This year may be the year of consolidation and legacy renewal when it comes to insurance carriers' IT spending, according to industry analysts. And IT budgets will increase slightly over 2005, although there may be trimming back in some areas.The wild card will be the impact caused by Katrina and other hurricanes that wrought such devastation in New Orleans, Florida and other locales in the Southeast.
Some industry experts envision a retrenchment in IT spending, particularly in the property/casualty area. Others anticipate the destruction caused by the hurricanes will spur insurers to spend more on data warehousing and retrieval, disaster recovery, and other IT systems to better prepare for future disasters.
Most analysts anticipate that IT spending in 2006 will continue to go up at about the same rate it has over the past couple of years.
"There's been a lot of cost takeout recently, but there's going to be a little more funding to consolidate organizations and to do better analytics," predicts Tracy Spadola, senior insurance industry consultant with Dayton, Ohio-based Teradata, a division of NCR and a provider of analytic technologies.
"IT budgets will continue to go up," suggests Stephen Kendrick, senior vice president of Edison, N.J.-based Majesco Software, a provider of software and technology services to the insurance industry. "A number of new technologies need to be employed."
Matthew Josefowicz, an insurance industry analyst with Celent LLC, a Boston-based research and advisory firm, anticipates that insurance carrier IT budgets will essentially continue to track projected premium growth and account for between 2.5% and 3% of total net written premiums in 2006.
That factors out to single-digit growth in IT budgets. Spending on IT projects, he explains, has to balance with other operational costs.
"The thing about the insurance industry is that it doesn't change on a dime," says Josefowicz. "The insurance industry takes a couple of years to change its priorities."
Analysts anticipate that carriers will be engaged in retrofitting their IT systems on an enterprisewide basis to link together various business lines and departments, although the process is expected to be lengthy and arduous.
Over the past few years, changes in competition and pricing have forced many insurers to look out across their various departments and business lines and recognize the need to bring them together.
One way of doing that is through consolidation of information, so it's in one single system available to everyone.
"Companies are looking to integrate all that information, to have an enterprise view," says Teradata's Spadola. "There are some cost savings. Also, everyone has access to the same information, resulting in better quality. Overall, consolidation can lower costs with a reduction to the infrastructure. So some of that money will be refunded to better analytics."
Marc Cecere of Boston-based Forrester Research Inc., a research and advisory firm, anticipates that with organizationwide consolidation of IT systems, insurers will be able to do more enterprisewide projects, such as data warehousing.
"They want to implement data warehousing that crosses multiple lines of business," Cecere explains. "If you're doing that and determine channel profitability, you need a structure in place that crosses over all of them. Right now, it's lined up by different lines of business or product groups."
Consolidation Can Be Slow
He cautions, however, that consolidation can be a slow process, because it can become highly political and result in senior executives changing jobs and losing power.
Another area likely to be consolidated next year is claims, particularly on the property/casualty side to create consistency in how a claim is processed, says Cecere. Carriers in the P&C business will be looking this year to structure a claims system that can be used across all their lines of business, he says.
On the life insurance side, policy administration is a likely candidate for consolidation, according to Cecere, but cost factors make it a complex endeavor and might delay its implementation by at least some carriers.
While some analysts expect legacy renewal to come to the forefront this year, others are not sure the time is quite right.
Joe Guastella, principal and leader of the U.S. insurance consulting practice for New York-based Deloitte Consulting LLC, thinks legacy renewal might still be a year or two off as a major focus of IT budgets.
"In the past, people couldn't pull the trigger on legacy renewal, so now they're rethinking it, and I think more money will be spent eventually," he says. "But there may be a temporary lull in 2006, until people figure which platforms are designated for growth."
There's little question, however, that many IT systems are antiquated and are in serious need of modernization by carriers.
Forrester's Cecere believes 2006 is the year that some of that spending and updating will be launched.
"They do what they do very well," Cecere says of existing IT systems, "but they don't support new products very well. They aren't flexible. Their interfaces are hard to manage." That means some companies will be introducing new systems in 2006, while others will turn to outsourcing, he says.
Datamonitor PLC, a London-based business information and analysis firm, predicts that over the next couple of years, American insurers will increasingly go to outside consultants and vendors for IT development and implementation.
Through 2009, external IT solutions will grow by 6.5% and internal IT spending will increase by 1.5% for life insurers, according to a recent report from Datamonitor titled, "U.S. Insurance Technology Strategies." Among non-life carriers, external budgets will grow by 7.2% compared with just 2% on internal IT solutions.
Emphasis On Compliance
Forrester recently asked insurers what their IT objectives were for the next 12 months.
The most common responses, in descending order, were to support regulatory changes, to reduce IT costs, to improve access to customer data, to implement common systems, to drive innovation in the business, to improve Web-based customer service, and to update/replace legacy systems.
"The emphasis is always on compliance," says Cecere. Specifically, the Sarbanes-Oxley legislation of 2002 is a key driver of increased IT costs for insurers.
"The need for specialized skills, particularly in the areas of Sarbanes-Oxley compliance and in migration of legacy systems onto new platforms, will provide a market opportunity for vendors," Datamonitor suggests in its report.
Compliance IT spending is a certainty for insurers, but how heavily the punishing winds of Katrina and its sister hurricanes this past fall will cut the sails of 2006 IT spending plans is still unknown.
It's probably too early to say. "Katrina won't have much effect," says Majesco's Kendrick, "other than on systems associated with claims adjustment."
Much of the cost, according to Celent's Josefowicz, was passed through to reinsurers, rather than being picked up by the primary carriers. "Not many expect to make changes to their budgets due to Katrina or Wilma," he says.
But, adds Josefowicz, the hurricanes "will bring to the fore the issue of disaster recovery and business continuity products. A few firms may increase their spending on business continuity preparedness, but I don't see it being a massive expenditure across the industry."
Scott Testa of Mindbridge Soft-ware, a Norristown, Pa., creator of intranet software solutions, expects the hurricanes to spur IT spending in the insurance industry.
"Whenever there is a natural disaster you have an increase in disaster and data recovery and related software, hardware and services," he explains. "I think you're going to see an up-tick in IT spending." That increase, Testa adds, will not just come in 2006, but over the two or three ensuing years as well.
Forrester's Cecere, while acknowledging the potential for some growth in areas such as data recovery because of the hurricanes, believes the overall impact will be to reduce IT spending.
"We're going to see the tightening of budgets for P&C because of the trickle-down effects from the hurricane disasters," he says. "It will be felt pretty wide. There will be increased cost pressure, particularly on the property/casualty side."
Some of the cost pressure is likely to come from top-level executive suites. The CEOs of U.S. insurance companies might be rethinking their future IT budgets, unsure if they're getting enough bang for the buck.
"No one ever feels like they get enough for what they spend," says Deloitte's Guastella. "Most people look at IT as a constraint rather than as an enabler. There's a natural gap in communication between the business side and the IT side. IT has to do a better job to make that communications work."
Majesco's Kendrick thinks CEOs have been somewhat skeptical of IT spending ever since Y2K. "Many of the CEOs have had a glimpse of that happened in Y2K and are still looking back at how myopic their CIOs were," he says. "Where the IT person once had an open checkbook, now the CIO has to go through the business manager."
At New York-based MetLife, IT people can only spend money when they're given the sign-off by the business manager, says Kendrick. "That's a good thing, because an awful lot of runaway projects have gotten out of control."
But Josefowicz thinks savvy CEOs recognize how essential good IT systems are to their entire mission as insurers. "The more forward-looking CEOs see that IT is core to the business," he says. "Having good systems is key to what you want to achieve on the business side."
Louis Berney is a freelance writer based in Baltimore.
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