IT Budgets Withstand Economic Maelstrom
Insurance Networking News, April 1, 2009
Negative stories surround the financial industry right now, yet, even in the face of economic upheaval, most insurers say they won't slash IT spending this year.
On average, property/casualty carriers anticipate single-digit increases in their IT budgets this year over last year, while life and annuities firms expect single-digit IT spending cutbacks, says Matthew Josefowicz, director of insurance at Novarica, a New York-based research and advisory firm. "Overall, property/casualty companies and some life companies are continuing to hold spend relatively stable even in a very challenging time," Josefowicz observes.
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The difference in IT spending between the property/casualty sector versus the life and annuities segment mirrors the financial plights of the businesses during the current downturn, says Ellen Carney, a senior analyst at Cambridge, Mass.-based Forrester Research Inc.
"It's definitely been worse on the life and annuities side, compared to property/casualty, because they have different investment strategies," Carney says, noting that property/casualty insurers seek short-term liquid investments, while life and annuities executives invest for the longer-term.
Life and annuities carriers face "a double whammy" of investment woes on top of the challenge of selling discretionary products that consumers can forego, says Josefowicz, noting laws often require property/casualty insurance.
WHY SPEND AND WHERE?
Although the trends vary for lines of business, the industry's flat overall IT spending during a severe recession reflects well upon IT departments, the analysts agree.
In part, the reluctance to cut IT budgets reflects top management's recognition that IT has become intertwined with business operations, says Josefowicz.
However, the conundrum of how best to spend those dollars remains.
"Where we're seeing the biggest [budget] decline is in strategic projects we're working on-we're not stopping the projects, we're slowing down and using fewer resources," says Stephen Boyd, CIO at San Diego-based Arrowhead General Insurance Agency Inc. The company plans to spend 10% less this year than last on strategic projects, but budgets will remain flat in other areas, Boyd says.
Carriers hesitate to reduce the portions of the IT budget that help present a friendly "face" to consumers and agents, says Karen Pauli, research director in the insurance practice at TowerGroup, a Needham, Mass., independent research firm owned by MasterCard Inc.
Consumers expect to find customer-facing applications on insurance Web sites in much the same way they expect banks to provide ATMs, while independent agents who once viewed such applications as high-tech chores now appreciate them as vital tools, says David Lawless, SVP and chief administrative officer at Magna Carta Cos., a New York-based mutual insurer that specializes in commercial insurance and workers' compensation.
David Lawless
"You're not going to garner any significant market share unless you have customer-facing or independent agent-facing applications," says Lawless, noting he expects flat IT spending at his company this year.
CRISIS AS OPPORTUNITY
A strong IT budget keeps companies ready to act swiftly when opportunities arise for competitive advantage, such as acquisitions, says Carney.
Crisis breeds opportunity, agrees Josefowicz. In the life and annuities business, carriers need to create new products and the right business model and distribution model for a more conservative time, he says. "You may see them start to put more emphasis on simplified, easy-to-understand life annuity products that have a lower cost of sale and lower margin."
Craig Lowenthal, EVP and CIO at New York Marine and General Insurance Co., agrees that recessionary periods are good times to consider change. He says his company will increase IT spending about 5% this year over last to continue work on replacing a legacy infrastructure system.
Recession, which often leads to re-examination, can provide the chance to cancel a pet project that originated on the business side, Lowenthal says. "Maybe this is a good time to push back and get the steering committee or the company management to kill a project that should be killed," he advises.
What's more, CIOs also can challenge their staff members to come up with money-saving ideas during hard times, and reward them with an opportunity to lead the resulting project or with a few days off, Lowenthal says.
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