If insurance analysts didn't invent the term cautiously optimistic, they should have. A viewpoint expressed often, it's as important a part of the lexicon at this time of year as "Happy New Year." IT budgets appear to be headed up, if only slightly, and considering the fact the property/casualty insurance industry is dealing with a softening market, there could be worse news for insurance IT leaders.

Craig Weber, managing director of Celent's insurance practice, finds there are exceptions on each end of the spending scale, though. "If you look at responses to our CIO survey, there are hot wires on either end of that scale, so you could be looking at a 10 percent budget decrease or a 15 percent budget increase at individual companies," he says. "Overall, I think the industry is two to three percent on the rise."

Larry Danielson, principal with Deloitte Consulting, also contends IT budgets will see slight increases for 2008. "We really don't see a big increase," he says. "People are focused on the growth topics." The wild card for the industry this year, in his opinion, involves regulatory issues. "Even though a lot of people talk about being prepared and doing the right thing from a regulatory perspective, I think they largely wait to the point where they might have a problem," he says. "If there are surprises this year, that's where we'll see them."

Barry Rabkin, senior research analyst for Financial Insights, an IDC Company, doesn't personally believe in spending studies and adds insurance companies shouldn't care that much about IT spending patterns, either. "What insurance companies should care about is how they [need to] reshape the marketplace so their competitors have to react to them–[a] get out of the herd approach," he says. "At the end of the day, how they are going to compete successfully is by providing more innovative products and services and better customer service."

Still, Rabkin indicates spending is headed up. "I think it's up because of the need to improve continually claims management and to have more efficient product development," he says. "I think we'll see much more spending in analytics and in collaborative technologies. The innovators will use location intelligence to better target their specific density of risk, customer service, and product development."

There is a significant amount of investment being done in Web services, Weber notes. The reward of this is the subsequent uses of those services will provide savings. "A lot of carriers seem to be at that point where they have something in production today and they are adding lines of business or functionality based on the infrastructure they've built," he says.

On the life side, Weber sees the focus being centered on support for distribution. He expects increased interest in the use of Web services for new business, particularly aimed at improving the distribution service experience. "The target still is some combination of end customers and end producers, but there is an awful lot of pain in the new-business process that needs to be addressed," he contends.

There are substantial differences in the directions taken by life insurers and those on the property/casualty side, according to Danielson. "When I look at the life carriers, I think they are going to be focused on modernizing the back office," he says. "There will be more money spent there." For P&C, though, Danielson feels more emphasis will be put on call centers and customer service–front-office activities.

Rebecca Amoroso, vice chairman and U.S. insurance leader, Deloitte & Touche USA, asserts carriers are more focused on technology today as a primary enabler for the objectives they want to achieve. "Whether it is using technology to enhance automation with your customer–the agent, broker, or policyholder–companies are looking to upgrade how they are doing business, automating the underwriting process, and becoming easier to do business with," she says.

Microsoft views the influx of data into the enterprise as a significant factor for 2008. Cynthia Saccocia, regional director for Microsoft, points out data technology is more advanced today, but it comes down to making sure the data you have is in good shape and is acceptable to the business users in the way in which those users want to consume it.

According to Mike Silva, also a regional director for Microsoft, most reasonably sized organizations have some type of data store, data mart, or data warehousing capability under way. The next stage for these insurers involves the ability to come up with the same version of the truth senior executives see from a dashboard perspective and the line-of-business managers study to make tactical decisions. "We believe spending on business intelligence will be at the top of most organizations' budgets, especially those that believe technology is a partner in running the business," he says. "Organizations that are laggards in the BI approach will be seriously disadvantaged as unstructured data streams start to come in over the course of the next few years."

SOFT MARKET

Karen Pauli, a senior analyst with TowerGroup, is among those concerned with the soft market in commercial lines. Compressed margins will cause insurance carriers to take a second look at technology expenditures, she believes, in particular knowing where carriers spend their money and how much is invested. Some carriers that were looking at investments in strategic development for 2008 are going to reassess that position, she remarks, and instead take those dollars and push them to places where they can improve their bottom-line margins.

For the most part, profitability has been good throughout the industry, but Weber anticipates the issue will be pricing in the P&C market. "If [softening] continues, it will put a lot of pressure on budgets," he says, adding there's at least a 12-month delay as the planning process takes into account the business cycle. "At this point, budgets are reflecting an overall healthy, active environment," he says. "We'll see whether that holds true for next year."

After speaking with carriers at a recent conference, Pauli found they still were in the market for solutions but were searching for tools that focused on very defined needs. "They were walking up to a vendor and saying, 'We need A. We don't need B and C; we just need A.' Carriers will spend the dollars, but it has to be exactly what they need," she says.

It looks as if 2007 is going to be another good year for the industry in terms of catastrophe spending, according to Amoroso. But following the even better results of 2006, the industry has to deal with softer prices, which in turn means competition is going to get tougher, which will impact profitability. "If you look at what companies are trying to do–create a competitive advantage for themselves, grow profitably in the P&C space and product development in the life space–technology is imbedded in all of that," she says. "There is significant opportunity ahead, and I don't think tech spending is going away."

Don West, vice president of client services for State National Companies, can be counted among those worried about the softening market. "I would think for the whole industry that's the bigger issue in 2008," he says. "Are we going to repeat the insanity of the last soft market? It appears we are. Prices are softening across almost every line."

Good years for insurers in 2006 and 2007 are attributed to a lower number of wind storms in the U.S., and with profits up, capital is looking for a home, observes West. "Carriers don't want to write CAT-exposed policies and are looking for other lines to write, so you have a little bit too much capital chasing too little premium," he says. "What happens? The price changes. It becomes about price, and that's never been good for the industry."

West adds insurers always deal with tactical and compliance issues, calling them "the price of entry into the business," he says. "The bigger issue, though, is how the industry is going to meet budget in 2008 from a pure underwriting standpoint without chasing down prices."

Traditionally in the soft market, businesses have skimped on maintenance work, and Pauli believes history will repeat itself in 2008. "When you take a look at a typical IT budget, 33 percent of the budget is going into maintenance," she says. "That's too many dollars. When you are faced with compressed margins, you have to fish or cut bait."

PRIORITY LIST

Policy administration and how property/casualty insurers deal with customers from a policy life cycle standpoint are the top business issues for property/casualty carriers in 2008, reports Kimberly Harris-Ferrante, research vice president, Gartner. "There still is interest in some of the old-fashioned stuff–policy admin and claims never go away," she says. "They are ingrained." The Internet also is a hot business topic, she continues, particularly how products are sold online and how self-service is conducted. "You see things around customer service are moving to the top," she says.

Nevertheless, technology priorities, which Gartner gathered for a recent report, center around architecture, Harris-Ferrante indicates. That outranked policy administration and claims systems. "This gives us an idea it's not just about buying a silver-bullet system anymore," she says. "Just because they buy a new policy admin system, that's not going to answer all the problems. How do you link the systems together? How do you create an architectural strategy that will allow better system-to-system integration? And how do you create a common technology platform that allows you to do things in a seamless electronic fulfillment manner?"

On the life side, Harris-Ferrante states the number-one business priority is data information management. "There is an overwhelming recognition data information is scattered and not necessarily stored with the ability to aggregate," she says. "Companies believe they need to focus on managing the data."

She believes customer intelligence is hard for life carriers to produce because it relies on the accessibility of data and requires good modeling techniques and clean data. "What this exemplifies is [life carriers] are going back to the basics and focusing on the foundational pieces," says Harris-Ferrante. "They need to get those things right."

Additionally, Harris-Ferrante observes XML and ACORD are among the technology priorities for life insurers. "Companies understand they really have to look at how they can do straight-through processing through the use of XML and standards," she says. "It's been inching its way up the list, and this year it has made a big jump."

COMPLIANCE ISSUES

Financial Insights lists its strategic initiatives for insurance from a global perspective, which helps explain why the consultancy differs with other consultants on what is to come in 2008. For example, Financial Insights lists regulatory compliance as the number-one priority, particularly because the prospect of Solvency II is hanging over the heads of European and Asia/Pacific insurers. "Last year compliance was number three [on the list of priorities]," says Rabkin. "It's jumped to number one because of Solvency II. The carriers that responded to this survey feel they have to get ready for Solvency II even though the deadline has been pushed back to 2012. Insurers are developing their operations as if they were under the requirements of Solvency II."

One area of compliance that's not new and is getting more focus, according to Amoroso, is enterprise risk management. "This is largely driven by the rating agencies, and carriers care what the rating agencies have to say," she says. International financial reporting systems are gaining more attention as the industry pays more attention to the international front, she points out. Security and privacy also have received increased attention in terms of making sure the data is secure and the use of the data is appropriate.

COMPANY ASSESSMENT

MetLife recently conducted a state of technology assessment both from an internal perspective on how the carrier was delivering to its customers and from an external perspective on where IT stands in the marketplace, looking at the business implications against IT capabilities. What the carrier discovered, according to Janis Egelberg, vice president, enterprise management solutions for MetLife, was the carrier's customer demographics are shifting from asset accumulation to asset distribution as the population ages. "We have a lot of shifts from employers, where they are no longer providing the benefits, to employee-paid benefits," she says. In addition, with MetLife's acquisition of Travelers Life & Annuity, there has been an increased focus on the independent distribution channel and the capabilities, opportunities, and challenges it presents. "When you look at those types of business shifts, you take a hard look at MetLife's IT capabilities and ask: What are the implications for us, and what are the opportunities for us?" says Egelberg. "The opportunities are things such as agility of our software development process, flexibility, cross-channel integration, increased mobility of our work force, and new product development. Looking at the business shifts, asset distribution opens tremendous opportunities, and speed to market is something we take a hard look at. Those trends drive IT capabilities."

LIFE WORRIES

With the baby-boomer generation reaching retirement age, Danielson points out there is a great deal of money that is going to be in the marketplace, and it will have to be invested. Coming up with products that are part protection, part growth, and part investment are going to be important for life insurers.

However, Danielson doesn't believe insurers have figured out the proper direction yet. "People are going to be looking at insurers for the answers," he says. "Some of the investment houses have proven themselves to be riskier investments. The boomer generation is going to look for insurers to get it right."

Danielson contends technology has a huge opportunity to make a difference in this area. "It has to do with the ability to introduce new products, service them, and do all the things in the back office once business is solidified, with people managing and moving their money around," he says. "Insurers have not worried about that today, and they're not good at it, but I think they have to get good at it. That money's coming, and like it or not, insurers are going to have to make some moves."

Egelberg believes MetLife is addressing the boomer issue. The carrier created a group solely focused on the issue–the retirement strategies group. "What we are looking at is how we package and bundle our products and services so we can provide our customers not only the benefits of life insurance but asset accumulation and distribution," she says. "We're coming up with new products and new ways to speak with our customers in support of the changing demographics."

Joe Brand, vice president, enterprise IT architecture for MetLife, feels MetLife primarily focused on tighter linkage from IT to the business. To do that, the enterprise architecture program needed enhancement. "The missing link was understanding how IT supported the business and how the drivers of the business would impact the IT environment," he says.

The first step was the creation of a common framework the entire architecture community within MetLife would use to link directly to the business. "With the framework in place, we believe we have the ability to assemble quickly business solutions to meet market demands," says Brand. Some of the reference architectures MetLife focuses on are SOA, collaboration, and business process management as key enablers to get the carrier into the competitive landscape quicker than its competitors, he adds.

BOOMER WORKERS

The employee population is a focus for the coming year at MetLife, according to Egelberg. "It's not even about baby boomers retiring," she says. "It's about knowledge management. It's capturing the knowledge of our applications, our systems, and our data." She notes any time a company loses an employee, it is faced with knowledge issues. At MetLife, Egelberg contends it's a constant driver to capture the knowledge of systems and applications.

"We're calling it corporate memory. It allows us to bring on new associates more effectively and provides rotational opportunities across our business lines," says Brand.

"Being able to deliver that knowledge around our information systems and applications has led to a key initiative this year: streamlining our internal processes and the capabilities of people to communicate and collaborate more effectively within our organization," says Egelberg.

Amoroso also sees the changing face of IT departments as an issue and believes the more tech-savvy carriers are the ones that will attract younger workers. "We are heading toward a talent crisis in general, and Generation Y is tech savvy," she says. "Insurance is not necessarily the first industry they think of joining, but they are attracted to technology-type jobs. Companies that demonstrate they have upgraded their technology are those that will enable more traction from that group."

Silva contends the expectations younger workers carry from their personal lifestyle as technology consumers mean the digital lifestyle is going to carry over into a digital workplace. From an employee retention standpoint, companies that fail to anticipate the needs of the new generation of workers will be left wondering where the top talent has gone.

GOOD THOUGHTS

Egelberg sees opportunities rather than challenges for 2008. To deliver on MetLife's vision, she reports governance, speed to market, investing to reduce the complexity of the IT environment, and continuing to build the capabilities to support the business are four areas of focus for the carrier. "A lot of companies have a challenge looking beyond the fiscal year," she says. "For us, the three- to five-year plan is important because you can't build a lot of capabilities in one year."

There are a lot more significant changes going on now in the insurance industry than observers, such as Harris-Ferrante, have seen in previous years. Companies are looking at product development, call center technologies, and more strategic areas such as business intelligence and data mining. "A warning we tell our customers is it's going to be a lot of uncharted water," she notes. As they enter new areas, Harris-Ferrante points out carriers may not have a lot of experience or the knowledge of how to use these systems and the rules for these systems. "It's going to take a more stringent and careful approach because it's not going to be something that comes easy," she says. "It's going to be a good year for a lot of interesting and innovative projects, but when you go into something you haven't done before, there is risk."

Amoroso worries whether companies will capitalize on making the right investments quickly enough, since the industry historically is slow in that regard. "Those that can capitalize on making smart investments to enhance their competitive edge and become leaner will become the winners at the end of the day," she predicts.

Danielson is among those who believe the credit crisis in the U.S. could cause some problems throughout the insurance industry. "Every day you read another story about underestimating the impact [of the crisis]," he says. "I'm worried what that will do to the general climate and to the psychology of decision-making, acquisitions, and investments in the company."

Beside the normal worry about catastrophes, Danielson anticipates the economy is going to be a bigger factor for insurers in '08. "I think that has more to do with predictability than anything else," he says. "Those people who figure out better ways of dealing with information are [ahead of] their competitors. The whole information area is huge. Those who find a better way of doing that will be in a better position to run the business and grow. A lot of people, quite frankly, are running blind." TD

Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

Your access to unlimited PropertyCasualty360 content isn’t changing.
Once you are an ALM digital member, you’ll receive:

  • Breaking insurance news and analysis, on-site and via our newsletters and custom alerts
  • Weekly Insurance Speak podcast featuring exclusive interviews with industry leaders
  • Educational webcasts, white papers, and ebooks from industry thought leaders
  • Critical converage of the employee benefits and financial advisory markets on our other ALM sites, BenefitsPRO and ThinkAdvisor
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.