Magna Carta Cos., a New York-based mutual insurer that specializes in commercial insurance and workers' compensation.

"You're not going to garner any significant market share unless you have customer-facing or independent agent-facing applications," says Lawless, noting he expects flat IT spending at his company this year.

CRISIS AS OPPORTUNITY

A strong IT budget keeps companies ready to act swiftly when opportunities arise for competitive advantage, such as acquisitions, says Carney.

Crisis breeds opportunity, agrees Josefowicz. In the life and annuities business, carriers need to create new products and the right business model and distribution model for a more conservative time, he says. "You may see them start to put more emphasis on simplified, easy-to-understand life annuity products that have a lower cost of sale and lower margin."

Craig Lowenthal, EVP and CIO at New York Marine and General Insurance Co., agrees that recessionary periods are good times to consider change. He says his company will increase IT spending about 5% this year over last to continue work on replacing a legacy infrastructure system.

Recession, which often leads to re-examination, can provide the chance to cancel a pet project that originated on the business side, Lowenthal says. "Maybe this is a good time to push back and get the steering committee or the company management to kill a project that should be killed," he advises.

What's more, CIOs also can challenge their staff members to come up with money-saving ideas during hard times, and reward them with an opportunity to lead the resulting project or with a few days off, Lowenthal says.

Even the most efficient IT departments can find ways to trim costs without forsaking long-term goals and bring a quicker return on investment.

Pauli touts a process she calls "chunking up," in which companies finish some parts of a project right away and postpone other portions. "So, instead of the deliverable being an end-to-end, fully functional claims admin system, you're taking that same software and putting in first notice of loss report," she says.

Even before the recession, IT departments were working to transform five- and 10-year "mega projects" into more manageable 18-month or two-year projects that produce a return in a shorter time, says Josefowicz. "More companies, just as they're switching to iterative software development methodologies, also are switching to more iterative planning methodologies," he says.

But carriers remain focused on infrastructure projects, says Carney. She recently studied 11 carriers she characterized as "Tier II" carriers with gross written premiums up to $3 billion, and found "every single one of them" had recently finished, or was caught up in a major project related to core applications - mostly policy administration or claims management.

"They're still going after the big projects," Carney says.

STAFFING CHANGES?

Despite tight budgets, Josefowicz does not anticipate many IT layoffs. "I don't think anybody is focusing on IT for cuts the way they did in 2000," he says.

Yet, while regular staff members may escape termination, independent contractors may not. "We tend to use a lot of 'staff aug,' but this year we won't be using nearly as much," Frank Vaccaro, CIO at Dallas-based Republic Underwriters Insurance Co., says of independent contractors. His company is spending 15% less on IT this year than last because of the recession, and a larger-than-usual number of hurricane-related claims.

Republic sometimes outsources pieces of projects but plans to cut back on that this year to reduce costs, Vaccaro says.

Find more about IT spend by searching "Budgets, Projects & Processes" at www.insurancenetworking.com.

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

Insurers to Feel Modest Impact from Stimulus Package

It's no mean feat connecting the fortunes of the insurance industry with the economy at large. Yet, Robert Hartwig, president of the Insurance Information Institute and an insurance industry economist, gives it a go.

In a Web seminar, Hartwig surveyed the health of the insurance industry through the prism of macroeconomic events, including the recently passed American Recovery and Reinvestment Act. Yet easy linkages are hard to come by, as Hartwig noted that the economy had been in recession for 14 months while insurers had been subject to a soft market for four years.

"The industry's overall financial performance over long periods of time is more a function of the underwriting cycle than the external economic environment," he said. "This doesn't mean we're immune to it, but the overwhelming force that determines profitability is where we are in the underwriting cycle."

Indeed, Hartwig said in the long view 2008 was an anomaly, as claims losses due to natural disaster were paired with the loss of value in a variety of financial assets held by insurers.

As for the stimulus law, Hartwig said that although it doesn't directly benefit the insurance industry, it would have some indirect effects, especially for commercial lines.

"The stimulus package is unlikely to increase net written premiums by more than 1%," he said, adding that the way the package is being rolled out may well defer the full effects of it until the end of 2010.

Yet, even a 1% bump in net written premiums would amount to $4.5 billion, Hartwig noted. With the focus of the act's infrastructure spending going toward the building trades, providers of commercial insurance coverage will see a measurable bump in demand.

"Because the primary objective of the act is to stimulate employment, workers' compensation will be principle line that benefits from the package," he said.

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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