Boston — A new report from Boston-based Celent says the reverberations of the turmoil in the financial market will travel all the way to insurers’ IT budgets.  

“We think that IT budgets will stay flat from 2009 from 2008,” Celent Senior Analyst Mike Fitzgerald, one of the report’s authors, told Insurance Networking News yesterday. “Previously, we were predicting a 2% to 3% increase.”

In addition to changing the amount of spending, the meltdown also may engender a shift in the way IT budgets are spent. Fitzgerald says long-term, strategic initiatives may take a backseat to IT projects that promise shorter, tactical gain.

“Carriers will look at your portfolios to see where you can have the most advantage the quickest,” he says. “The spending is going to shift toward immediate payback—especially if it has to do with retaining customers or gaining market share.”

Yet, like battleships, IT organizations cannot turn on a dime. Fitzgerald says that given the number of strategic projects underway, and the multi-year nature of these projects, carriers will have to change their priorities to accommodate the new market realities. “There may be some products that are changed in terms of emphasis and delivery,” he says. “Larger projects may have to be cut it up into smaller pieces, so the tactical ones can come first.”

Indeed, the report “Bad News on the Street: Insurance IT Strategy and the Financial Crisis,” counsels carriers to re-examine their IT projects against a combination of strategic goals.  Insurers should invest in technology enabling them to get bigger by growing revenue, get leaner by reducing expenses and increasing productivity and get smarter by making better use of their data.

Celent acknowledges that in uncertain times (the report predicts the downward pressure on IT budgets will continue for at least the next 12 to 24 months), such initiatives may not be an easy sell.

“A broader, philosophical issue is whether IT spending, in the near term, can produce increased efficiency and significant competitive advantage,” the report states. “Carriers that view IT as highly strategic are less likely to look at IT budgets as a ready place to cut costs.”

The report, authored by Fitzgerald and Senior Analysts Donald Light, Catherine-Stagg Macey and SVP Craig Weber, sees other wider implications for the insurance industry.

Celent expects the U.S. and global insurance markets to see an increasing level of consolidation, either through acquisitions abetted by a weak dollar or “shotgun marriages” forced by regulators.

Also foreseen is a “broader and tighter” regulation of U.S. insurers. “The move to federal regulation will be strengthened by the AIG takeover—even though AIG’s state-regulated insurance operations had almost no impact on the corporate failure,” the report states.

Source: Celent

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