Over the last three months, there has been scant positive newsto report about the state of the financial services in the U.S. andacross the globe, but except for carriers such as AIG and TheHartford, the economic problems mostly have arisen in the bankingand investment world–not insurance. Those in the insuranceindustry, particularly the property/casualty field, are not singingthe blues the way other industries are. In fact, some analysts arepredicting a strong year for insurance in the area of ITspending.

The reason for this is companies have wisely invested intechnology over the last few years to improve efficiencies andoperations, and now it is time for IT to display its mettle. AsCraig Lowenthal, CIO for commercial lines and marine carrierNYMAGIC, says, "For the IT shops that have been investing in recentyears, it's show time. Show the company how you really can leveragethe investments made in past business intelligence projects, dosome key analytics to determine where there might be some staff orresource bloat, move resources to more profitable areas, or findways to reduce staff."

No one is implying life will be easy this year, however. "It's avery challenging period coming up," says Matt Josefowicz, directorof the insurance practice at Novarica.

P&C carriers will see some decreasing demand due to reducedbusiness activity, reduced payroll, fewer new homes, and fewer newcars, but Josefowicz believes volume is not going to fall off acliff. "People still need car insurance, and business people needinsurance to operate," he points out. "The basic demands for theproducts are going to face some challenges, but [the products] arenot going to disappear."

Life insurance, on the other hand, is more discretionary. "Theinvestment element of the [life] industry, where it has been makingmost of its profit lately, is going to face a big challenge,"predicts Josefowicz.

It has been seven years since the insurance industry was at alow point, and Deb Smallwood, cofounder of consulting groupSmallwood Maike & Associates, contends the reason insurancewill be able to avoid a repeat of 2002 is because of the technologyinvestments and advances made since then.

"Think about where the industry was [in 2002]," statesSmallwood. Among the major changes for insurers since that time arepredictive analytics, straight-through processing, agency andcarrier portals, self-service by customers, data projects andbusiness intelligence tools, and upload/download with agents.

"If you think of the significant investments of the last sevenyears, they are interwoven between technology and the businessprocesses in allowing [carriers] to compete at a different level,"says Smallwood. "[Insurers] can't stop now. They see the impact[the investments] have had on their financials. They understand thevalue, and they realize they can't compete in today's world withoutit. These aren't things that give a carrier competitive advantage;they are things that allow it to compete."

Josefowicz sees property/casualty companies as being cautiouslyoptimistic about market conditions and their ability to compete.Life companies are getting hit with what he calls "the doublewhammy" of lower investment returns and diminished demand for theirproducts due to less discretionary income and lower demand forinvestment products. "The life companies are going to beconservative, and the property/casualty companies are continuing tomake strategic investments," says Josefowicz.

The predictions of even flat spending in insurance IT is viewedas good news by Smallwood. "The insurance industry knows how toweather these storms," she says.

Smallwood believes 2009 will be difficult, though, because ofwhat she calls a "triple whammy"–the soft market, bad economy, andbad investments. "The mutual and privately owned companies continueto do what they want to do and need to do," she says. "The stockcompanies are a little more fickle because of the pressure fromtheir stockholders, but I don't hear anyone slashing budgets."

Smallwood anticipates there is going to be more emphasis onstrategic alignment this year. "The midtier and the large playershave seen a shift in market share, so they are going to be doingportals to provide connectivity to agents and thebrokers/wholesalers," she says. "I also think money will beinvested in external data and other services to help reallyunderstand the market."

She doesn't see any slowdown on the P&C side for policyadministration systems, although projects will be slower on thelife and annuity side. "What's going to be interesting to watch onthe life side is, given how bad the market has been forinvestments, you wonder whether there is going to be a shift tosafer investments around annuities and long-term life insuranceinvestments," she says. "Now is the time for [life insurers] toseize the moment."

On the other hand, if there is going to be any pressure onbudgets, Smallwood feels it will affect the smaller enhancements tothe business. "Infrastructure projects and server consolidationsand upgrades are the ones that are going to get squeezed," shesays. "No one is going to buy new hardware unless the companyabsolutely has to."

A survey by Forrester on IT spending in various industries for2009 found insurance spending is going to increase by four percent,according to Ellen Carney, a senior analyst with Forrester."[Insurance] is coming through relatively unscathed, which is whysome technology vendors are looking at the insurance market," shesays. "There are some revenue opportunities there [vendors] mightnot have looked at so closely in the past."

Insurers that have worked to expand the online experience fortheir customers should be rewarded in 2009, according to ChadMitchell, also a senior analyst with Forrester. He has seenpredictions online ad spending and e-mail acquisition marketingactually are going to grow about 10 percent this year. "[Consumers]still are going online, but because of the economy, people arelooking to cut back," he says. "The message we see from P&Cauto and homeowners insurers is they can save [consumers] money.You have the confluence of customers hurt in their wallet needingto pull back while you see hundreds of millions in ad spend stillgoing after that auto insurance buyer by guaranteeing [customer]savings."

The attitude toward e-commerce is going to continue to driveinvestments in site personalization, quote engines, and onlinepolicy admin, adds Mitchell. "The types of things that either arein the works or are where they need to catch up," he says, "that'swhere I think you'll see that four percent increase, at least withP&C."

Carriers are going to work on improving the independent agentdistribution channel, as well, asserts Carney. "Carriers arelooking at better ways to connect with agents to quote and bind thepolicy quicker," she says. "Another big thing they are willing toinvest in is a way to accelerate new product creation. Instead oftaking months and months with a lot of IT involvement, they arelooking at business rules engines to support new productdevelopment tools."

Josefowicz sees a major difference between today's situation andthe last economic catastrophe that followed 9/11. "The differencebetween this storm and the last storm is in the last storm IT wasthe first overboard," he says. "Now, IT is up there with thecaptain making decisions on how to survive."

Over the last five years the industry's recognition of thecritical strategic nature of IT to create advantage for insurancecompanies has grown and been more widely accepted, Josefowiczremarks. "So, when insurance companies hit a crisis situation,their first instinct is not to shut down IT," he says. "Their firstinstinct is to look at IT and ask how they can be more efficientand effective in order to weather this storm."

One reason for the improved standing of IT among carriers isregulatory demands, such as the Gramm-Leach-Bliley Act and theSarbanes-Oxley Act along with the expansion of the model audit rulefor private companies, according to Karen Pauli, research directorfor TowerGroup. "All that has helped carriers stay out of the messor at least stay neutral in the midst of the mess," she says."Those that have invested in technology are in a much betterplace."

Carriers have not returned to the "back-to-the-basics" formulathat marked 2002 and other difficult times and instead are lookingfor ways to gain efficiencies. "This is the perfect time forcarriers to take a look at where they have invested in technologyand use [that technology] across the enterprise," says Pauli.

For example, she points out, now would be a good time forpersonal lines carriers that are underwriting with predictiveanalytics to take that investment and use it in another line, suchas small business, where there is a lot of data. "This is a timewhen carriers need to stop internal wars between divisions," shesays. "Now is the time to put that aside and leverage theinvestment."

Insurance carriers must make some bold decisions this year,suggests Lowenthal. "Now is the time really to invest in IT, if youare smart," he says. "We are probably 12 to 24 months from gainingany momentum [in the economy]. If you can absorb an IT investmentin the next 12 to 24 months and are ready to charge as the economystarts going up, you are going to be 12 to 24 months ahead of yourcompetitors."

NYMAGIC currently is in the middle of a legacy replacementproject that Lowenthal maintains will position the company for thefuture. "It's going to keep us nimble and agile so we'll be in agood spot for competitive advantage," he says. "And in the shortterm, it will bring us efficiency."

Some carriers will eliminate projects, predicts Lowenthal. If acompany is unsure where a specific project is going or what thevalue is, the right answer probably is to kill the project, hecontinues. But those companies that find themselves in the middleof a major project need to maintain the course if the project isgoing to provide specific benefit and pay dividends. "I wouldvigorously protest any attempt to stop our legacy replacementproject now because that would be detrimental to the company," hesays.

Market conditions change in the insurance industry, notesJosefowicz, so insurers should not focus on the hard or softmarket. "The most important thing now is to get away from thereliance on the cycle and focus on underwriting profitability nomatter what the cycle is," he says.

Lowenthal anticipates the soft market will begin to fade away in2009, although he believes it is premature to say the hardeningalready has begun. "Certainly capital has dried up, and that's theformula for what drives the market," he says. "When you have toomuch capital, the pricing gets crazy. I don't think you are goingto see a terribly hard market until 2010, but I think you will seestabilization."

He contends more than improved underwriting is needed to dealwith the changing markets in property/casualty insurance. "Whenevera market is hard and there is a need for insurance, you get capitalinfusion," he says. "Then you have too much capital in the market,and you get competition. Some of the new capital entrants lowballthe market, and that drives pricing down."

Like some companies, NYMAGIC has refused to play that game,explains Lowenthal. "What we've done over the last two years is notwrite some business," he says. "We're not going to sacrifice ourprofitability for this game. We'd rather lose some revenue and makesure we're a going concern for the future."

"The regulators aren't going to let the insurance companies losetoo much money, so I think [the market] is going to start toharden," says Smallwood. "We've seen some conflicting reports onwhether the hard market is coming, but I think it is coming,although it is going to be slow."

Carriers need to look at their particular lines of business,their current clients, and how they can grow and then start toposition themselves for the hard market, which Pauli also feels iscoming. "More money is being spent on ease of doingbusiness–upload/download and seamless connectivity to the agents,"she says.

Pauli believes any vendor with a solution involving a short-terminstallation and impacting bottom-line results is going to be finein 2009. On the other hand, software that is complicated to installor involves a new skill set carriers don't have on staff could beheaded for a difficult year.

Smallwood expects it is going to be another strong year forpolicy administration, underwriting, and agent-connectivityvendors. "The horizontal players might have a harder time unlessthey have a pinpointed solution with content–such as a BPM provideror enterprise content management," she says.

Merger and acquisition activity among insurance software vendorsis likely to accelerate this year, according to Josefowicz. "We maycome back to an age of the mega-vendor, where there will be five orsix strong portfolio companies with comprehensive solutions andinfrastructure," he says.

If the market for software deals slows down in 2009, it may behard to handle for some solution providers, Josefowicz notes. Suchcompanies may be inclined to hook up with a deeper pocket. "Whatremains to be seen is how the credit crunch affects the M&Amarket," he says. "People aren't going to be borrowing money to buythings. A lot of people already have money in hand and are lookingto buy things."

Money is tight right now for M&A activity, observesSmallwood. "No one is going to take a risk right now," she says."Once we get into 2009 and we show patterns of similar spending, itmay open up, but I've spoken with a few [investment] firms, andthey are nervous."

Josefowicz doesn't believe carriers have changed their spendingpriorities despite the difficult financial conditions. "Ifanything, they may have changed their speed," he says. "Most stillare focused around the four main drivers–time to market, ease ofdoing business, operational efficiency, and BI and dataaccessibility," he says. "Those things continue to driveprojects."

Forrester recently surveyed P&C carriers with revenuesbetween $250 million and $2 billion in gross or direct writtenpremiums and found every single respondent is doing something atsome stage or another with one of their core applications,primarily policy administration, reports Carney.

Mitchell believes the reason the insurance industry is somehowcoming through the current financial crisis relatively unscathed isbecause of the risk-averse and investment-structured foundation ofthe industry. "If you look at providers in the U.S., we actuallyare forecasting some potential growth from an IT spendperspective," he says.

Many insurers are going to focus on the online or multichannelexperience, suggests Mitchell, which means investments in areassuch as lower-cost Software as a Service implementations. "Thingssuch as improved online search, application prefill, the types ofthings directed at either acquisition or recruiting, the onlinequoting and purchasing experience for existing customers," hesays.

The key point for insurance carriers today is to invest intechnology where they can see a return relatively quickly, pointsout Mitchell. "If you look at the investment in self-service oronline policy admin, the cost savings and the ROI and economicvalue are there for the investment in that technology," hesays.

"I don't see all doom and gloom for the P&C world," assertsPauli. "The degree to which carriers understand what technology cando for them is going to make a difference. That's the decidingfactor."

Smallwood is confident insurance IT executives know how to ridethe wave today. "A lot of them realize in putting projects on theback burner in 2002 they lost significant time," she concludes."They know they can't afford to do that again."