Information Technology spending is always under scrutiny,but how do insurance companies view their IT spend considering thecurrent economic conditions?

When analyzing the IT spend overall, the majority of companiesthat participated in a recent study conducted by Ward Groupanticipate an IT budget increase for 2010 compared to 2009. The ITbudget as a percentage of gross premiums written was projected tobe near 4.5 percent in 2009 and is anticipated to grow five toseven percent in 2010. About half of the growth is attributed tothe increases in IT budgets and the other half is driven by theexpected decline in premium for 2010. Interestingly, the Ward's 50high performers benchmark performed 25 percent lower in IT expenseto premium. While the Ward's 50 group of companies has invested intechnology at the same rate as the overall benchmark, they have notbeen affected to the same degree by declining premiums as theoverall benchmark.

While companies believe in the value provided through ITorganizations and are choosing to invest in their IT operationduring these trying economic times, they are selective about whereto invest. IT leaders are making reductions in certain functions toprovide for investment in other functions. By evaluating staffingand expense growth expectations in each IT functional area, thereis some interesting insight as to how common issues are impactingthese investments made by insurance companies.

IT Functions with Increasing Investment
Telecommunications investments have particularly grown over thepast two years and are expected to increase again in 2010. Of the44 percent of companies increasing expense in telecommunications,the average increase is 7.3 percent. VOIP systems tend to be thelargest investment. The current telecommunication systems for manycompanies are unsupported or obsolete. As a result, many companiesare looking at full scale VOIP implementations, escalating thetimeline and cost.

The function with the largest number of budget increases isapplication architecture and design. In fact, 52 percent ofcompanies expect an increase, compared to no companies expecting adecrease in expenses. Insurance companies are investing more onexternal spend (i.e. consulting) rather than increasing staff. Newsystem projects and visioning of the future system architecturealso impact budget increases. The rationale for the new spend isoften built on the potential to simplify the technology stack anddrive out long term IT costs.

Approximately one-third of companies are increasing investmentin data warehouse activities with the goal to leverage theirinformation into actionable data. This function continues to beinteresting to analyze. Companies are in all stages of development,but almost no company is ignoring the need for better businessintelligence.

The information security and disaster recovery functions alsohad a significant number of companies expecting increasingexpenses, 40 percent and 44 percent respectively. Most of theexpense increase is expected to be external rather than increasesto staffing. On the disaster recovery side, Ward Group has seen atrend of companies recovering their distributed environmentinternally rather than using a third party provider. This is morecostly in the short term, but will provide additional reliabilityand flexibility.

Mixed Results
Companies are in variousstages of their server virtualization initiatives, causingincreases or decreases to expenses depending on where they are inthe process. Ward Group typically sees a spike in expenses when acompany begins a server virtualization initiative for softwareacquisition and related consulting. Once the project is inmaintenance and the company has reached their virtualization goals,the costs decrease and efficiencies can be obtained. On average,insurance companies have 40 percent of servers virtualized.

In the Application Development and Maintenance functions,companies also reported mixed results. These functions are oftenproject driven and reflect the company's position in the cycle ofdevelopment. One of the current challenges presented to ITorganizations is to reduce the amount spent on non-discretionarywork or maintenance activities. This challenge is occurring at atime when many companies are adding new systems without thesimultaneous elimination of the legacy system(s). As a result, themaintenance burden for the company increases to maintain moresystems with fewer resources. This practice is anotherjustification for the necessity of legacy system retirement.

IT Functions with Expense Reduction
Oneout of five companies are expecting reductions in budgets ondesktop support for 2010. Some of the contributing businesspractice factors for the decrease are the decreasing cost of PCequipment, longer refresh periods, and more evaluation of the useof virtual desktops or thin client devices (lower unit cost andlonger refresh period).

Another function experiencing decreases is Mainframe Support.About one fourth of companies expected decreases in the MainframeSupport function. One driver is that companies that are eliminatingthe mainframe and moving systems to the distributed environment.These are lengthy projects averaging 5 years to complete. Of thecompanies that are committed to the mainframe platform long term,they are achieving cost reductions through renegotiating hardwareand software contracts.

Conclusion
Despite aggressive expensereduction initiatives, insurance companies continue to invest ininformation technology where business value is provided. Companiesare challenged to target the areas of the IT operation that bestalign with corporate strategy and maximize their IT investment.

Ward Group recently conducted a study of property-casualtyinsurers relating to 2010 Information Technology (IT) investmentsand system replacement activities. The purpose of this survey wasto provide guidance on the status of IT spending trends for 2010and the degree of new system implementation at property-casualtyinsurance companies. In addition, Ward Group identified keyspending trends for major IT functions and specific initiativesthat are being funded in 2010. Contact Leah Hollstegge at[email protected]for more information about the 2010 Information TechnologyInvestment and Systems Replacement Study or purchase the completestudy on-line at www.wardinc.com.