Insurance IT leaders and analysts have thrown the often used andby now very familiar word caution to the wind for their spendingforecast for 2006, focusing instead on an optimistic viewtechnology projects will pave the way for improved performance overthe next 12 months. “I think 2006 looks a lot like 2005, and 2005was a very welcome change from 2002 and 2003,” says MattJosefowicz, group manager in the insurance practice for Celent.

Budgets in the early years of this century proved to be tightbefore the environment began easing up in 2004. “Things started toopen up a little bit more in 2004, and 2005 was a lot more open,”comments Josefowicz. “I think 2006 will continue that trend. TheY2K/dot-com boom is not coming back, but insurers are continuing toimprove their infrastructures and their systems, and theyunderstand there is no way to achieve competitive advantage withoutcorresponding systems investment.”

At Grange Insurance, CIO Charlie Carter indicates the carrier isnot increasing its IT budget a large amount, but it is not goingbackward, either. “We are making some major investments headinginto 2006,” he says. Among those are initiatives in businessintelligence and business continuity–areas insurers only dreamedabout three years ago but didn't have the resources to investin.

TowerGroup doesn't anticipate much shifting from what itforecast last year. “We don't see any major changes,” says CynthiaSaccocia, research area director in the insurance division forTowerGroup. The reason for this, she claims, is there haven't beenany major events that require substantial investments orsubstantial increases in investments. As attention-getting as werethe industry issues in 2005, such as the hurricanes and thecriminal investigations in New York, none of them had an effect onIT spending, she contends. “Those [events] are concerns of the CEOsand the line of business heads, but we're yet to see some of thethings that occurred in 2005 turn into any substantial changes forthe industry to make a sweeping investment that would driveindustry spending,” says Saccocia. “Without a substantial shift,there is nothing being adopted every competitor needs to have.Demographics haven't altered dramatically such that new productshave to be built that only a certain type of application couldsupport. There is no triggering event that says IT spendingwouldn't be commensurate with inflation or net premium growth, suchas the Internet bubble and Y2K.”

Since each institution is going to be making decisions about itsIT spending based on its individual needs, Saccocia asserts it'sdifficult to ascertain key trends for the industry. “We've testedmuch of our IT spending projections over the course of 2005 in anumber of different forums, and we still believe the breakdown bycategory is going to persist–about 38 percent on maintenance, 32percent on development, and 30 percent onsoftware/hardware/networking,” she says. “We feel pretty stronglyless than 10 percent of the development budget is being spent oninnovation.”

For 2006, Saccocia predicts IT spending in the industry will be$38.2 billion of which, she estimates, property/casualty insurerswill spend $18.1 billion and life/annuity insurers will ante up$20.1 billion. She claims TowerGroup analysts have been testingthese numbers at many industry events with little argument fromindustry leaders. “Everybody's pretty clear: There's not a lot ofnondiscretionary dollars to be spent on development,” she says.Most insurance carriers tend to run their IT spending budgets atbetween three percent and five percent of net premium written, sheobserves, with about 50 percent of IT costs personnel related.

Celent's Josefowicz agrees IT spending in 2006 will see no majorshift from 2005. “I think '05 was a very strong year in terms ofbuilding for growth and making strategic investments,” he says.“The pure cost-cutting mind-set of a few years ago has been prettymuch laid to rest. Obviously, cost takeout is a strong concern, butas we look at plans for '06, there's a greater concern for buildingfor growth and for meeting market demands. Whether those marketdemands are better service, faster turnaround for informationrequests and transaction requests, or getting new products tomarket more quickly, we see a lot of emphasis there.”

However, IT budgets still are growing in single digits,Josefowicz continues, essentially tracking overall industry companygrowth. “[IT budgets] are not outpacing company growth or laggingbehind it too much,” he says, agreeing with Saccocia most insurersset their budgets as a percentage of premium but stipulating theaverage is 2.5 percent to three percent of premium. “Our averagegrowth figures [forecast] for IT are around five percent to sevenpercent, but those basically are tracking premium growth,” hesays.

Celent continues to expect a focus on policy administrationsystems and other core systems among carriers (see “Power Toolbox,”p. 16). “Those are the biggest projects and tend to dominate interms of dollars spent,” notes Josefowicz. “But they are not theexclusive focus. I still see a focus on document and contentmanagement.”

Over the past year, Republic Group has had several initiativesunder way to improve what Glenn Headley, CIO, calls the foundationsystems. Among the changes are a new billing system to replace theold mainframe-based system and a new commercial lines rating andpolicy-issuance system, which he believes is a substantialimprovement over how Republic did commercial lines before.

Most of Republic Group's investments in 2005 and moving into2006 have been with the intention of either rebuilding thosefoundation systems or adapting systems with new functionality sothe carrier can invest and build systems that give it a competitiveedge. “We have a lot of money and effort going into Web-basedsystems, which we believe are a necessity for the industry totransact business,” says Headley. “By putting transactions out tothe point of sale, you take some of the costs out of processingthose transactions–and that's good for us, good for the agents, andgood for the insureds. It also speeds up transactions.”

Data projects will come to the foreground this year, accordingto Josefowicz. “If 2005 was the year of the policy administrationsystem project, I think 2006 is the year of data as a strategicasset,” he states. “We see a lot of investment in businessintelligence and data warehousing. We see investment in datastandards, Web services, and enterprise data models. As insurerscontinue to focus on profitability, they need to know what ishappening inside their enterprise.”

He'll get no argument from Grange, where one of that regionalcarrier's major projects this year involves business intelligence.“It's an extension of our data warehousing project we've had goingon in 2005,” says Carter. “We've decided to make a major investmentin [BI] going into 2006.” The project involves taking what Cartercalls terabytes of information and turning them into usefulinformation. “We're placing heavy emphasis on things such aspredictive modeling for the purpose of being able to cross-sellamong our property/casualty company, our bank, and our lifecompany,” he adds. “We're producing new credit-scoring models offour business intelligence. We're trying to analyze thecharacteristics of our drivers and change the way we order our MVRreports.”

Grange scratched the surface of this in 2005 with a datawarehouse the carrier developed over the last couple of years. Theresults Grange has received from this process, Carter claims, haveopened the company's eyes to the possibilities that exist in thefuture. “We are in the process of making a major upgrade not onlyin hardware and software but in some of the approaches we aretaking, such as predictive modeling and some of the other ways weare looking at our historical information,” says Carter. “One ofthe things we never had the ability to do before was to combine ourmultiple companies together and look at them collectively. This hasoffered us real opportunities in the area of cross-marketing.”

TowerGroup analysts have noticed some increasing interest inbusiness process management and the use of applications in thatarea along with front-office investments in data integration andrules-based technology to support underwriting, according toSaccocia. “I think the activities over the course of [2005] incatastrophe management have brought new issues to the table, suchas re-looking at disaster recovery plans,” she says. Catastrophemodeling and using predictive analytics are two practices insurersneed to examine closely, she adds.

Grange has done most of the work on its data project in-housewith IT working closely with the business units. “We've hiredbusiness analysts and product managers in those areas, and we aredoing a lot of drilling down into our data to try to understandwhat we have,” reports Carter. Grange has used a phased approach.“We don't look at this as being a one-year or two-year project,” hesays. “We look at this as being an ongoing application.”

Most of the Republic initiatives are associated with some formof vendor system rather than being internally developed, explainsHeadley. “Those systems have taken a little longer to implementthan we planned,” he says. Reasons for the delays include problemsthe vendors had that called for a reallocation of resources by thevendors to fix their internal problems.

Headley contends any time you have long-term projects–and hedefines long term as over three months–those projects become fluidin nature, and you must recognize the scope of the project is goingto change over a four- or five-month period. In his opinion,carriers have to be willing to accept some changes in businessrequirements as they enter the process of developing a solution.“That's the biggest challenge anybody faces when trying to put in asignificant system,” he says. “You have to adjust accordingly. Thattends to have an impact on the planned delivery date.”

Companies are trying to balance both the long-term andshort-term view, Josefowicz believes, focusing on short-termprojects that will deliver business value quickly but lead into alonger-term enterprise strategy. “If there are different units inthe company trying to do, say, business intelligence for their ownpurposes, they need to make sure they are all on the same page andhave a common platform [with other units] that eventually will leadto an overall enterprise strategy,” he says.

The length of projects has changed, as well. Josefowicz pointsout in 2001 and 2002, any initiative that didn't have a costtakeout justification wasn't getting approved, and ROIs were tight.“Most companies today are not requiring six months or less forROI,” he says. “More than half of our large respondents and even agood number of our smaller respondents say they are willing to livewith 24 months or more, and the majority is between 12 and 24months. People are not fixated on the six-month paybackanymore.”

Republic Group has demonstrated efficiencies in its personallines area, in particular where 100 percent of business comes in onthe Web. “We still continue to enhance our personal lines system,but we've been focusing on using the same business model–whatpeople are calling straight-through processing–with someinitiatives that will do the same things for our commercial linesarea,” says Headley. “We hope we will get the majority of ourstraight-through processing automation deployed for commerciallines in 2006. We've spent a lot of time and effort [in 2005] onit, and deployment will begin [this year] with additionaldevelopment line by line.”

Carter is proud of Grange's agent portal–grangeagent.com. “Weplan on making some further enhancements to that, includingintegrating our data warehouse with the agency Web site and givingagents access to their data, providing them with some statisticalreports, and letting them do some modeling and cross-selling,” hesays.

Saccocia believes the Web offers a few things necessary forinsurers to maintain a competitive advantage. “First and foremost,[carriers] have to deal with distribution automation for newbusiness–integrating producers, customers, and the insurancecompany,” she says. Additional investments are required infront-office tools–data capture, business rules, and creating anenvironment based on ease of use and efficiency–to attract andmaintain the most profitable agents and their customers, shesuggests.

“Mega-insurance companies are very focused on retention ofhigh-value producers,” says Saccocia. “They may tend to use thingssuch as utilities and automating a lot of the data exchange. Thelarge niche regional insurers, when it comes to retention, arefocused on market-share gain, determining what it is going to taketo attract new producers and retain the ones they have. Amega-insurer can go buy a block of business and solve some of itsproblems, but the large niche regional insurers really have todifferentiate themselves.”

In P&C, Saccocia believes areas such as catastrophemanagement, regulation, profitable growth, and capital managementare interesting. “There is real opportunity for niche regionalinsurance companies,” she says. “Whether that's a niche in productor a niche in a particular area of the country, there are some realopportunities being crafted because the mega-insurer can't affordto support some of this business nationwide.”

Republic Group went public in 2005, which created a new set ofproblems, particularly in the area of compliance with theSarbanes-Oxley Act. “Most insurance companies if they are publicstill are wrestling with Sarbanes-Oxley issues and spending a greatdeal of time and money on the SOX issue,” observes Headley. (Formore on Sarbanes-Oxley compliance, see “The Road Ahead,” p. 16.)Republic started its SOX initiative in January 2004. “The date ofour public offering was very unclear at that point, but we knew wewere going to do it eventually,” he says. “We thought we could doit inside, but we realized after a couple of months there was noway we could do it without outside help, so we looked around andfound a consulting group we liked.”

As have most companies, Republic has spent a lot of money andeffort on SOX, and it's not over yet. “Whether you are a brand-newcompany or an existing public company, at this point in time,everybody still is wrestling with Sarbanes-Oxley,” he asserts.“Some companies are further ahead than [Republic], but now they arewrestling with the second year.”

Compliance will continue as a major track, as well, Josefowiczbelieves. “Insurance companies are not so much worried about rogueemployees doing naughty things; they are worried employeesinadvertently will lie to a regulator because they don't know thetruth,” he says. “For large companies, data is a larger problem,and they are being more aggressive in addressing it, but it also isan issue for a lot of smaller companies.”

Grange also will invest heavily in business continuity in 2006.“We have a large platform of servers and a large mainframe,” saysCarter. “To try to develop a business continuity plan is just anightmare.” Grange has developed a game plan and is in the processof putting it in place for 2006. “It's very expensive to do thisbecause we're actually generating a second data center,” saysCarter. “In the old days you would ask, 'What are your criticalsystems?' and those would be the ones for which you would providebackup at an off-site location. Today, all our systems are sointegrated. You can't remove one from the other, so it's easier toleave them together than pull them apart.”

Headquartered in Columbus, Ohio, Grange will have its secondsite also in Columbus in another data center. The decision to keepthe backup center in the same city was the best way to providebackup, Carter claims. “We are creating an entire data center, andwe will be mirroring all of our production in a synchronous mode,”he says. “There are some mileage limitations on synchronousmirroring that required we stay within a 50-mile radius. We areconverting over to a storage area network solution and do 100percent mirroring between the two data centers, and that will allowus to switch production from one data center to another. It's verylabor intensive and very expensive.”

The next five years are likely to be difficult for CEOs,Saccocia believes, as insurers look to survive issues such ascompetitive advantage, catastrophe management, regulation,profitable growth, capital growth, demographics, and strategicresource management. “To survive over the next five years, you haveto have investments in what it is going to take to increaserevenue, decrease expenses, and drive shareholder and policyvalue,” she sums up. “Status quo is not going to be a leadingstrategy. Good enough is not going to give you the competitiveadvantage of ease of use and efficiency for producers. Producerswill find the top-tier carriers they are going to do theircommoditized business with. They then will seek small nicheinsurance companies to provide them with the unique value they needfor their select customers. That's reality.”