Policy-administration system replacement remains a top priority for insurers in 2012, particularly for large and midsize carriers, according to Matt Josefowicz. However, it is less of a priority for smaller carriers.

“That’s partly because small insurers have fewer systems and may not feel like they can afford a newer system,” says Josefowicz, partner and managing director in the insurance practice at Novarica.

There aren’t that many policy-admin solutions available that aren’t a huge drain on a smaller carrier’s budget.

“If you are a $50 million insurance company, you may have a total IT budget of $4 million,” says Josefowicz. “If you are going to try to replace a policy-admin system, the cost might take up your total IT budget for the next two years.”

Smaller carriers instead tend to focus on issues that are more tactical—at least until their policy-admin-system issues become too pressing.

In its report on U.S. insurer IT budgets and projects for 2012, Novarica found many carriers rated their systems as being poor in quality. Josefowicz believes carriers in turn are looking at where they can obtain the greatest improvements in these systems on a short-term basis, such as enhancements. Such a plan may be both less expensive, Josefowicz says, and advantageous from a risk-management perspective.

“It’s generally viewed as lower risk to enhance something that’s already in place rather than to go through the transition of replacing a system,” he notes.

He explains it is difficult to lump all insurers into a particular bag, because the marketplace is diverse in terms of the state of capabilities at different insurers.

“Carriers may see different areas as core, but if you look at the business drivers—growth, operational effectiveness, competitive parity—and look at the business capabilities, which mostly are around speed-to-market, distributor service and business intelligence, that’s how those goals translate to technology-enabled capabilities,” he says.

When Novarica asked insurers to cite their top project areas for 2012, predictive analytics was one of the lowest rated on both the life & annuity side and the P&C side—no matter the size of the insurer.

“It’s not in the top three for most insurers because being able to implement a predictive-analytics model depends on strong rating, policy-processing and transaction-processing capabilities,” says Josefowicz. “But that doesn’t mean insurers aren’t doing analytics. I would hazard a guess it is a driver for policy-admin projects that include rating and underwriting systems so the additional predictive models can be implemented. The need to support predictive analytics is one of the things that drives other larger projects.”

Josefowicz doesn’t like to make bold predictions about what lies ahead in insurance IT because he sees the industry dealing more with incremental change, as opposed to massive change.

“I think the problems are well known, the challenges are established, and the solutions, in most cases, are understood,” he says. “People are engaged daily in the struggle. It’s not glamorous, but it’s absolutely necessary.”

Josefowicz believes that is why issues such as social media and mobile technology got so much attention in 2011.

“Those pieces of technology are not necessarily expensive. A lot of what is going on in those areas relates to leveraging investments that were made for real-time Web,” he adds. “On the other hand, having an inflexible administration system, rating engine, agent portal or claims environment that doesn’t allow you to do new things is going to hold you back from being able to leverage the value of mobile and social media.”