There's little doubt in Steve Boyd's mind that 2009 was a yearthat called for turning to insurance technology to help ridethrough the storm. As Boyd, COO of Arrowhead General Insurance,explains, “When you are in a situation where you are dealing withfewer premium dollars going around, you need to have more of arazor focus on things.”

And for many IT leaders, that razor focus was directed towardfinding innovative ways to make their operations more efficient andprofitable.

Kimberly Harris-Ferrante, vice president and distinguishedanalyst with Gartner, believes 2009 was unprecedented for theinsurance industry. “There was less money being spent by theindustry on technology,” she says, and “that had a huge impact onproject plans, vendor financials, and industry trends such asconsumerization.

“Companies were looking at reducing the cost of operations withmore tactical, short-term projects,” she continues. “That led to arefocus on some of the core technology. The emerging technologythat was starting to gain momentum in 2008 lost that momentum in2009 as companies focused attention on the basics and running thebusiness more effectively rather than on growth-typeinitiatives.”

Arrowhead, for example, was more reflective in how it evaluatedprojects and opportunities. “From a technology perspective, we'redoing more around trying to share technologies within ourorganization vs. the silo mentality of building out,” saysBoyd.

LESSONS LEARNED

Beginning early in the year, companies were trying to figure outwhat projects to keep and what to put on hold, points outHarris-Ferrante. “They realized they were making decisions ontechnology projects, and they had to know whether it would chillthe business, whether customers would be dissatisfied, and whetherit would drive up costs elsewhere,” she says.

“The policy system is the heart of the business, but it's veryexpensive,” says Harris-Ferrante. “They realized it had to be doneeven if it was costly. If they didn't, it could be a point ofcontention where competitors could surpass them when the economyturned around. One of the lessons learned was even though someprojects don't have a short-term return on investment, [carriers]had to think beyond that.

“To make these hard decisions about what and what not to do,they realized business and IT had to be aligned, and in some casesthere was no alignment.” Companies have talked about business/ITalignment for years, but for many this was the first time suchmajor gaps surfaced, she adds.

One of the main lessons insurers learned in 2009's difficultenvironment, according to Jim Dean, vice president, Robert E. NolanCompany, was to take a critical look at their vendors, thelong-term contracts that were in place, and ways they could improvethose relationships to increase value. IT departments increased thefocus on discipline of financial and project management, Deanbelieves, by addressing questions such as: Do we need thisparticular project? Do we need it now? What's the bottom-linebenefit? Does it help reduce operating cost or increaserevenue?

INNOVATION

Most of the innovation work in 2009 was performed by softwarevendors, Dean contends, because research and development is theirbread and butter. In terms of insurance companies, though, Deanasserts 2009 was the year to secure any active projects that hadmajor strategic value and go slower on implementation of technologythat was unproven or didn't have an immediate payback.

“Typically, innovation doesn't have immediate payback,” saysDean. “It takes a while to integrate to the business operationsbefore you start seeing payback. This wasn't the year thatcompanies had the appetite for that.”

Two interesting areas Dean saw carriers target were speed tomarket solutions and the use of analytics and underwriting,especially in the small commercial lines. “The smaller softwarecompanies are bringing a new way of analytic and quantitativeanalysis to pricing and underwriting, and more actuaries areexamining it,” he says.

One of the hottest innovation areas Harris-Ferrante observedthis year was companies looking at Internet-based business models,including self-service to allow customers to take advantage oftechnology without building on to the cost structure.

However, the hottest area is Web 2.0, she says, with socialnetworking as companies dabbled with iPhone applications, Twitter,and Facebook. “A year ago hardly anyone was talking about thatstuff; now, you see it all over,” she notes. “It's a low-costinvestment to play with the new technologies.”

One of the reasons carriers looked to social networking was toexpand the company brand, particularly among younger consumers.“Companies are going out and marketing through the new technologiesto get brand awareness and look more innovative with youngerconsumers,” she says.

MOBILE APPLICATIONS AND SOCIAL NETWORKING

Nationwide's iPhone application and the subsequent follow-upwith insurers USAA and State Farm are huge pieces of innovationfrom an IT perspective, indicates Chad Mitchell, a senior analystwith Forrester. They create a mobile platform and deliverself-service functionality to a smart phone.

Dean also points to Nationwide and State Farm developing iPhoneapplications for claims as innovations that attracted attention tothe industry, but he stops short of stating such innovation is agame-changing event for insurers. “Those technologies areavailable, but do insurance companies want to spend their capitalon that?” asks Dean. “Unless it's something that will help themcontrol costs in the short and medium term, I don't think so.”

“There are a lot of major-brand marketers in the retail worldthat would like to have a custom iPhone app that just touches whatNationwide and State Farm are able to do,” Mitchell says. “To me,that would be the flagship piece of innovation, at least from acustomer-facing perspective.” However, he adds, if the innovationin 2009 is looked at in aggregate, in his view it wasn't a standoutyear.

Ellen Carney, also a senior analyst with Forrester, explainsinnovation can be broken down into three areas. “Certainly thesense of making more applications available in a mobile device isone–the consumerization of that experience for people within theinsurance space,” she says.

Another is social networking–Twitter or Facebook or whatever thenext networking piece is going to be. “Whether [insurers] jump inwith both feet is a little unclear as the whole idea remains a bitforeign to them,” she points out. “The third area where there is alot of interest and some trepidation is cloud computing. There is ahuge amount of fascination with that.”

Cloud has drawn interest as insurers try to reconcile how muchmoney they have invested over the years in legacy applications.“One of the [companies] in a group we speak with every quarterreminded us it is used to this concept already with time trackingin payroll applications,” she says. “[Cloud computing is] a newlook at something [IT departments] have done and been comfortablewith for a while. Are we going to see policy administration in thecloud any time soon? Probably not; it's more around applicationsthan what is really running the business right now.”

Four out of 10 auto and life insurance policyholders use someform of social networking on a monthly basis, Mitchell reports, butthat could be as little as once a month posting to Twitter orFacebook.

The best use he has seen of social media involves catastrophealerts through Twitter. “That's the right way to use it to betterserve customers,” he says.

He points out insurance leader Geico, a well-known brand with,he claims, the highest advertising spend in the category, has 7,000Facebook followers for its gecko mascot and 3,000 Twitterfollowers.

INNOVATIVE TURNABOUT

An innovative project Arrowhead did in 2009 involved an unusualrelationship with one of its vendor partners, ISCS.

“We wanted to do some large development of some policy adminbilling systems, but it wasn't pressing for us to get it done thisyear,” says Boyd. “We have a development team in-house that workswith the ISCS product, and we saw an opportunity to enhance andimprove the process. We had some excess resource, and in talkingwith [ISCS], it had some need from pending customers to buildthings out that exceeded their staffs. So, we actually did areverse relationship, and we are the vendor for ISCS. We are doingdevelopment work with ISCS as an extension of its developmentdepartment.”

The benefit of this relationship for Arrowhead is the insurergets to use whatever is built as well as bill out some revenue.Boyd points out ISCS benefits from some extra depth in itsengineering ranks thanks to the Arrowhead IT team.

“That's not the most traditional relationship with vendors, butwe both were able to scratch each other's back,” he says.

Such an arrangement depends heavily on the basis for thepartnership, according to Boyd. “Is it a vendor that isinterchangeable and has no compelling interest in your strategicsuccess, or is it a partner to whom you can explain the challengesand with whom you can do something together?” he emphasizes. “Wehave a handful of partners. They are able to come to us each yearand ask what our pressure points are this year and how can theyassist. It could be restructuring arrangements, spreading payments,delaying some deliverables, speeding up some deliverables, or whatwe did with ISCS, which is a nontraditional type ofpartnership.”

SURVIVAL MODE

Budgets for 2010 are going to be flat, predicts Carney, whichonce again will affect innovation in the industry. However, “flatbudgets are better than down budgets,” she adds.

Mitchell jokes, “Flat is the new up.” But some CIOs Forresterhas spoken with indicate if there is business justification for aproject or a demonstrated return on investment, they have theability to get the money for it, Mitchell reports.

The Obama administration and the financial services scandals oflate 2008 created uncertainty in terms of regulation for theinsurance industry, Carney points out. “You wonder where thepressure might be from a budget standpoint to relieve some of theregulatory compliance initiatives,” she says. “There is a lot ofpressure on IT budgets right now in insurance.”

Building and justifying the business case for major projects aretable stakes for IT departments, Carney maintains. “Frankly, thereis some skepticism on vendor-
produced ROI, so carriers are going to rely on more objectivesources,” she says. “There needs to be more discipline in ROIcalculation. If there is a business case for an innovation,insurers will move forward with it.”

Mitchell believes insurance strategy groups are working oninnovation projects that are based on efficiency and cost cutting.“They are not looking for revolutionary innovation, they arelooking for evolutionary innovation that helps them reduce costs,”he says.

The onus is falling squarely on IT departments, observes Carney.“We published a report in terms of what insurers were going to bespending money on,” she says. “We found it interesting to see thenumber of IT shops that were responsible for driving businessinnovation.”

2010 PLANNING

Harris-Ferrante doesn't see a big shift in budgets as we headinto 2010 compared with this year. “[Gartner's] customers aretelling us 2010 is going to be a little better, but budgets won'tgrow drastically compared with now,” she says. “We find budgetswill increase slightly, and there will be a slight shift from whatwe call running the business to a focus on growth andtransformation and how to bring in more customers and revenue, newstrategies for new markets, and new products.”

The good news is while a good portion of 2009 budgets went tokeeping the lights on, in 2010, the companies that reaped somebenefits in 2009 will shift some of that cost savings to growth andtransformation. “[Insurers] continue to focus on value-addedservices and differentiation, so those projects that wereconsidered nice to have in 2009 are going to be funded in 2010,”says Harris-Ferrante. “That's a big signal the industry is going toget back to a more competitive and innovative culture.”

The insurance industry is in a stabilization period, Deanbelieves, but most insurers are going to hold off on hiring morepeople because they are unsure whether we are out of the recessionentirely.

So, how does the industry accommodate new business withouthiring more people? The answer, according to Dean, will be a focuson improving operational efficiencies. “It's a great opportunityfor CIOs to look at the application and support systems and beproactive in working with the user community and bring things tothe table that increase efficiencies,” he says. “A lot of companiesare maxed out production-wise. The current staff has had toaccommodate the reduction, and to add more business is going to beproblematic. If CIOs can come in with ideas on how to eliminateinefficient processes, maximize the technologies they have, andincrease capacity of the operational staff, that will be a big winfor them corporately.”

Dean holds the opinion the economy has stopped its slide butjust barely. “Wall Street improvements don't necessarily mean theeconomy has improved; it just means the opportunity to make moneyon the stock market has improved,” he says. “That's good newsbecause it increases consumer confidence, but from what I've seen,the economy lags behind [the stock market]. CIOs are going to havesome time in the first part of next year to work with the usercommunity to be proactive and increase operational efficiencies, sowhen the growth finally hits, they are prepared and ready forit.”

TOUGH DECISIONS

In Arrowhead's experience, the insurer had a tougher time in2008 than in 2009, recalls Boyd. “This year has been a bit of arebound for us,” he says. “I think it might be the nature of thebusiness we write. I think 2008 was the year we put on the brakes,made some tough decisions, sold some nonperforming business units,tightened our belts, and got ahead of it. We made some decisionsthat were good for us in the long haul and positioned us for whenthe market comes back.”

Boyd saw some signs in 2009 some of Arrowhead's markets hadstabilized and even started to grow again. “This has been atransition year, and next year, we are hopeful it will be a growthyear.”

That said, the overall economy still will have to brightenfurther, though, suggests Boyd. He notes some of Arrowhead's lines,such as writing workers' comp in California, remain part of avolatile
marketplace.

“Certainly the economy is having an overall impact, but evenbefore that we saw a softening market that made pricing tough,which meant we had to focus on things such as innovation,” saysBoyd. “We sell through independent agents, so we need to be easierto do business with and differentiate ourselves from 50 othercompanies selling the same product.”

Other fallout of the recession–layoffs and not replacingretirees–had an impact on intellectual property, according toHarris-Ferrante.

Some companies were forced to look at outsourcing as they triedto find cheaper ways to maintain systems or fill gaps when they letpeople go, she adds.

There were plenty of different issues, for insurers to dealwith, sums up Harris-Ferrante. “None of these were things we'venever seen before, but they were things that were more impactfulthis year,” she says. “We've had similar issues here and there, butall these happened at one time as companies struggled to make harddecisions.” TD