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CEOs See The Light: Global IT Budgets Get Some Respect

Carrie Burns January 2007

Around the world, CEOs at insurance companies are slowly coming to the conclusion that they need smoothly running IT departments if their companies are to remain competitive. As a result, IT projects and budgets are getting some respect and are becoming less likely to fall victim to arbitrary cuts, according to analysts in North America, Europe and the Asia-Pacific region.

The newfound respect is coming at a time when IT departments face intense regulatory pressure in Europe-and tamer but still formidable rules in the United States, China and Japan, according to reports from Boston-based Celent LLC. Pressure also arises from the need to service customers and distributors in real-time transactions and with rapid information flow, Celent says. Those functions can strain internal legacy systems, prompting insurers in mature markets, such as the United States, Europe and Japan, to update communications systems and core data environments.

The world's insurers are coping with another modern challenge in the form of service-oriented architecture (SOA). SOA is a critical framework for the legacy change, according to Cambridge, Mass.-based Forrester Research Inc. Forrester found in a survey of North American insurance companies that 74% are either using or pursuing SOA, while 14 out of 17 insurers using SOA plan to increase usage over the next 24 months. Forrester says insurance firms have been patching together existing client/server and mainframe systems to "make do" and are now recognizing they need to replace their core systems.

Health insurer Blue Cross Blue Shield of Michigan, for example, devised a U.S. $200 million to $400 million multi-year investment plan to modernize its systems infrastructure and increase capabilities, says Joe Hohner, vice president and CIO of BCBSM, which is headquartered in Detroit.

Making the most of their legacy systems is a common focus among insurers throughout Europe, too. "We call this the 800-pound gorilla challenge," says Celent senior analyst Catherine Stagg-Macey, who works with European insurers. "How do you become an agile and flexible organization when you are weighed down by disparate, complex and outdated legacy systems? Approaches differ widely; from re-platforming to newer technologies, wrapping and extending or replacing core systems."

European insurers will pay considerable attention to IT purchases and will make sure to address core systems, predicts Stagg-Macey. "A number of the largest insurers are undergoing a rationalization exercise—reducing the number of core systems from more than 20 to two or three," she says.

The legacy issue poses less of a problem in China because Chinese insurers-old and new-are starting almost from scratch when it comes to building IT infrastructure, according to Celent reports. In China, the insurers focus on building infrastructure to handle growing capacity, while maintaining flexibility to handle a rapidly evolving business and regulatory scene.

Compliance affects IT spending globally, too. Although the "heavy lifting" on Sarbanes-Oxley is mostly done, U.S. insurers continue to invest in compliance-related projects, especially IT security, but also communication monitoring and retention, anti-money laundering and other areas, according to Celent.

A compliance issue especially important to European insurers is Solvency II, according to Stagg-Macey. That set of rules is being introduced as a European Commission directive in 2008—although the date keeps slipping back, says Stagg-Macey. "At the very heart [of the regulation] is capital adequacy - making sure you have sufficient capital set aside, depending on the risk you are taking on," she says.

IT needs to focus on management information-having a multifunctional view of data, incorporating valuations, payments, reserves and loss data, according to Stagg-Macey. "We are already seeing money being spent on data warehouses, business intelligence and MIS systems," she says, "and this is largely being driven by compliance reasons."

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