We are only a month into the new year, so it's too earlyto determine what type of year this will be for informationtechnology professionals working in the insurance industry. Onething is certain, though, insurance carriers are relying on theirIT departments more and more each year and that is evidenced by theincrease in technology spending that several industry analysts haveforecasted for this year.

These increases in IT investment bode well for insurers,particularly among carriers where the business side has come tounderstand—and embrace—the significance of IT enablement, accordingto Deb Smallwood, founder of Strategy Meets Action (SMA).

In its spending survey for 2012, SMA learned over one-third ofinsurers plan to make a significant investment in IT this year.

One reason for this increase in spending is insurers havedeveloped confidence that their IT organization can deliverresults, according to Smallwood. She adds that carriers alsorealize that a failure to invest in their own systems often meansthey quickly can fall behind their competition.

"It's competitive differentiation," she says.

Data, business intelligence, and analytics appear to be featuredareas for investment in 2012, according to Smallwood,

"What we are finding is insurers are adding more lines ofbusiness or they are shifting focus—say from finance tounderwriting or a different piece of underwriting," says Smallwood."We're starting to see maturity around spending in thoseareas."

Smallwood explains that insurers aren't just making initialinvestments—many of them are re-investing in a project.

"We keep talking about the same initiatives, but [insurers] areeither going deeper or to areas like risk evaluation, pricing, or aline of business that they never entered before," she says. "Theyare taking their success stories and expanding them throughout thevalue chain."

Gartner Research sees a continuing movement among p&cinsurers toward policy system replacement in 2012 as the number ofdeals for core systems has increased each year for the past twoyears.

"Companies are facing legacy problems and the heritage of badsystems," says Kimberly Harris-Ferrante, vice president anddistinguished analyst for Gartner. "It's not the majority, but it'smore and more each year. A lot of money is being invested inpolicy, pricing engines, rating engines, claims systems, and evenbilling systems. That's definitely on the upswing."

Harris-Ferrante credits part of this movement to the technologyprogression within the industry, particularly advancements made byvendors to offer free-standing policy or claims systems that allowcarriers to purchase a single portion of the core, such as policyadministration, and not have to buy billing and claims systems atthe same time.

"Look at the progress carriers have made to go to one vendor andbuy three different modules, implement them in separate years, andhave a common integration with one single vendor," she says. "Itallows carriers to have the vision of a big replacement, but theability to do it incrementally. All of that is coming from thematurity of the vendors themselves."

Policy administration system replacement remains a toppriority for insurers in 2012, particularly for large and midsizecarriers, according to Matt Josefowicz. It is less of a priorityfor smaller carriers, though.

"That's partly because small insurers have fewer systems and maynot feel like they can afford a newer system," says Josefowicz,partner and managing director in the insurance practice atNovarica.

For a small carrier there aren't that many policy administrationsolutions available that aren't a huge drain on a smallerbudget.

"If you are a $50 million insurance company, you may have atotal IT budget of $4 million," says Josefowicz. "If you are goingto try to replace a policy admin system, the cost might take upyour total IT budget for the next two years."

Smaller carriers instead tend to focus on issues that are moretactical; at least until their policy system issues become toopressing.

"If [smaller carriers] wait long enough, a more cost-effectiveSaaS option might rear its head with a lowertotal-cost-of-ownership," says Josefowicz. "We're already startingto see those kinds of options on the market."

Ellen Carney, senior analyst with Forrester, believes thep&c industry finally is entering a hard market, which shemaintains will have interesting implications for the industry.

"We'll have to get a lot smarter about underwriting and thequality of our customers," she says. "At the same time, ascustomers receive higher bills they are going to start shoppingmore."

Carney also believes the customer base is changing and thatmeans insurers need to look for different ways to attractcustomers, women, for instance.

"How are women going to buy insurance?" she asks. "In manyrespects women are opting to remain single and we see carrierslooking at women in a variety of different lenses. The competitivelandscape is getting interesting."

Carney is optimistic because the industry has had five quartersof increasing profit.

"The volume of catastrophes the industry was able to handle andthe hardening market are exploiting why the industry is feeling sooptimistic," she says.

On the life side, Smallwood sees investments in business processmanagement and workflow as life insurers seek efficiencies in thefront office, underwriting, and distribution connectivity.

"We're seeing investments on the life side on new businessunderwriting, e-submissions, and illustrations," she says. "Thedata for life continues to be aligning products for distribution totheir customers. What products do customers buy and through whatchannel?"

On the p&c side, the number one investment area is coresystem replacement, according to Smallwood.

"It continues to be a top priority," she says. "Some carriershave implemented one line and now they are implementing a second orthey did a policy system upgrade earlier and now they are doingbilling. We also see increased attention on rating engines, productconfiguration, and product management. Portals and agentconnectivity, real-time download and upload remain top of mind aswell."

INDUSTRY CONCERNS

Smallwood maintains the most troubling challenge for 2012involves project management, particularly the need to ensure theproject management office has the right mix of business andtechnical analysts.

"We still see failed projects and it always seems to come downto the fundamentals," she says.

A second area of concern for Smallwood is data integration. Shemaintains that some carriers don't have the basic architecture inplace to hone in on the integration and create a centralized datahub.

"We need to centralize the data integration," she says.

Smallwood's third concern is portfolio simplification.

"As we continue to invest in software, we need to remove thecomplexity from application and data portfolios and develop a planto simplify the projects so we are unplugging some applications,not adding more," she says.

Smallwood continues to see insurers cut corners and she feelsdata integration issues could arise from a lack of clarity orknowledge if there are insufficient resources available tocorrectly architect the integration.

"When you buy a core system, [the vendor] is going to help youconnect," she says. "That's why enterprise solutions are takinghold vs. best-of-breed because they come pre-integrated. But evencore systems have to interface with portals and front ends and theyhave to interface with the back end and the general ledger. We'vejust got to get smarter about it."

Smallwood believes that what happens with portfoliosimplification is carriers go with a plan to replace their legacysystems and when they start to implement policy admin the projectbecomes either too expensive to implement or they look at the costjustification for some of the other lines of business and they endup keeping their legacy system for certain lines of business.

"They go in with a plan to replace the legacy systems, but theplan sometimes fizzles," says Smallwood. "It needs to be part ofthe strategy—both business and IT—to simplify. A simplificationportfolio will help reduce costs.

OTHER FEARS

Harris-Ferrante is fearful of the current trend toward vendorconsolidation, which she believes is driven, at least partly, byinsurance companies in their effort to deal with as few vendors aspossible.

"My fear is we are moving to more of a collector model," shesays. "The vendor buys a complementary technology company and saysthey have one in this bucket and one in another bucket. The beautyof going with a single-vendor, best-of-breed model is if you buymultiple applications from a single vendor carriers are not justgetting a discount for buying multiple products, but the technologyis compatible with the same foundation, architecture, and datamodel."

But Harris-Ferrante points out what sometimeshappens is a vendor acquires a company and decides against makingchanges to the guts of the system they just bought because thatwould cause problems for existing users. But if a carrier buys twoapplications from a single vendor and the products don't have thesame technical foundation or data model, it means the carrier needsto have duplicate skill sets to maintain the products, they have todeal with two architectures, and also will need to make the datamodels work together.

"It's not simple," she says. "There's no synthesis in thetechnology foundation with some of these applications. It might bebetter than dealing with two vendors from a vendor relationshipmanagement point of view, but from a technical integration,total-cost-of-ownership, and maintenance point of view, it's nothelping a lot."

Another worry for Harris-Ferrante involves cybersecurity. Asinsurance companies become more digital, cybersecurity and riskmanagement are not always top of mind for companies.

"Insurers are focusing on moving to digital, but not focusing onprotection of the digital assets," she says. "We need to move toall-electronic content—digital records and digital data andaccessing it to portal technology for customers, partners andagents—but you have to make sure it is safe and secure."

When there is a blunder and one of their competitors is on thenews , companies want to know to keep that from happening to them,but up until then it's what Harris-Ferrante refers to as,"ignorance is bliss. I fear we may have a big insurance problemwith cybersecurity. Unfortunately it will be too late for the firstperson it happens to."

Carriers will continue to march forward in 2012 with biginitiatives—customer centricity, digitalization—but Harris-Ferrantealso worries that insurers underestimate change management and theculture within their companies.

"They want to talk about the technology and the vendors, but notwith how they are dealing with things like the call center and theskill sets of the people working there," she says. "Is it going tobe a low-pay, high-turnover job? Call center is an importantchannel, but many hire low-end people."

Insurers forget how the culture of the company has to change tofacilitate the experience that comes with using the new technologyappropriately.

"It's not just buying technology and voila you are modern anddoing fancy things," says Harris-Ferrante. "When you focus on howyou are going to do things differently you have to be sure theemployees, the culture, even the incentive and compensation aredriving the behavior you want. Otherwise the technology won't doanything for you. You can't just wake up tomorrow and do somethingdifferent. You have to deal with training, employee retention,change management, employee education. If you don't take a stronglook at the role of people and process, and change management froman organizational point of view, you can't be successful."

QUALITY SYSTEMS

In its report on U.S. insurer IT budgets and projects for 2012,Novarica found many carriers rated their systems as being poor inquality. Josefowicz believes carriers are looking at where they canobtain the greatest improvements in these systems on a short-termbasis, such as enhancements. Although such a plan may be consideredless expensive, Josefowicz regards it as a risk managementissue.

"It's generally viewed as lower risk to enhance something that'salready in place rather than to go through the transition ofreplacing a system," he says.

Josefowicz points out it is difficult to lump all insurers intoa particular bag because the market is diverse in terms of thestate of capabilities at different companies.

"Carriers may see different areas as core, but if you look atthe business drivers—growth, operational effectiveness, competitiveparity—and look at the business capabilities, which mostly arearound speed-to-market, distributor service, and businessintelligence, that's how those goals translate totechnology-enabled capabilities," he says.

Josefowicz includes among those capabilities bringing newproducts to market faster, serving agents more effectively, usingtechnology to improve the agent/underwriter relationship and speedof transaction, and leveraging internal and external data throughbetter business intelligence.

When Novarica asked insurers to cite top project areas for 2012,analytics was one of the lowest rated on both the life &annuity side and the property & casualty side—no matter thesize of the insurer.

"It's not in the top three for most insurers because being ableto implement a predictive analytics model depends on strong rating,policy processing, and transaction processing capabilities," saysJosefowicz. "But that doesn't mean insurers aren't doing analytics.I would hazard a guess it is a driver for policy administrationprojects that include rating and underwriting systems so theadditional predictive models can be implemented. The need tosupport predictive analytics is one of the things that drive otherlarger projects."

Josefowicz doesn't like to make bold predictions about what liesahead in insurance IT because he sees the industry dealing morewith incremental change as opposed to massive change.

"I think the problems are well known, the challenges areestablished, and the solutions, in most cases, are understood," hesays. "People are engaged daily in the struggle. It's notglamorous, but it's absolutely necessary."

CUSTOMER SERVICE

Customer-centric projects will be a major area of focus for someinsurers in 2012. The CRM era of the 1990s was universally panned,but Harris-Ferrante points out things have changed since then. Tothat end, a number of Gartner's larger clients have begun strategicinitiatives around customer experience management, she adds.

"The next wave of CRM or customer centricity involves looking atthe experience customers can have," she says. "It includes devices,transactions, multi-channel integration, changing the variousprocesses that make them more customer-friendly, and asking thequestions: What do customers want from us and do we have the rightproducts they want to buy?"

Harris-Ferrante believes what is different today is carriers arelooking inward to determine what customers want from theirinsurance company—products, processes, technology—experiences thecarrier might be unable to offer today.

"How do [insurers] transform their company into something thatis seen more positively by their customers?" she asks. "It's acultural transformation that I've never seen before."

Harris-Ferrante believes this transformation arose from thetraditional fear of customer turnover, but also the fears ofstronger competitors, the ability to acquire new customers, andhaving the right products and prices for customers.

Some of these fears arose from the explosion in the social mediaworld over the last 24 months, particularly the transparency andvisibility of bad events. A decade ago, if a consumer had a badclaims experience, they might tell a few friends and family, butwith the power of the Internet consumers can easily tell the wholeworld about their bad experience.

"There is a growing fear and recognition of the transparency ofbad customer service," says Harris-Ferrante. "Not just how ittarnishes the brand, but how it affects existing customers and newcustomers. We've been tracking social media as a referral sourcefor a couple of years now. Friends and family recognition isstronger in power when selecting insurance products than even brandor broker/agent recommendations. That's changing the playing fieldfor companies."

IT is injecting innovation into the business side with new waysof doing things and Carney believes such innovation is creatinginterest and activity around virtualization and cloud.

She described herself as "shocked and awed" by some of theinquiries Forrester has received from tier-one carriers looking toput things in the cloud that no one ever would have imagined.

"We need to catch up with what is going on inother industries," she says. "This is the age of the customer andif we want to be competitive we have to manage our resources betterthan we have in the past and be smarter about it all."

Many carriers already have business intelligence and predictiveanalytics in place, but Carney believes they are looking to spreadusage broadly across the business.

"Carriers are looking at it more holistically," she says. "Ifthey can't get the answer out of their system there is somethingfundamentally wrong and they could lose the business. We are seeingincredible interest right now in keeping customers loyal."

GOING MOBILE

Mobile apps aren't multi-million dollar investments, explainsCarney, so they can be on the market quickly.

"If you are a smaller carrier these could be easilyimplemented," she says. "They are built and deployed withoutcosting a lot of money to compete. Even smaller, single-statecarriers are doing interesting stuff around mobile in order tocompete. Mobile and social media are the kinds of spendinginitiatives happening outside of the IT organization. It doesn'tcost a lot and [the business units] can run it themselves."

Harris-Ferrante also sees significant increases in mobility ascarriers work with existing internal applications to make themmobile friendly or actually purchase new devices. "The world isbecoming more mobile with agents and consumer-facing applications,"she says. "There's a big hike in spending there."

Smallwood remains enthusiastic about insurance IT.

"I think the combination of social media, mobile, cloud, data,and analytics are the right ingredients to transform the industryfrom a technology perspective," she says. "It's not one or theother, but a combination of all of them."