At a recent meeting of the Novarica Insurance Technology Research Council, I had the opportunity to participate in conversations with a few dozen insurer CIOs. Most of the discussions at the meeting centered around one common theme: the challenges of managing insurance IT in an era of accelerated change.
There are, of course, dynamic changes in the regulatory environment occurring daily, which seem to be designed to push insurers from a risk-pricing model to a risk-pooling model at the exact point in time at which true risk pricing seems to be possible. This is evidenced both in the recent health care reform in the United States and European Union directives that would curtail the ability to underwrite based on established risk factors, such as gender.
However, the bigger changes for insurers are the results of changes in the capabilities of IT in society at large. Essentially, the insurance industry was designed based on the constraints of 19th or 20th century IT, and is now operating in the 21st century where the old rules about the speed and accessibility of information have entirely vanished, but they've definitely eroded.
The industry now faces radical change in:
* Customer expectations for service levels and information accessibility, which have skyrocketed
* Distribution models, which are rapidly evolving in the face of growing preference among some segments for direct channels and generational change in the agent force, as well as agents' own skyrocketing expectations for service levels and information accessibility
* Underwriting and claims capabilities, where electronically available third-party data and automated analytics and workflow have the potential to radically streamline processes
In the face of this unprecedented level of change, CIOs also face managing changes in the IT operating model, including SaaS/cloud, blended sourcing and agile development and the requirement for IT to be an integral element of the business, not a separate services organization.
At the same time, CIOs must help their business leaders deal with their total dependence on IT coupled with their lack of understanding, which can lead to poorly informed decision-making and one-sided cost-benefit analyses.
CIOs' resources have not increased proportionally to meet these challenges. Insurer IT budgets have essentially stayed flat, growing only modestly for most classes of insurers. The mantra is a variation of "do more with less"-do a lot more with a little more. While individual IT budgets may range from 1% of premium to more than 10% of premium, the average for most sectors of the industry remains 3% to 4%, as it has for most of the last decade. IT has gotten more efficient, but the demands on IT and its role in the business have continued to increase.
Insurers are focusing their investments around badly needed business capabilities, such as distributor or customer ease of doing business, business intelligence capabilities and speed to market. Less than 20% of insurers in Novarica's recent research have "reducing operating expenses" as their top IT goal for 2011. To make the most of their limited resources, insurers are modernizing and rationalizing core application portfolios and making infrastructures less expensive to maintain and more adaptable to change.
Insurers also have increasingly embraced agile development, working iteratively with business users and project sponsors to ensure that projects meet users' needs. While impacts on productivity are not significant, impacts on quality and alignment can be dramatic.
In addition, many insurers are using blended sourcing partners to enhance their skill sets, free up internal staff for less commodity work and increase their ability to scale to meet short-term project needs without taking on longer-term cost structures. Our research shows that larger insurers (those with premiums over $1 billion) have been more aggressive users of blended sourcing across a wider range of functional areas, while smaller insurers tended to use external partners mostly for project work rather than as an ongoing element of their resourcing strategies.
Without dramatically increased budgets to match the dramatically increased demands, the necessity for intelligent strategic planning, careful execution and innovative approaches to solving business problems have never been more important for insurer CIOs.
INNSight is exclusive commentary from Novarica. Matthew Josefowicz is partner and managing director at New York-based Novarica. This column was adapted from his recent report on "Managing Insurance IT in an Era of Accelerated Change."
