Insurance traditionally has been viewed as a bastion ofstability amid the sometimes topsy-turvy world of financialservices, but the current weakened state of the U.S. and worldeconomies has many wondering how the insurance industry will beaffected.

Certainly, one would expect budgets would be slashed or eveneliminated in an effort to make up for the poor performance ofinvestments and perhaps a downturn in business.

Yet when it comes to information technology–and policyadministration technology, in particular–most experts seem to thinkour economic problems should and will have little effect.

"Do whatever you can on policy administration," recommends ChadHersh, principal, insurance, for Novarica. "Do replace systems thatkeep you from being competitive, and do so in a way that is rapidbut economically plausible within your current budget situation.Some carriers can't do it right now," but most carriers need not tohave that attitude.

Hersh says his firm characterizes the current state of insuranceIT purchasers as reflecting the "frostbite effect," explaining,"when a person ventures out into extremely cold temperatures, thebody's reaction is to restrict blood flow to areas farthest fromthe body's core, especially the heart. This is done to directblood–and warmth–in order to protect the body's core.

"Similarly, when spending must be curtailed at an insurancecarrier, there is a strong tendency to jettison noncore projects(such as back-office accounting systems, infrastructure upgrades,enterprise architecture projects, etc.), focusing instead onprojects that address core insurer solutions, which typically offerthe operational efficiencies and value carriers are looking toimprove in a tough economic climate."

Hersh notes for life/health and annuities providers, thefrostbite effect may not play as key a role as on theproperty/casualty side.

"Core systems projects for these carriers tend to takeconsiderably longer and cost considerably more due to both thepricing of the solutions and the conversion costs," he says. "As aresult, cost-justifying these projects is especially difficultheading into what could be a protracted downturn.

"We're actually seeing what I would call high levels of activityin policy administration in particular, primarily on the P&Cside, but that's pretty much normal," Hersh indicates, adding suchactivity on the life/health side is "still moderate, because itclearly is more affected" by the economic downturn.

"P&C is at worst seeing a plateau vs. last year; there mayeven be more activity," he says. "P&C carriers have long sincerecognized to stay competitive they have to do things on a par withtheir competitors." This includes better speed to market, pricingaccurately and competitively, the need to have a great producerportal, and upload/download capability, he continues. "We're pastthe ability to do that with legacy modernization; you have to startreplacing systems to do that."

Would the weakened economy make now a bad time to startreplacing systems? "Carriers are notoriously slow at making shiftsthat are caused by the macro-economy and macro-trends," Hershpoints out. "Most experts say this recession is slated to endtoward the end of 2009 in theory. So, it's bad business practice tocurtail major projects. Those that are well positioned may have atremendous opportunity coming out of this recession.

"What is expected to be a recovery in conjunction with ahardening market–that's something carriers need to take advantageof," he asserts. "That being said, carriers also have learned theycan be creative about how much money they spend and how they spendit."

As examples of such creativity, he cites software as a service,software leasing, and "creative stuff to keep capital outlays downand still move projects forward." Such projects can be done for oneline of business at a time, he notes.

"If I'm a carrier and I'm going to look at adding new lines asthe recession ends and the market hardens," says Hersh, "it makestremendous sense to get a new line of business onto a new platformso I have it available to me as the market shifts and budgets canhandle it. I'm prepared for the next big thing."

According to Hersh, in a survey completed by insurance ITexecutives during the "height" of the crisis (the week of Oct. 6,2008), "carriers once again proved they are no more likely to berash in the face of negative events than in the face of positiveones (e.g., the dot-com boom)." The key finding of the surveyshowed a large majority of P&C CIOs still expect their budgetseither to remain flat or grow, while some L&H CIOs expect minorcuts to theirs.

"One of the worst mistakes a carrier can make during adownturn–whether that downturn is a soft market or a globalfinancial crisis–is to make wholesale cuts in its IT budget," hecontends. "As IT has begun to play a critical role in helpingcarriers achieve operational efficiencies, speed to market,analytics, compliance, and nearly every other critical area, thosecarriers have come to realize cutting indiscriminately is not theanswer.

"Focusing on core systems replacements, predictive analytics, orother projects that can reduce operational costs, improveunderwriting results and/or expense ratios, improve speed tomarket, or otherwise provide strong cost/benefit ratios now is anexcellent strategy," he adds. "This advice is doubly important withthe sudden likelihood that any given carrier may acquire eitherblocks of business or entire divisions from distressed competitorsor that any given carrier will compete against one that does justthat."

"Companies have been squeezing efficiency out of theirprocesses/systems for the last several years," according to BillJenkins, CIO and vice president, information technology, at PennNational Insurance. "Policy administration systems are viewed asmission-critical applications, so efforts to enhance theefficiencies and overall capabilities of these systemscontinue–either in the replacement initiative or anextend-evolve-and-enhance mode.

"The economy, although it has many insurers reexamining a numberof initiatives, has not deterred insurers in their investments toupgrade their suite of mission-critical systems, e.g., policyadministration systems," Jenkins notes. "The IT function is nolonger in the crosshairs of the organization for wringing outorganizational expenses. It now is viewed as a tool/method forreducing overall organizational expenses as well as the neededcomponent for the company to achieve revenue growth or, in today'senvironment, defense of its book.

"The economy no doubt has impacted IT's spending momentum (someprojects even with clear-cut ROI will be passed by); however, ITinitiatives deemed mission-critical will be continued given seniormanagement now views IT as necessary to compete and even just tosurvive," says Jenkins.

"IT spending at most carriers is projected to be flat this year,not reduced, in order to continue and complete these majorinitiatives," he observes. "[Such efforts] are needed to achieveSTP (operational efficiency); [to increase] ease of doing business(increase revenue); to allow the company's IT infrastructure,systems, and operations to be agile and flexible (quicker time tomarket); and to provide the needed information to make the businessdecisions needed to compete (open systems).

"Finally," concludes Jenkins, "there is no doubt the recentfinancial meltdown will result in further regulation and regulatoryscrutiny that will require our core systems to have thecapabilities of transparency, reporting access to 'all' data, andbetter audit trails–thus, the need for newer, open systems.

"Many companies, such as Penn National, are looking to use areplacement strategy that provides a cheaper, faster, and bettersolution for legacy replacement," he says.

"Through its discussions with CIOs since the financial crisishas hit the insurance industry, Celent has found very, very few ITinitiatives planned for 2009 have been halted or even phased back,"states Donald Light, senior analyst for the Boston-based researchfirm. "This includes major initiatives such as the replacement of apolicy administration system, which by its nature takes severalyears to plan, implement, and deploy across all lines in allstates.

"The observation also applies to point solutions within policyadministration, such as agent/broker portals, rating engines, andunderwriting desktops," he adds.

"For all insurers, especially those with more modern policyadministration systems, there certainly will be increased emphasison getting the most gains in productivity and expense control outof the broad range of features and functions already present butnot fully utilized in their current policy administration system,"he suggests.

According to Rod Travers, senior vice president of technology atRobert E. Nolan Company, the effect of the recession "depends onwhere each company is in the development/implementation cycle oftechnology. Companies in the midst of implementation should reviewtheir plans with an eye toward gaining efficiencies as soon aspossible–ideally within the current budget cycle," he advises.

This strategy could include narrowing scope to implement soonerdiscrete functionality, focusing on the largest lines of businessor on processes currently underserved by automation, andemphasizing the highest cost/benefit opportunities, says Travers."When implementations already are under way, there are front-endsunk costs, so there is both a desire and a business justificationto continue the project so that benefits can be realized," hepoints out.

On the other hand, companies that have not yet embarked onimplementing new technology may delay plans because of thesignificant front-end investment required, Travers contends. "Theymay instead focus on improving efficiencies of current processes,wringing more functionality/value out of existing technology, andpursuing less comprehensive technology upgrades. Business processmanagement (BPM) systems likely will see increased attention as apractical and less expensive alternative to wholesale systemreplacements," he says.

"The primary issue with implementing new policy administrationsystems is the length of time required," Travers explains."Experience has shown, and many vendors concur, implementing acomprehensive new policy administration system (several lines ofbusiness, several states, etc.) can take two to four years. In mostcases, another year must be added to these estimates to accomplisha renewal-based rollout to the new systems.

"Due to the uncertainty in the financial markets and economy,some carriers may be reluctant to embark on such majorimplementations due to the long implementation time frame and thefact that costs are front loaded and benefits will be derived muchlater," he says.

"In previous downturns, many carriers focused instead on gainingmaximum efficiency from current systems and reducing costs throughprocess redesign while delaying major systems expenditures untilthe business cycle turned. Others have revisited the possibility ofoutsourcing, though this alternative has its own costs, risks, andunique management requirements," continues Travers.

Updates and modular add-ons for policy administration systems isan area that likely will see much more activity, he predicts."Carriers will be much more inclined to invest in incrementaltechnology (e.g., BPM, imaging and workflow, Web-enablement, etc.)that has lower initial cost, shorter implementation time, and aquicker return on investment," he says.

"Most companies with older policy admin systems have some kindof plan in place to upgrade/replace their system," Travers notes."These companies have faced the cyclical nature of P&C in thepast. We expect to see an overall slowdown in full policyadministration systems.

"That said, those carriers with a track record for successfullyimplementing technologies will have every reason to proceed with aplanned replacement because of the eventual cost savings,operational benefits, and competitive differentiation that modernsystems can bring when properly implemented," Travers asserts.

Kimberly Harris-Ferrante, research director, financial servicesindustry, for Gartner, based in Raleigh, N.C., believes many policyadministration efforts will be put on hold, however.

"What we're seeing is companies are doing two things: respondingto reduction in capital and saving money and anticipating the nextwave of change in regulatory processes or markets. Companies arefearful," she claims.

For 2009, Harris-Ferrante states IT budgets in insurance willstay the same or be reduced. "Hard decisions must be made.Companies must maintain current systems and decide what will stayand what will go; also, what new projects will be done and what puton hold?"

Big multiyear core replacement projects may be put on the backburner, she points out. "You can't cut customer service, so whatwill go will be back-office projects with long terms and bigcosts."

If a carrier has a current policy administration project, "youare putting it on hold for most companies," she comments. "If it'sa publicly traded company, shareholders want more value. Bigreplacement is going to be hard to justify from a funding point ofview. It's not that companies shouldn't be doing it, but financialmarket conditions say otherwise."

When it comes to reacting to the economy, Harris-Ferrantedescribes four types of insurance company reactions. The first typesays, "Let's stop where we are and wait to see what happens." Thereare no major changes or drastic cuts. "They'll be positioned OK forwhat comes," she indicates.

The second group is the "knee-jerk, cut-costs" crowd. This groupfocuses on cost cutting and efficiency, she maintains, perhapsconsidering outsourcing, layoffs, system cuts, and budget cuts."But will you jeopardize your competitive position?" she asks.

The third type of company says, "We know something will happen,and we don't know what, so let's focus on cost cutting andagility/flexibility." SOA, integration, and consolidation projectsare the focus, explains Harris-Ferrante. These companies want to beable to jump quickly when everything settles down and new marketsopen up. The emphasis is on being flexible.

A fourth group of companies says, "We aren't as hurt as someothers in the market, so we want to turn that into an opportunity,"she continues. "How do we figure out niches, opportunities, ways toimprove, and ways to steal customers away from others while ourcompetition is up to their eyeballs in other things?"

Most insurers are in the second group–responding to short-termneed without thinking of long-term implications, saysHarris-Ferrante. The second-most popular is number one. "If you arein either one and your competitor is in the latter two, in 12months you could be behind the eight ball, and [those] companieswill be in a position to capitalize on your weakness," sheasserts.

"We see the insurance software market taking a big hit in 2009.Sales of policy admin systems will take a hit in 2009," shepredicts. "So, it will be a buyers' market. They will have moreleverage. This would be a great time to do a policy admin upgrade,because you will get better deals," contends Harris-Ferrante.

"I don't think we will see a lot of rebuilds. There will be alot of modularized improvements. Not a lot of companies will bemigrating off the mainframe to a different platform," she adds.

Jim Knight, executive vice president, global CIO for Warren,N.J.-based Chubb, confirms some IT projects are being curtailed dueto the economic slowdown.

"Many IT departments [in the industry] are operating with verysevere constraints," he remarks. "Recently, I was in Orlandoattending the Society for Information Management SIMposium 2008. Iheard many fellow CIOs, session speakers, and panel discussions(both CIO panels and media panels) around the problems. Manyreported IT activities are curtailed, some even saying newdevelopment is at a standstill.

"In times like these, it is absolutely critical IT is aligned asclosely as possible with the business side of the corporation," hestates. "The key to forging a strong alliance between IT and thebusiness is mutual respect and having a seat at the decision-makingtable."

This situation has improved in recent years, according toKnight, "but for those IT groups that are not currently at thetable, one way to get there is to become more agile and look atthings from a business perspective first and a technologyperspective second. To stay at the table, IT has to continue todeliver and to help drive strategic direction. We have theexpertise to make recommendations about technology, but they mustbe in concert with the business and its priorities, within economicconstraints, and based on very sound business cases with clearROIs."