Most insurance companies went into survival mode in 2009 to getthrough the economic collapse. Many turned to innovative technologymeasures to boost business–such as connecting to new customersthrough social networking. Others went back to the tried andtrue–doing more with less. The budget forecast for 2010 is guarded,but opportunities nevertheless present themselves.

Indeed, there's little doubt in Steve Boyd's mind that 2009 wasa year that called for turning to insurance technology to help ridethrough the storm.

“When you are in a situation where you are dealing with fewerpremium dollars going around, you need to have more of a razorfocus on things,” explained Mr. Boyd, who is both chief operatingofficer and chief information officer at Arrowhead GeneralInsurance, an independent national insurance program manager forcommercial and personal lines products headquartered in SanDiego.

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 analyst withGartner in Stamford, Conn., believes 2009 was unprecedented for theinsurance industry. “There was less money being spent by theindustry on technology,” she said, 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 continued. “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, according to Mr. Boyd. “From atechnology perspective, we're doing more around trying to sharetechnologies within our organization versus the silo mentality ofbuilding out,” he said.

Beginning early in the year, companies were trying to figure outwhat projects to keep and what to put on hold, according to Ms.Harris-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 said.

“The policy system is the heart of the business, but it's veryexpensive,” noted Ms. Harris-Ferrante. “They realized it had to bedone even 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.”

She explained that “to make these hard decisions about what andwhat not to do, they realized business and IT had to be aligned,and in some cases there was no alignment.” Companies have talkedabout business/IT alignment for years, but for many this was thefirst time such major gaps surfaced, she added.

One of the main lessons insurers learned in 2009's difficultenvironment 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, according to Jim Dean, vicepresident at Robert E. Nolan Company, headquartered in Simsbury,Conn.

IT departments increased the focus on discipline of financialand project management, Mr. Dean noted, by addressing questionssuch as:

o Do we need this particular project?

o Do we need it now?

o What's the bottom-line benefit?

o Does it help reduce operating cost or increase revenue?

Most of the innovation work in 2009 was performed by softwarevendors, Mr. Dean contends, because research and development istheir bread and butter. In terms of insurance companies, though, heasserted that 2009 was the year to secure any active projects thathad major strategic value, while going slower on implementation oftechnology that was unproven or didn't have an instantaneousreturn.

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

Two interesting areas Mr. Dean saw carriers target werespeed-to-market solutions as well as the use of analytics andunderwriting–especially in the small commercial lines. “The smallersoftware companies are bringing a new way of analytic andquantitative analysis to pricing and underwriting, and moreactuaries are examining it,” he said.

One of the hottest innovation areas Ms. 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 said, with socialnetworking front and center as companies dabbled with iPhoneapplications, Twitter and Facebook. “A year ago, hardly anyone wastalking about that stuff. Now, you see it all over,” she noted.“It's a low-cost investment 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,” according to Ms. Harris-Ferrante.

Nationwide's iPhone application and the subsequent follow-upwith insurers USAA and State Farm are huge pieces of innovationfrom an IT perspective, said Chad Mitchell, a senior analyst withForrester, headquartered in Cambridge, Mass. They create a mobileplatform and deliver self-service functionality to a smartphone.

Mr. Dean also pointed to Nationwide and State Farm developingiPhone applications for claims as innovations that attractedattention to the industry, but he stopped short of stating suchinnovation is a game-changing event for insurers.

“Those technologies are available, but do insurance companieswant to spend their capital on that?” he wondered. “Unless it'ssomething that will help them control costs in the short- andmedium-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,” said Mr. Mitchell. “Tome, that would be the flagship piece of innovation, at least from acustomer-facing perspective.”

However, he added, if the innovation in 2009 is looked at inaggregate, in his view it wasn't a standout year.

Ellen Carney, also a senior analyst with Forrester, explainedthat innovation 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 said.

Another is social networking–Twitter or Facebook, or whateverthe next networking piece is going to be. “Whether [insurers] jumpin with both feet is a little unclear as the whole idea remains abit foreign to them,” she said. “The third area where there is alot of interest and some trepidation is cloud computing. There is ahuge amount of fascination with that.”

Cloud computing–a general term for anything that involvesdelivering hosted services over the Internet–has drawn interest asinsurers try to reconcile how much money they have invested overthe 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,” said Ms. Carney. “[Cloud computing is] anew look at something [IT departments] have done and beencomfortable with for awhile. Are we going to see policyadministration in the cloud any time soon? Probably not–it's morearound applications than what is really running the business rightnow.”

Four out of 10 auto and life insurance policyholders use someform of social networking on a monthly basis, according to Mr.Mitchell, although he noted that could be as little as once-a-monthposting to Twitter or Facebook.

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, hebelieves, the highest advertising spend in the category–has 7,000Facebook followers for its gecko mascot and 3,000 Twitterfollowers.

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,” recalled Mr. Boyd. “We have a development team in-house thatworks with the ISCS product, and we saw an opportunity to enhanceand improve the process. We had some excess resources, and intalking with [ISCS], it had some need from pending customers tobuild things 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.Mr. Boyd pointed out that ISCS benefits from some extra depth inits engineering 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 said.

Such an arrangement depends heavily on the basis for thepartnership, according to Mr. Boyd.

“Is it a vendor that is interchangeable and has no compellinginterest in your strategic success, or is it a partner to whom youcan explain the challenges and with whom you can do somethingtogether?” he emphasized.

“We have a handful of partners. They are able to come to us eachyear and ask what our pressure points are this year and how canthey assist,” he said. “It could be restructuring arrangements,spreading payments, delaying some deliverables, speeding up somedeliverables, or what we did with ISCS, which is a nontraditionaltype of partnership.”

IT SURVIVAL MODE

Budgets for 2010 are going to be flat, predicted Ms. Carney,which once again will affect innovation in the industry. However,“flat budgets are better than down budgets,” she added.

Mr. Mitchell joked that “flat is the new up.” But some CIOsForrester has spoken with indicate if there is businessjustification for a project or a demonstrated return on investment,they have the ability to get the money for it, he noted.

The new Obama administration and the financial services scandalsof late 2008 created uncertainty in terms of regulation for theinsurance industry, Ms. Carney pointed out. “You wonder where thepressure might be from a budget standpoint to relieve some of theregulatory compliance initiatives,” she said. “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, Ms. Carney said. “Frankly, thereis some skepticism on vendor-produced ROI, so carriers are going torely on more objective sources. There needs to be more disciplinein ROI calculation. If there is a business case for an innovation,insurers will move forward with it.”

Mr. Mitchell believes insurance strategy groups are working oninnovation projects based on efficiency and cost-cutting. “They arenot looking for revolutionary innovation; they are looking forevolutionary innovation that helps them reduce costs,” he said.

The onus is falling squarely on IT departments, according to Ms.Carney. “We published a report in terms of what insurers were goingto be spending money on,” she noted. “We found it interesting tosee the number of IT shops that were responsible for drivingbusiness innovation.”

2010 PLANNING

Ms. Harris-Ferrante doesn't see a big shift in budgets headinginto 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 reported. “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-added services anddifferentiation, so those projects that were considered nice tohave in 2009 are going to be funded in 2010,” predicted Ms.Harris-Ferrante. “That's a big signal the industry is going to getback to a more competitive and innovative culture.”

The insurance industry is in a stabilization period, Mr. 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 Mr. Dean, will be afocus on improving operational efficiencies.

“It's a great opportunity for CIOs to look at the applicationand support systems and be proactive in working with the usercommunity and bring things to the table that increaseefficiencies,” he said.

“A lot of companies are maxed out production-wise. The currentstaff has had to accommodate the reduction, and to add morebusiness is going to be problematic,” he added. “If CIOs can comein with ideas on how to eliminate inefficient processes, maximizethe technologies they have and increase capacity of the operationalstaff, that will be a big win for them corporately.”

Mr. Dean believes the economy has stopped its slide–but justbarely.

“Wall Street improvements don't necessarily mean the economy hasimproved; it just means the opportunity to make money on the stockmarket has improved,” he said. “That's good news because itincreases consumer confidence, but from what I've seen, the economylags behind [the stock market].”

The bottom line, he said, is “CIOs are going to have some timein the first part of next year to work with the user community tobe proactive and increase operational efficiencies, so when thegrowth finally hits, they are prepared and ready for it.”

TOUGH DECISIONS

In Arrowhead's experience, the insurer had a tougher time in2008 than in 2009, recalls Mr. Boyd. “This year has been a bit of arebound for us,” he said. “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.”

Mr. Boyd saw signs in 2009 that 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,” he added.

That said, the overall economy still will have to brightenfurther, suggested Mr. Boyd, noting that 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,” said Mr.Boyd. “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 to Ms.Harris-Ferrante. Some companies were forced to look at outsourcingas they tried to find cheaper ways to maintain systems or fill gapswhen they let people go, she added.

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

Robert Regis Hyle is associate editor atTech Decisions For Insurance, part of Summit BusinessMedia's P&C Magazine Group, which includes NationalUnderwriter.