Early indications are that overall IT spending for 2008 will increase—albeit, forecasters predict the increase to be relatively small. The insurance industry isn't an exception. “Based on benchmarking data, IT spending has been rising slightly in the past few years, and we expect that to continue,” says Jack Tyniec, senior manager, Insurance Benchmarking Center, of New York-based Deloitte Consulting LLP.

Craig Weber, managing director of the Insurance Group at Celent LLC, also sees the slow growth, even though the Boston-based research firm estimates total IT spend by North American insurers in 2008 will total $36 billion, which is up from its 2007 estimate of more than $33 billion. “In general, budgets are flat, to rising slowly—2% to 3%,” he says. “We have a few outliers that expect their budget to rocket up 10% to 15% in 2008, and a few outliers the other way, saying they’re expecting budget cuts.”

Can this anemic growth be attributed to the uncertain economy? The ability to fund increases in IT spending levels in 2008 will depend primarily on the overall health of the economy, according to Computer Economics Inc., an Irvine, Calif.-based adviser and research provider. In September and October 2007, the company surveyed 125 IT executive decision-makers in the United States and Canada who indicated that they had already scaled back their expectations for IT spending increases in 2008. If economic conditions worsen, median IT spending increases in 2008 will be flat compared to 2007.

What effect is the softening of the notoriously cyclical insurance market having on underwriting profit? Tracking the U.S. property/casualty market since 2001, the Dallas-based insurance exchange Market Scout uses data assimilated via its insurance exchange that is supported by in-person surveys of retail agents, company personnel, wholesale brokers and MGAs. At press time, P&C insurers were set to record historic underwriting profits for 2007. According to MarketScout, underwriting profit is driving the soft market, resulting in a composite property/casualty rate reduction in October 2007 of minus 15%. MarketScout data reveals commercial property and general liability lead rate reductions at minus 16% and minus 17%, respectively.

“We expect a very competitive market for the balance of 2007 and well into 2008,” MarketScout’s CEO, Richard Kerr, forecasts. “There is simply too much capacity chasing premium and what is perceived as incredible opportunities for underwriting profits.”

Deloitte’s Tyniec agrees that the softening insurance market will likely have a modest impact on insurers’ 2008 IT spending. “Projects already underway will likely not be impacted, but projects in queue may be delayed or more stringent ROI hurdles may be used before they are approved,” he says.

ACROSS ALL LINES

Most of those projects have their roots in data, which some say is insurance, says Annemarie Earley, managing VP, Insurance Services at Stamford, Conn.-based Gartner Group. “Everyone is striving to tear down the siloed environment and make it more of an enterprise environment where data is shared and readily available without having to navigate between multiple systems.” 


Tyniec believes software spending overall will be a little bit higher because insurers will be looking to acquire software with greater productivity capabilities. He says this is partially the result of the emphasis on e-service. “E-service has been increasing in terms of emphasis, because it’s a cost reduction opportunity by leveraging technology to provide service in place of call centers and related expenses.”

Gartner has noticed that service initiatives have shifted in importance. “In past surveys, sales was the top concern by both life and P&C insurers, and now we are seeing a shift to servicing initiatives,” Earley says. “Consumerism is forcing change to organizations’ strategy and technology investments since consumers increasingly bring their experience and expectations from non-insurance interactions with them when dealing with their insurance provider. Insurers are no longer measured against each other for service and convenience. They are measured by the consumer’s experience with all service transactions, regardless of the industry; therefore, insurers are pushed to respond to consumer expectations of service.”

Distribution is a hot area that spans P&C and life sectors, according to Celent’s Weber. “We see a lot of interest in Web 2.0 technology or portals for customers and agents,” he says. “For the last five years, we’ve been tracking investment in more efficient delivery of information to customers and agents, and we see that transitioning now to more efficient transactions—conducting business online versus just using the Web as a delivery tool.”

Another factor affecting IT spend is the changing composition of the workforce as baby boomers start to retire. Could the increasing demand for employees with technology experience cause strain on already tight IT budgets?

Earley says the looming exodus could have an effect on IT budgets as companies look for technological fixes to compensate for retiring staff. “That drain on staff could mean more automation usage in other areas to make up for the intellectual properties that are moving outside of the organization,” she says.

Conversely, Tyniec says, in the short term, the impact of retirements on budgets will be negligible. “I don’t believe the two are connected,” he says. “Whether or not a company is feeling the tightening of budgets, IT is always under cost pressure. I don't see 2008 being any different.”

The push back against IT budgets, Weber says, could be coming from CFOs anxious to drive some efficiency from previous years’ investments. “So as the tools improve and some of the core applications become a little easier to develop and maintain, CFOs are saying ‘okay, show me that budget; we invested in you and now you need to turn some savings back in to the corporation.’”

An investment topic still burning among insurers is legacy replacement, according to Weber. We see a fair amount of legacy replacement activity, especially policy administration system replacement in both P&C and life,” he says. “There’s probably more legacy replacement going on than most people realize. Most people we’ve talked to looked at the business case and, if they’ve evaluated the risks, they think it’s hard to make the jump to the legacy replacement. But, at the end of that process, people are nevertheless deciding to do it, which is interesting.”

Deloitte’s Tyniec disagrees. He sees legacy system replacement being emphasized less than in years’ past because many insurers have acquired new systems for new products, while older products and books of business with complex characteristics are remaining on the legacy systems. “Some companies have already replaced their legacy systems and, those who have not, have acquired new systems to handle new products,” he says.

PROPERTY/CASUALTY

Core policy administration systems are top-of-mind for P&C IT initiatives, and have been for many years. The reason for the relative lack of action in years’ past is the high risk involved in replacing policy admin systems, Earley says.

P&C insurers now have more reason to upgrade due to both internal pressures and external ones, such as the changing marketplace, Earley says. “When you want to respond quickly to new changing marketplaces, it’s very hard to move those older technologies and bring new things to market quickly.” Another traditional barrier to replacing policy administration systems has been cost. However, carriers have begun to realize that the cost of maintaining multiple policy admin systems is starting to outweigh the initial investment in a newer technology that’s more nimble and agile, Earley says.

Weber agrees that policy administration is top-of-mind for P&C insurers. “It makes sense because, with commoditized products that have a shorter lifecycle for each policy, it’s actually possible to renew a core system in the property/casualty world without totally destroying the everyday operation,” he says.

Also at the top of P&C insurers’ IT budget priorities is customer-facing technologies, such as improvements to self-service portals for policyholders.

According to Gartner research, the use of the Internet to provide customers with direct interaction to their policy, billing and claims is a growing concern among P&C insurers.

“Many of the P&C insurers have multiple billing systems and they’re looking to decrease the numbers of vendors and products they’re supporting and move to a more consolidated billing system that would do more for them in one application without the need for multiple applications running that function,” Early says.

LIFE, HEALTH AND ANNUITIES

Product configurators/development tools, business intelligence (BI)/analytics and portal technologies are top technology priorities for life insurers and annuity providers, according to Gartner. The firm anticipates that the adoption of product configurators to support product development processes will continue to rise.

Data and information management also is a top business priority, which ties in with BI/analytics, according to Gartner. Insurers want to turn internal data into information that can be used by business managers and users, and analyze data to provide more granular insight into customers, underwriting risk, claims performance and sales productivity.

Earley sees a common theme in all of the top priorities. “It all flows together—how to get that data to the end user, who gets access to it, and how to combine data to get information and not just data elements has become very important,” she says.

Health insurers also see the benefit of BI and analytics, Earley says. “They’re using data intelligence for a multitude of reasons—predictive modeling, fraud detection, disease management and care management,” she says, noting that there’s a lot of pressure in the health industry right now for cost and care. “BI and analytics is being looked at as a way to provide some of those initiatives, especially in the cost area, so you can see where your bottlenecks are and change those in order to drive some cost factors out of the process.”

Celent’s Weber doesn’t see the slow growth rate changing quickly. “Most carriers have started to renew technology—the ones that are a little bit ahead, might be leveling off their budgets, but there are still plenty of insurers who have not made the leap, so they can’t gain the efficiency and can’t cut their budgets.”

While the softening market may not affect 2008 IT investments, it could in the distant future, says Weber. If the market slows down in terms of price, there will be a more downward pressure on IT budgets.

Register or login for access to this item and much more

All Digital Insurance content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access