Few U.S. companies will escape the fallout from the recent financial scandals in corporate America. One outcome of the well-publicized corporate debacles is the Sarbanes-Oxley Act of 2002, requiring CEOs and CFOs of public companies to attest to the integrity of the company's financial statements.In a heavily regulated industry, such as insurance, this increased scrutiny just adds to the already daunting financial reporting burden.

A recent report by the Data Warehousing Institute claims that the annual cost of poor data quality for U.S. industries is $611 billion. This includes direct costs of analyzing and correcting data errors and indirect costs as well.For instance, when errors become exposed to customers and regulators, fines can follow and the backlash can force an avalanche of expensive changes to how an insurance company conducts its business.

With almost 60% of its homeowners insurance business consisting of coverage for homes valued at $1 million and up, Novato, Calif.-based Fireman's Fund Insurance Co. understands that appraising affluent homes is an extremely tall order.Expensive dwellings don't come equipped with run-of-the-mill furnishings. Often, such homes feature rare and exotic items ranging from Pella French doors, Italian granite countertops, premium carpeting and elaborate building materials.

Insurers are becoming insular with information technology maintenance and investment priorities. Referring to it as internal "housecleaning," Cary, N.C.-based Sapiens International Corp. states that U.S. insurers are shifting gears to emphasize internally-driven IT efficiencies as a better way to control costs.Findings from a recent survey conducted by Sapiens, a global IT solutions provider, reveal that externally focused activities, such as business process outsourcing (BPO), customer relationship management (CRM), and standards implementation-such as ACORD XML, now rank significantly lower on the IT priority scale than internal initiatives.

The economy has tempered IT spending within the insurance industry in recent years, as many carriers reigned in their project development to concentrate on essential projects. This year, spending appears to be bouncing back somewhat, according to the findings of Insurance Networking News' recent survey of 95 carriers, agents, brokers and services firms.For starters, insurers' spending on packaged applications and software development appears to be on the upswing for the remainder of 2003. Carriers have budgeted an average of $1.4 million for packaged software for 2003, up by more than 14% from what they spent in 2002, the survey reveals (See chart, page 19).

Project management software won't increase a carrier's market share or revenue streams, and it won't improve system integration. But the impact it can have on an IT department's bottom line can be as significant as the ROI claimed by some of the more trendy technology tools carriers are implementing.

Ten years ago, telecommunications costs were typically the 14th or 15th line item for insurance companies, says Johnny Podrovitz, CEO of MSS Group Inc., Castle Rock, Colo. "Now, they're the third or fourth."

When Farmers Insurance Group conducted testing on a Web-based customer self-service program, the Los Angeles- based property/casualty insurer considered implementing a capability that would enable customers to make changes to their policies.Farmers executives recognized the value of self-service capabilities. After all, enabling a customer to instantaneously make a change to their auto or homeowners policy represents the spirit of customer self-service. But earlier this year, as Farmers executives examined the concept further, they uncovered a flaw with the concept: Giving customer unfettered access to make changes was considered an affront to Farmers' agents.

With their backs against the wall to stimulate profits and revenues in the face of poor economic times, senior-level executives in insurance companies are turning to their chief information officers to breathe new life into their static operations.As IT spending begins to inch upward-industrywide expenditures are projected to increase gradually each year, peaking at about 7% by 2007-industry experts believe it's incumbent upon CIOs to capitalize on the additional dollars they'll have at their disposal. Having learned from experience, CIOs indicate they are poised to reach a higher level of IT spending stewardship, with many pledging to convert IT from what is now regarded as an art into a science.

Most insurers rely on external guidance to help them map out information technology strategies. Over the years, they've derived such support from vendors, consultants, analysts and even state and national associations-all of whom possess a unique role in the grand scheme of IT strategizing.But a fledgling group that's touting itself as an "IT advisory and research firm" for property/casualty insurers is providing yet another alternative. The question is: Will P&C carriers embrace the concept widely enough to enable it to succeed?

A study released in June by Giga Research, an operating unit of Cambridge, Mass.-based Forrester Research Inc., provides insights into specific spending areas that CIOs presently value.The study, "Improving Business and IT Efficiency," culled insights from 10 CIOs across the United States and Canada in the property-casualty, life/health and specialty insurance industries.

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.

As legacy applications move through their life cycle, they frequently evolve from assets that manage key processes and information to liabilities that drain time and resources. As a result, these applications become increasingly more difficult to maintain.At the point when an organization's legacy assets no longer serve its goals for financial management, customer intimacy, regulatory compliance, and operational effectiveness, management must decide whether to rebuild key systems, replace them with third-party applications, or modernize aging applications to extend their useful life.

Michael Galvin knows more about disaster recovery and business continuity than most of us care to know. That's because the vice president and chief infrastructure officer of Empire Blue Cross and Blue Shield has first-hand experience with the worst catastrophe this country has ever endured: September 11, 2001.The New York-based health insurance company occupied 10 floors and 480,000 square feet in the North Tower of the World Trade Center. And, although the company tragically lost 11 people that day and several employees were injured, most of the 1,900 employees and consultants escaped from the building unharmed.

Using Global Positioning Satellite (GPS) and cellular communications technology to gather information about when and where a motorist is driving, United Kingdom-based insurer Norwich Union is launching a pilot study this summer that could play a role in transforming the way auto insurers underwrite policies.Called "Pay As You Drive," the two-year study will involve retrofitting the cars of 5,000 Norwich Union policyholders with a "black box" that will gather and transmit vehicle and driving data to the insurer's back-end systems. Norwich Union statisticians will then analyze the data to determine which variables affect risk and claims, and those results will be used to calculate usage-based premiums.

At this time of economic and operational uncertainty, many global insurers are scurrying to identify-and then rectify-vulnerable components of their operations.In April, executives at Boston-based John Hancock Financial Services Inc. believe they made a key decision to help restore stability to the operation when the carrier inked a multi-year agreement to implement IBM Corp.'s e-business on-demand solution.

Already on the defensive about the use of credit scores for underwriting, property/casualty insurers now face another assault on one of their prime data tools in the nation's largest market for homeowners insurance.In late April, California Insurance Commissioner John Garamendi all but banned carriers' use of the main data source to underwrite and rate homeowners insurance policy. For 11 years, the Comprehensive Loss Underwriting Exchange (CLUE) has tracked claims on properties and property owners supplied by carriers of the nation's homeowners insurance policies.

Balboa Insurance Group Inc. needed to integrate its legacy-based customer data with an enterprisewide CRM system. Executives considered a costly systems conversion project, but opted for a middleware solution instead.Balboa Insurance Group Inc. faced a modern-day information technology conundrum. It had critical customer information locked away in its siloed host applications and couldn't get it out to support new Web-enabled business processes.

An increasing number of carriers are taking advantage of the cost savings of software development using geographically disparate teams, including those located offshore. And with good reason: the economic benefits of doing so can be exceptional.Most approaches to outsourced development are best-suited for traditional maintenance and system evolution projects in which requirements are static and well-documented. From my experience, these projects can run largely on autopilot and don't require a lot of structure and management time.

The potential savings for agents and carriers using real-time interfaces amounts to thousands of hours-and dollars-each day.A billing inquiry initiated through an agency management system takes two minutes, whereas the same inquiry takes eight minutes by phone, and nine minutes by carrier Web site. Those are the results of an agency workflow study conducted last year by Applied Systems Client Network (ASCnet), the user group for Applied Systems Inc., University Park, Ill.