Technology Investment: Carriers' IT Spending Creeping Back Upward

At the recent ACORD technology conference, keynote speaker Larry Downes offered a theory that information technology spending shouldn't be curtailed just because operating conditions are poor.Downes, a technology strategist, noted that technology should not be perceived "as an obstacle within a business," adding that insurers "can't save their way to success" by scaling back on IT investments.

Insurers might be getting the message. Following a dramatic drop in IT spending in 2002-when spending plummeted 8% from 2001, with hardware taking the largest hit-insurers are getting ready to open the wallets again. In placing an emphasis on selectivity, IT spending through 2003 is projected to grow at a modest 1.6% as insurers continue to operate in "recovery mode," states a new study by Framingham, Mass.-based IDC, a global market intelligence and e-business advisory firm.

IDC's projection for 2004 and beyond builds on the recovery of 2003. Over the next four years, IDC predicts that IT spending will grow 4.3% next year, and 6.7% in 2006.

"This is an industry that has been troubled with uncertainty for the past 18 months. It will take time for the profits and market to stabilize, and even longer for significant IT investments to be made," explains Jessica Goepfert, an IDC program manager and author of the study. "However, barring any unforeseeable catastrophes, the groundwork is laid for more favorable IT spending."

Goepfert adds that "insurers are finished with investing in IT solely on faith: They have learned that with IT spending, they must proceed strategically and opportunistically."

Life, health leads pack

In the study, "U.S. Insurance IT Spending Forecast 2003-2007: Investment Priorities and IT Spending by Line," IDC surveyed 16 insurers across multiple lines as well as selected vendors. IT spending is broken out by hardware, software/services and lines of insurance.

From a business lines standpoint, life and health insurance represents the greatest area of spending throughout the forecast period and has a slightly higher than average overall compound annual growth rate (CAGR).

By the end of 2003, life/health insurers are projected to spend $7.2 billion of the overall $20 billion IT spending estimated to occur. This comes on the heels of a desultory 2002 when-despite the fact health insurance companies faired well in 2002-IT spending didn't keep pace with the revenues generated. Life insurers, particular those companies marketing investment-laden variable annuities, were rocked by instability in the stock market.

Revenues in the life/health segment rose about 12% during the last fiscal year, IDC reveals, and this will provide impetus to spend more on IT going forward. These revenues were strong due to the high demand for health insurance right now, which will fuel the need to have dynamic technology in place to support this growth, says Goepfert.

For life insurers, compliance with the USA PATRIOT Act and risk management programs will continue to be key drivers of IT spending.

IDC reports that property/casualty insurers will spend $6.6 billion on technology this year. Property/casualty insurers experienced modest revenue growth of 1.9%, and the fact that P&C insurers are still recovering from September 11 impacted their ability to spend aggressively on IT, states IDC.

Throughout IDC's forecast period, property/casualty insurers will increase their IT spending because of the need to improve claims management, says Goepfert, describing it as "a pain point." "But for property/casualty insurers, there is a strong correlation between generating profits and IT spending. The more profitable an insurer is, the more likely they'll increase their spending on IT. But there is a lag time between when profits are realized and when IT spending begins," she states.

Business assessment

Broken out by type of investment, IDC found that IT projects most likely to gain funding will be those that help insurers operate more efficiently, such as outsourcing; drive profitability, such as improved underwriting capabilities; or those that help insurers achieve differentiation in a crowded market, such as enabling brokers and agents to improve service.

Outsourcing has become an attractive strategy for carriers to execute IT spending. Large-scale outsourcing projects have proven their efficacy over the past two years-enough to convince skeptical insurers that outsourcing projects can demonstrate a compelling return on investment.

Underwriting investments will also lead the change, says Goepfert, stressing that "while human intervention of underwriting will always have a role, each year more insurers are becoming believers in automated underwriting."

Investments in customer relationship management solutions had been a dubious investment for insurers years ago, when many bought into more CRM products and services than they could possible use. The new approach to IT spending is epitomized in how insurers now proceed with CRM, says Goepfert. "When insurers approach CRM, they will work with what they have internally rather than investing in unproven solutions. For instance, they will leverage business analytics and data warehousing to unlock the power of their data," says Goepfert.

With the exception of relinquishing control of processes via outsourcing, insurers will place an emphasis on retaining internal control other ways. While hardware spending took a hit in 2002, Goepfert predicts that hardware investments will outpace software spending for insurers because "investing in hardware reflects insurers' desire to control projects by keeping them in-house through custom development," she concludes.