Insurance IT Spending Unlikely To Shrink

Strict reserving and solvency requirements have spared insurance companies the ravages the credit crisis has caused other financial services institutions but the insurance industry is still vulnerable to secondary effects, such as diminished investment income and a public with less income to spare. However, the current competitive environment will keep pressure on insurers to invest in IT, industry analysts and researchers say. That does not mean that spending will necessarily remain unaffected. The third annual joint IT spending survey conducted by Gartner (Stamford, Conn.) and the Property Casualty Insurers Association of America (PCI) found that P&C insurers' spending growth would decrease, with 2008 to 2009 spending increasing 1.9 percent, compared to an 8.1 percent increase in the previous annual cycle. Even with diminished growth, IT spending still outpaced change in revenue, with IT spending in 2008 representing 3.6 percent of the previous year's revenue, compared to 3.0 percent in 2007. P&C insurers have also improved their maintenance-to-new development ratio, with 60 percent of budget dedicated to "lights-on" spending this year. "This is down from 65 percent in 2006, indicating that these companies are able to invest in the future in a tough economy because they have become more productive in their day-to-day operations," comments Erig Stegman, research director, Gartner. Greater productivity is itself driven by IT investment, and recognition of that fact is built into carriers' multi-year IT budgetary plans, insists Craig Weber, the San Antonio, Texas-based senior vice president and insurance practice leader at Celent. "For most carriers today IT spending is a necessary catalyst for efficiency," Weber asserts. "In addition, there is so much work going on that carries over one budget season to another, and all the easy-to-kill projects were dumped years ago." Weber expects to see a return to cost-consciousness and a focus on spending discipline but not to the extent that strategic transformations and efficiency-focused initiatives will face cut-backs. Weber also foresees increased spending in targeted areas. "Categories such as compliance and data mastery are almost certain to see increased action, some of which will be mandatory," he comments. Current economic conditions provide an opportunity for carriers to achieve sustainable cost reduction, which will facilitate greater nimbleness in the future, asserts Michael Costonis, a partner with Accenture (Chicago). Costonis sees, "a combination of IT spend rationalization, organizational efficiency improvements and process improvements. This will require a 'rack and stack' of current initiatives to realize these improvements and deliver cost savings." While IT budgets may remain flat, according to Costonis, technology must play a role in carriers' achieving greater profitability through core business operations. "This means underwriting for a profit, processing at the right unit costs per transaction, and pursuing smart and tactical growth opportunities, both organic and inorganic," he says. "The market will separate the winners from the losers: having the right cost structure will be critical to determining which side of the line individual insurers will end up on." The life and annuities business may be harder hit than P&C, owing to diminished consumer confidence in financial services industries. Despite these difficulties, life insurers still badly need strategic IT capabilities that, if anything, more important under current conditions, according to Matthew Josefowicz, New York-based Novarica's practice leader. "With the marketplace in flux, competitive position becomes even more important, and insurers need IT improvements in order to compete in speed-to-market and service levels." Owing to the collapse of AIG on the holding company level, insurers may be tarred by the same brush that has blackened the reputation of banks and securities firms, Josefowicz fears. "Declining investment markets will hit both sales volume and investment returns, and the portrayal of the AIG crisis in the media has damaged the brand of the industry as a solid, dependable partner for retirement savings, even though AIG's life units remain solid," he says. While the fate of AIG may have cast doubts on the solidity of the insurance industry, the far greater troubles of banks and securities may result in investors and consumers favoring the insurance industry as an alternative, speculates Howard Mills, chief advisor within Deloitte's (New York) insurance industry group. "I see the retirement space as a major area and believe that people may look to insurance as a safer haven than some other slices of the financial sector," he says. Current conditions also open the way for mergers and acquisitions, Mills believes. "Many carriers will be looking at opportunities for inorganic growth that they might not have thought of two months ago," he comments. "The insurance industry seems fairly well situated, given what's going on right now, and that all goes back to its very strenuous reserving and solvency requirements." IT spending will be a critical factor for insurers wishing to both take advantage of these opportunities and address the inevitably heightened compliance and risk management concerns raised by the financial crisis, Mills believes. "Cutting IT spending is not a viable option," he says. "There is too much risk in not updating infrastructure."