If insurance analysts didn't invent the term cautiouslyoptimistic, they should have. A viewpoint expressed often, it's asimportant a part of the lexicon at this time of year as "Happy NewYear." IT budgets appear to be headed up, if only slightly, andconsidering the fact the property/casualty insurance industry isdealing with a softening market, there could be worse news forinsurance IT leaders.

Craig Weber, managing director of Celent's insurance practice,finds there are exceptions on each end of the spending scale,though. "If you look at responses to our CIO survey, there are hotwires on either end of that scale, so you could be looking at a 10percent budget decrease or a 15 percent budget increase atindividual companies," he says. "Overall, I think the industry istwo to three percent on the rise."

Larry Danielson, principal with Deloitte Consulting, alsocontends IT budgets will see slight increases for 2008. "We reallydon't see a big increase," he says. "People are focused on thegrowth topics." The wild card for the industry this year, in hisopinion, involves regulatory issues. "Even though a lot of peopletalk about being prepared and doing the right thing from aregulatory perspective, I think they largely wait to the pointwhere they might have a problem," he says. "If there are surprisesthis year, that's where we'll see them."

Barry Rabkin, senior research analyst for Financial Insights, anIDC Company, doesn't personally believe in spending studies andadds insurance companies shouldn't care that much about IT spendingpatterns, either. "What insurance companies should care about ishow they [need to] reshape the marketplace so their competitorshave to react to them–[a] get out of the herd approach," he says."At the end of the day, how they are going to compete successfullyis by providing more innovative products and services and bettercustomer service."

Still, Rabkin indicates spending is headed up. "I think it's upbecause of the need to improve continually claims management and tohave more efficient product development," he says. "I think we'llsee much more spending in analytics and in collaborativetechnologies. The innovators will use location intelligence tobetter target their specific density of risk, customer service, andproduct development."

There is a significant amount of investment being done in Webservices, Weber notes. The reward of this is the subsequent uses ofthose services will provide savings. "A lot of carriers seem to beat that point where they have something in production today andthey are adding lines of business or functionality based on theinfrastructure they've built," he says.

On the life side, Weber sees the focus being centered on supportfor distribution. He expects increased interest in the use of Webservices for new business, particularly aimed at improving thedistribution service experience. "The target still is somecombination of end customers and end producers, but there is anawful lot of pain in the new-business process that needs to beaddressed," he contends.

There are substantial differences in the directions taken bylife insurers and those on the property/casualty side, according toDanielson. "When I look at the life carriers, I think they aregoing to be focused on modernizing the back office," he says."There will be more money spent there." For P&C, though,Danielson feels more emphasis will be put on call centers andcustomer service–front-office activities.

Rebecca Amoroso, vice chairman and U.S. insurance leader,Deloitte & Touche USA, asserts carriers are more focused ontechnology today as a primary enabler for the objectives they wantto achieve. "Whether it is using technology to enhance automationwith your customer–the agent, broker, or policyholder–companies arelooking to upgrade how they are doing business, automating theunderwriting process, and becoming easier to do business with," shesays.

Microsoft views the influx of data into the enterprise as asignificant factor for 2008. Cynthia Saccocia, regional directorfor Microsoft, points out data technology is more advanced today,but it comes down to making sure the data you have is in good shapeand is acceptable to the business users in the way in which thoseusers want to consume it.

According to Mike Silva, also a regional director for Microsoft,most reasonably sized organizations have some type of data store,data mart, or data warehousing capability under way. The next stagefor these insurers involves the ability to come up with the sameversion of the truth senior executives see from a dashboardperspective and the line-of-business managers study to maketactical decisions. "We believe spending on business intelligencewill be at the top of most organizations' budgets, especially thosethat believe technology is a partner in running the business," hesays. "Organizations that are laggards in the BI approach will beseriously disadvantaged as unstructured data streams start to comein over the course of the next few years."

SOFT MARKET

Karen Pauli, a senior analyst with TowerGroup, is among thoseconcerned with the soft market in commercial lines. Compressedmargins will cause insurance carriers to take a second look attechnology expenditures, she believes, in particular knowing wherecarriers spend their money and how much is invested. Some carriersthat were looking at investments in strategic development for 2008are going to reassess that position, she remarks, and instead takethose dollars and push them to places where they can improve theirbottom-line margins.

For the most part, profitability has been good throughout theindustry, but Weber anticipates the issue will be pricing in theP&C market. "If [softening] continues, it will put a lot ofpressure on budgets," he says, adding there's at least a 12-monthdelay as the planning process takes into account the businesscycle. "At this point, budgets are reflecting an overall healthy,active environment," he says. "We'll see whether that holds truefor next year."

After speaking with carriers at a recent conference, Pauli foundthey still were in the market for solutions but were searching fortools that focused on very defined needs. "They were walking up toa vendor and saying, 'We need A. We don't need B and C; we justneed A.' Carriers will spend the dollars, but it has to be exactlywhat they need," she says.

It looks as if 2007 is going to be another good year for theindustry in terms of catastrophe spending, according to Amoroso.But following the even better results of 2006, the industry has todeal with softer prices, which in turn means competition is goingto get tougher, which will impact profitability. "If you look atwhat companies are trying to do–create a competitive advantage forthemselves, grow profitably in the P&C space and productdevelopment in the life space–technology is imbedded in all ofthat," she says. "There is significant opportunity ahead, and Idon't think tech spending is going away."

Don West, vice president of client services for State NationalCompanies, can be counted among those worried about the softeningmarket. "I would think for the whole industry that's the biggerissue in 2008," he says. "Are we going to repeat the insanity ofthe last soft market? It appears we are. Prices are softeningacross almost every line."

Good years for insurers in 2006 and 2007 are attributed to alower number of wind storms in the U.S., and with profits up,capital is looking for a home, observes West. "Carriers don't wantto write CAT-exposed policies and are looking for other lines towrite, so you have a little bit too much capital chasing too littlepremium," he says. "What happens? The price changes. It becomesabout price, and that's never been good for the industry."

West adds insurers always deal with tactical and complianceissues, calling them "the price of entry into the business," hesays. "The bigger issue, though, is how the industry is going tomeet budget in 2008 from a pure underwriting standpoint withoutchasing down prices."

Traditionally in the soft market, businesses have skimped onmaintenance work, and Pauli believes history will repeat itself in2008. "When you take a look at a typical IT budget, 33 percent ofthe budget is going into maintenance," she says. "That's too manydollars. When you are faced with compressed margins, you have tofish or cut bait."

PRIORITY LIST

Policy administration and how property/casualty insurers dealwith customers from a policy life cycle standpoint are the topbusiness issues for property/casualty carriers in 2008, reportsKimberly Harris-Ferrante, research vice president, Gartner. "Therestill is interest in some of the old-fashioned stuff–policy adminand claims never go away," she says. "They are ingrained." TheInternet also is a hot business topic, she continues, particularlyhow products are sold online and how self-service is conducted."You see things around customer service are moving to the top," shesays.

Nevertheless, technology priorities, which Gartner gathered fora recent report, center around architecture, Harris-Ferranteindicates. That outranked policy administration and claims systems."This gives us an idea it's not just about buying a silver-bulletsystem anymore," she says. "Just because they buy a new policyadmin system, that's not going to answer all the problems. How doyou link the systems together? How do you create an architecturalstrategy that will allow better system-to-system integration? Andhow do you create a common technology platform that allows you todo things in a seamless electronic fulfillment manner?"

On the life side, Harris-Ferrante states the number-one businesspriority is data information management. "There is an overwhelmingrecognition data information is scattered and not necessarilystored with the ability to aggregate," she says. "Companies believethey need to focus on managing the data."

She believes customer intelligence is hard for life carriers toproduce because it relies on the accessibility of data and requiresgood modeling techniques and clean data. "What this exemplifies is[life carriers] are going back to the basics and focusing on thefoundational pieces," says Harris-Ferrante. "They need to get thosethings right."

Additionally, Harris-Ferrante observes XML and ACORD are amongthe technology priorities for life insurers. "Companies understandthey really have to look at how they can do straight-throughprocessing through the use of XML and standards," she says. "It'sbeen inching its way up the list, and this year it has made a bigjump."

COMPLIANCE ISSUES

Financial Insights lists its strategic initiatives for insurancefrom a global perspective, which helps explain why the consultancydiffers with other consultants on what is to come in 2008. Forexample, Financial Insights lists regulatory compliance as thenumber-one priority, particularly because the prospect of SolvencyII is hanging over the heads of European and Asia/Pacific insurers."Last year compliance was number three [on the list ofpriorities]," says Rabkin. "It's jumped to number one because ofSolvency II. The carriers that responded to this survey feel theyhave to get ready for Solvency II even though the deadline has beenpushed back to 2012. Insurers are developing their operations as ifthey were under the requirements of Solvency II."

One area of compliance that's not new and is getting more focus,according to Amoroso, is enterprise risk management. "This islargely driven by the rating agencies, and carriers care what therating agencies have to say," she says. International financialreporting systems are gaining more attention as the industry paysmore attention to the international front, she points out. Securityand privacy also have received increased attention in terms ofmaking sure the data is secure and the use of the data isappropriate.

COMPANY ASSESSMENT

MetLife recently conducted a state of technology assessment bothfrom an internal perspective on how the carrier was delivering toits customers and from an external perspective on where IT standsin the marketplace, looking at the business implications against ITcapabilities. What the carrier discovered, according to JanisEgelberg, vice president, enterprise management solutions forMetLife, was the carrier's customer demographics are shifting fromasset accumulation to asset distribution as the population ages."We have a lot of shifts from employers, where they are no longerproviding the benefits, to employee-paid benefits," she says. Inaddition, with MetLife's acquisition of Travelers Life &Annuity, there has been an increased focus on the independentdistribution channel and the capabilities, opportunities, andchallenges it presents. "When you look at those types of businessshifts, you take a hard look at MetLife's IT capabilities and ask:What are the implications for us, and what are the opportunitiesfor us?" says Egelberg. "The opportunities are things such asagility of our software development process, flexibility,cross-channel integration, increased mobility of our work force,and new product development. Looking at the business shifts, assetdistribution opens tremendous opportunities, and speed to market issomething we take a hard look at. Those trends drive ITcapabilities."

LIFE WORRIES

With the baby-boomer generation reaching retirement age,Danielson points out there is a great deal of money that is goingto be in the marketplace, and it will have to be invested. Comingup with products that are part protection, part growth, and partinvestment are going to be important for life insurers.

However, Danielson doesn't believe insurers have figured out theproper direction yet. "People are going to be looking at insurersfor the answers," he says. "Some of the investment houses haveproven themselves to be riskier investments. The boomer generationis going to look for insurers to get it right."

Danielson contends technology has a huge opportunity to make adifference in this area. "It has to do with the ability tointroduce new products, service them, and do all the things in theback office once business is solidified, with people managing andmoving their money around," he says. "Insurers have not worriedabout that today, and they're not good at it, but I think they haveto get good at it. That money's coming, and like it or not,insurers are going to have to make some moves."

Egelberg believes MetLife is addressing the boomer issue. Thecarrier created a group solely focused on the issue–the retirementstrategies group. "What we are looking at is how we package andbundle our products and services so we can provide our customersnot only the benefits of life insurance but asset accumulation anddistribution," she says. "We're coming up with new products and newways to speak with our customers in support of the changingdemographics."

Joe Brand, vice president, enterprise IT architecture forMetLife, feels MetLife primarily focused on tighter linkage from ITto the business. To do that, the enterprise architecture programneeded enhancement. "The missing link was understanding how ITsupported the business and how the drivers of the business wouldimpact the IT environment," he says.

The first step was the creation of a common framework the entirearchitecture community within MetLife would use to link directly tothe business. "With the framework in place, we believe we have theability to assemble quickly business solutions to meet marketdemands," says Brand. Some of the reference architectures MetLifefocuses on are SOA, collaboration, and business process managementas key enablers to get the carrier into the competitive landscapequicker than its competitors, he adds.

BOOMER WORKERS

The employee population is a focus for the coming year atMetLife, according to Egelberg. "It's not even about baby boomersretiring," she says. "It's about knowledge management. It'scapturing the knowledge of our applications, our systems, and ourdata." She notes any time a company loses an employee, it is facedwith knowledge issues. At MetLife, Egelberg contends it's aconstant driver to capture the knowledge of systems andapplications.

"We're calling it corporate memory. It allows us to bring on newassociates more effectively and provides rotational opportunitiesacross our business lines," says Brand.

"Being able to deliver that knowledge around our informationsystems and applications has led to a key initiative this year:streamlining our internal processes and the capabilities of peopleto communicate and collaborate more effectively within ourorganization," says Egelberg.

Amoroso also sees the changing face of IT departments as anissue and believes the more tech-savvy carriers are the ones thatwill attract younger workers. "We are heading toward a talentcrisis in general, and Generation Y is tech savvy," she says."Insurance is not necessarily the first industry they think ofjoining, but they are attracted to technology-type jobs. Companiesthat demonstrate they have upgraded their technology are those thatwill enable more traction from that group."

Silva contends the expectations younger workers carry from theirpersonal lifestyle as technology consumers mean the digitallifestyle is going to carry over into a digital workplace. From anemployee retention standpoint, companies that fail to anticipatethe needs of the new generation of workers will be left wonderingwhere the top talent has gone.

GOOD THOUGHTS

Egelberg sees opportunities rather than challenges for 2008. Todeliver on MetLife's vision, she reports governance, speed tomarket, investing to reduce the complexity of the IT environment,and continuing to build the capabilities to support the businessare four areas of focus for the carrier. "A lot of companies have achallenge looking beyond the fiscal year," she says. "For us, thethree- to five-year plan is important because you can't build a lotof capabilities in one year."

There are a lot more significant changes going on now in theinsurance industry than observers, such as Harris-Ferrante, haveseen in previous years. Companies are looking at productdevelopment, call center technologies, and more strategic areassuch as business intelligence and data mining. "A warning we tellour customers is it's going to be a lot of uncharted water," shenotes. As they enter new areas, Harris-Ferrante points out carriersmay not have a lot of experience or the knowledge of how to usethese systems and the rules for these systems. "It's going to takea more stringent and careful approach because it's not going to besomething that comes easy," she says. "It's going to be a good yearfor a lot of interesting and innovative projects, but when you gointo something you haven't done before, there is risk."

Amoroso worries whether companies will capitalize on making theright investments quickly enough, since the industry historicallyis slow in that regard. "Those that can capitalize on making smartinvestments to enhance their competitive edge and become leanerwill become the winners at the end of the day," she predicts.

Danielson is among those who believe the credit crisis in theU.S. could cause some problems throughout the insurance industry."Every day you read another story about underestimating the impact[of the crisis]," he says. "I'm worried what that will do to thegeneral climate and to the psychology of decision-making,acquisitions, and investments in the company."

Beside the normal worry about catastrophes, Danielsonanticipates the economy is going to be a bigger factor for insurersin '08. "I think that has more to do with predictability thananything else," he says. "Those people who figure out better waysof dealing with information are [ahead of] their competitors. Thewhole information area is huge. Those who find a better way ofdoing that will be in a better position to run the business andgrow. A lot of people, quite frankly, are running blind." TD