Efficiency Gives Way to Proficiency
As the economy recovers, IT budget priorities will shift from technologies that facilitate cost savings toward ones that engender business growth.
Insurance Networking News, 08/01/2010
The worst of the recent economic crisis seems to be behind us, and insurers are finally climbing out of their storm cellars, eager to capitalize on new markets and opportunities. Information technology spending is shifting from IT as a cost-cutting tool to IT as a growth engine. As this new economy emerges, where are insurers investing their IT dollars this year and next? What are the new priorities?
In its most recent survey of insurance CIOs, Boston-based Celent confirmed that as the economic storm passes, these industry CIOs are more "buoyant and positive" about their IT plans.
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Still, the economy took a toll on some carriers. Over half of CIOs said that "pipeline" projects were scaled back; one-third had scaled back existing projects and one-tenth stopped projects altogether. About one-third reported they either froze or reduced staffing or contractor levels.
However, Celent also found the downturn took an uneven toll among insurers, with some taking multiple countermeasures, and some taking none. "It's a tale of two carriers," says Craig Weber, analyst with Celent and author of the study. "Economic issues really hit some carriers harder than others depending on their products and investment strategies. Some carriers steamed through the recession mostly unscathed with their IT budgets left intact. Now, virtually everybody is positioning for growth. But some people had been investing for growth right on through the recession."
The lessons of the recent economic downturn, which Celent estimates affected three out of five insurance IT shops, are not forgotten, though. IT budgets are being watched even more closely than before. "We're about a 2% increase over 2009," says Michael Fergang, VP and CIO of Columbus, Ohio-based Grange Insurance. "We've always been prudent fiscal managers, but there's a sharper pencil nowadays, and that's just good economics."
At Columbus, Ga.-based Aflac, priorities also have emphasized initiatives to control expenses and improve efficiency. However, a major push also continues to "impact the user and customer experience," says Bahija Noell, VP for IT business partnership management at Aflac. "Those are the types of projects that we are investing in and continue to invest in."
Celent confirms that for most insurance companies, there has been a modest increase in year-over-year total IT spending growth, showing a positive trend from a year earlier. And there has been a shift in CIO attitudes-the consultancy says that insurance company business priorities in 2010 are notably growth-driven, and more positive in tone than a year earlier. In fact, business growth-versus cutbacks-is a top-three issue for 80% to 90% of both property/casualty and life/health insurers. Conversely, cost-reduction, which topped last year's IT agendas, dropped from 72% to 39%. Instead, the second most important issue is improving business partnerships with producers-also part of a growth agenda.
"Insurance firms are again focusing on growth," agrees Ajoy Menon, VP and global head for the insurance practice at Wipro Technologies. "Sales and distribution initiatives have again become a magnet for portfolio dollars in both life and in property/casualty."
CORE SPENDING
Much of the rejuvenated IT spend is going to upgrading and modernizing the aging core systems that run many insurers' operations, Celent's Weber says. In fact, anywhere from 30% to 50% of CIOs plan "large" spending increases for 2010 over 2009 to modernize their policy administration, underwriting and claims systems. Moreover, 65% intend to replace their policy management systems starting this year, 58% intend to start replacing their billing systems and 53% intend to replace their underwriting systems.
"There's an increased appetite for efficiency," adds Fergang. "Insurance companies can no longer afford to have multiple versions of administration or claims systems. The economics of keeping parallel systems that do similar things can't be continued."
In terms of budget allocations, large insurers, on the average, plan to spend more than an average of $9 million on each of their top IT initiatives over a multi-year period. Midsize and small insurers' CIOs said they will be spending anywhere between $3 million to $4 million on each project.
"For the last couple of years, we actually have put forth a significant effort in our call center operations," says Aflac's Noell. "This year we're looking at our claims operations. These are significant projects that have gone tremendously well, and have proven to be effective because we managed them internally, with internal technologies and internal resources, implemented without impacting business operations."
Celent finds the most costly projects on tap include system consolidation projects, averaging $26 million to $30 million in total multi-year cost. This is a significant priority for life/health insurers, Celent observes, as these carriers are well known for having multiple core systems-each often are dedicated to several generations of similar products. Many property/casualty companies are addressing a similar problem. Second on the budget priority list is implementing multiple core systems (e.g., claims and billing) over a multi-year span.
