Insurers have generally cut IT budgets over the past fiveyears, due mostly to the economic downturn, but a comparativelybrighter outlook now should spur growth in IT investments over thenext five years with a particular focus on expanding digitalchannels, a research and consultancy firm says.

In a report, “Insurance Sector IT Priorities & SpendingForecast to 2017,” Ovum says that “the steady improvement inwritten new business across most global markets means insurers areshifting from a primarily 'maintain as-is' stance toward a cautiousre-investment in strategic IT projects.”

Ovum says it expects insurance IT budgets to grow at 6.5 percentCAGR (compound average growth rate), for a total IT spend of over$108 billion, by 2017. Much of that growth will be seen in thelife-insurance sector, Ovum says, as the global life industrysuffered more than the property and casualty industry during thefinancial crisis and therefore saw deeper cuts to IT budgets duringthat time.

Charles Juniper, senior analyst, Insurance Technology at Ovum,says in an email, “IT spend in the life-insurance market will growat 7.6 percent CAGR to reach a value of $49 billion by 2017, withthe P&C industry growing at 5.7 percent to reach a total marketsize of $60 billion by 2017.”

Priorities will center around digital channels and legacymodernization, the report indicates. IT spending in North Americaand Europe is expected to remain at least twice the size ofspending in the faster-growing Asia-Pacific region through 2017,says Ovum, but spending priorities, or at least the order ofimportance of these priorities, vary somewhat depending on theregion.

Deploying core administration systems and IT infrastructure willbe the key priority in Asia-Pacific as P&C insurers look tokeep pace with market growth and gain market share, notes thereport. Insurers in this region will also work on implementingdigital channels, particularly mobile and social-media channels, tosupport direct policyholder interaction.

For North American P&C insurers, digital-channel investmentis top-of-mind, as it helps achieve the primary business objectiveof revenue growth. While the report notes that North Americancarriers are already “well advanced in terms of online-channeldeployment and functionality,” IT budgets are expected to expand at9 percent CAGR, reaching an annual spend of $2.3 billion by 2017,to further support these projects.

Ovum notes that digital-channel emphasis for North Americaninsurers is shifting toward mobile and social-media projects.Juniper says key areas for mobility include functions such asfiling claims via smartphone—“i.e. using time and location data,on-board cameras, etc. to submit an accident report”—and usingsmartphones as a vehicle to offer usage-based insurance (UBI).

North American insurers will also focus on core administrationand claims-processing systems to improve operational efficiency,Ovum says.

Juniper says, “The complexity, cost and risks of managingmultiple systems that have grown up over time to overcome theshortcomings of legacy systems have reached unsustainable levels.”But he acknowledges that pressures to address this reality areweighed against limited investment budgets. “As a result,” he says,“most transformation projects will be incremental, such asconsolidating the number of core legacy systems down to one (or atleast a small number), followed by a migration to a modernplatform, probably one functional module at a time (e.g. replacethe underwriting engine first, then maybe the claims moduleetc.). Most transformation project for large insurers willhave at least a three-year and more typically a five-yeartimeframe.

In Europe, Ovum says the “relatively muted state of the…non-lifeinsurance market as economies in the region remain fragile meansthere is greater focus on cutting operational cost compared toother geographic markets.” As such, Ovum says IT projects will befocused primarily on improving operational efficiency and customerservice through digital channels, and improving claims expensesthrough fraud detection.

Ovum notes that European insurers are, in general, less advancedin the area of digital channels than North American carriers, butthe gap is expected to “rapidly diminish as deployment of onlineportals and mobile channels emerges as a key priority from 2013onwards.”

For IT vendors, Ovum recommends focusing on insurance chiefinformation officers' current priorities: digital channels, legacymodernization and regulatory compliance. “While IT budgets areexpanding and there is a growing demand for vendors that are ableto support complex transformational projects, insurance CIOs remaincautious,” says the report. Vendors therefore need to engageclients around the “key insurance priorities,” and even then,vendors should expect the sales cycle and decision-making processto remain protracted.