One question the industry analysts from Novarica invariably receive when they visit insurance carrier CIOs is this: If technology is getting cheaper, why isn't their technology expense ratio going down with it?

The simple answer, according to Matt Josefowicz, partner and managing director of Novarica's insurance practice, is insurance companies are doing a whole lot more with technology today than they used to.

Josefowicz explains that if there was such a thing as a unit cost of IT capability, that cost would be going way down while the volume of work being done in insurance IT departments would continue to rise.

"We see that insurance IT budgets are either holding flat or increasing," says Josefowicz. "We see very few companies decreasing their IT budget, but on the other hand they are getting more from their investment than they used to."

For Josefowicz, it's simply a matter of the technology getting better, cheaper, and more effective.

"[Technology] has driven up productivity across the economy and the insurance industry is no exception," says Josefowicz. "It's also become much more a core part of every process now."

If you think of the way insurers handled underwriting decisions 15 years ago versus the way the decisions are handled today, Josefowicz points out more of today's processes are automated and most of the information is digitized—either starting that way or becoming that way through the processes.

"Computer technology plays a much larger role in every process within insurance," says Josefowicz. "Certainly much more than it used to. Companies are supporting this massive increase of technology capability without massively increasing technology budgets."

The Novarica study ("Growth of IT-Enabled Capabilities and IT Budgets 2004-2011 at U.S. Insurers") doesn't focus on salaries paid to IT team members, but Josefowicz doesn't believe technology salaries in the insurance industry have outpaced the rest of the economy.

"I haven't done a study on that, but I think companies have been creative over the last decade in strategic sourcing, blended sourcing, and making sure internal salary costs represent the highest value for what they are spending," he says. "[Insurers] are bringing in less-expensive external providers whenever they can."

Josefowicz believes part of the increase in capabilities has to do with the maturation of software products available today for insurance carriers.

"Companies are building less and buying more," he says. "There's no doubt about that. There are companies that are still successful with component-based builds and there are certain areas that are more likely to be built or built on tools rather than be purchased as a mature off-the-shelf application. The greater capability of package software providers is one of the things we've witnessed."

As far as finding any surprises in the report, Josefowicz maintains it was important to document the expansion of capabilities across the board.

"We knew that was true anecdotally, but we wanted to put some numbers behind it to show that companies have dramatically increased their capabilities," he says. "You can argue with the scaling factor we put on it, but you can't argue with the fact companies are doing a whole lot more with IT than they did seven years ago or even 15 years ago."

Josefowicz concedes the scaling metric used by Novarica in this report could be considered arbitrary. The premise of the scaling metric was that deploying a new capability is harder for insurers than expanding an existing capability across additional lines of business.

He adds that expanding it from most lines of business to all lines of business represents an additional incremental effort on behalf of the carriers.

Josefowicz cites as examples of the new demands the amount of real-time information, the fact transactional capabilities are available in the field in many cases, data is more accessible throughout the enterprise—both customer and risk data—and the increased use of third-party electronically-provided data for both underwriting and claims.

"The industry has been transformed by the application of information technology over the past decade," says Josefowicz. "Even more so, I think, than in the previous decade."

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