Its nearly impossible to find any unqualified good news in the financial arena when it comes to the coming year. Given the uncertainties in the economic and political climates, forecasters not surprisingly cant seem to agree on whats coming. A study conducted earlier this year by researchers at TowerGroup, a Needham, Mass.-based consultancy, predicted IT spending for property/casualty insurers would rise six percent in 2003 from $13.1 billion this year to $13.9 billion next. But the Boston research group Celent Communications, in its recent report, claims IT spending for both life/health and property/casualty will rise from $18 billion to $19.3 billion in 2003. Considering Celent claims 51 percent of insurance IT spending occurs on the life/health side, it would seem the numbers from the two reports dont match up very well. Still, both indicate some amount of upward trending expenditures.
Analysts are cautious in their predictions as well. Each positive point they make is followed by a caveat their predictions could turn 180 degrees without much warning. For instance, Kimberly Harris, research director for Stamford, Conn.-based Gartner, Inc., predicts the insurance industry will improve by the second quarter of 2003 but quickly adds political problems could change any optimistic outlook. Howard Rubin, executive vice president at META Group, based in Stamford, Conn., says IT spending in insurance will go up percentage-wise but notes thats because revenues are down, and IT budgets have already been scaled back as far as they can go. Jack Gohsler, senior vice president at Hartford, Conn.-based Conning Corporation, sums it up best: Its really hard to get a thread simply because you have a lot of companies in a lot of different positions.
Harris doesnt see a great deal of improvement very soon in the financial services field. Its our belief that, if anything, well see small increases in IT spending and the economy within financial services and [the environment] becoming better in the second quarter, she says. How much better? Its very minimal at this point. Within that limited IT budget we see a shifting of resources and investments. What Im projecting for the insurance industry next year is strategy reassessment and realignment.
She points out any further terrorism issues in this country could make market predictions worthless, but if homeland security holds up, so will the economy. Were going to see some increases in the second, third, and fourth quarters, she says. But I dont think it is going to be anything dramatic.
At presstime, Gartner and Conning were completing their reports for 2003, while META had published 2003 Worldwide IT Benchmark Report. Rubin says insurance IT spending has gone up 3.9 percent over the last two years, but that is because the insurance industry is hitting the wall with falling revenues. As a percentage of revenue, IT spending will likely go up again in 2003, he says. But revenues are down, so real dollars are down as well.
Rubin says he sees no scenario where IT spending will go up wildly in 2003. Essentially, it will be flat next year, he says. There isnt anything that will likely spark IT spending. The only message we have is it will be either flat or down.
What that means is insurers have to examine closely what they do over the next 12 months. If you look at the earnings of some of the big technology providers, Gohsler says, I think you are seeing overcapacity. Revenues are falling significantly from what they had been.
Insurers continue to spend very carefully, Gohsler adds. One of the things I dont think youll see is insurers cutting their technology costs significantly. He believes there is a strategic advantage to be gained by those who invest today. Insurers are going to spend cautiously, but they are going to spend, simply because there is an opportunity to benefit from it.
Harris believes costs are going to be consistent this year and budgets will remain about the same. Im not seeing huge increases or huge decreases, she says.
What she is seeing, though, is insurers turning to projects that will directly affect them in the short term. More people are spending money in the CRM [customer relationship management] software area and taking funds away from somewhere else, she says. One classic example is of some pilots going on for wireless a year or two ago, but a lot of them were cut because the companies dont consider that something they need for survival.
The Buck Stops Where?
Companies have decided to go back to the basics in 2003, notes Rubin. Any project must have a definitive ROI, he says. Failing that, companies will be forced to back off on projects.
Technology and the business side will be tightly coupled this year, Harris believes. Business is going to look to increase revenue, decrease inefficiencies, and reduce the cost of operations, she says. They will be looking for technology that helps them meet those goals.
One option might be outsourcing. Gohsler says a recent study he came across reported that approximately half of all U.S. businesses were doing some type of outsourcing, but only about 10 percent expected to increase the number of functions outsourced. He believes that having success with outsourcing will lead to greater usage but doesnt think it is necessary for companies that are keeping up with their systems.
If you are weak, you have to strengthen your position. If you are already strong, you have to maintain it, he says. If youve updated a lot of core applications and youre fairly efficient, and your technology expense ratios are fairly much in line, the need to outsource is less than if you have high expense ratios and youre dealing with a lot of legacy applications.
Rubin adds the real problem with outsourcing is getting value out of it.
As for what companies will be spending on, Harris predicts a greater increase in technology that works on the front end, which includes a refocusing on CRM. When CRM first came about, the insurance industry was not quite sure what it meant, she asserts. What Ive seen is a complete shift to where its distribution management, focusing on how you can increase skill sets and give more technology and support to agents, brokers, and traditional channels.
Gohsler believes partner relationship management (PRM) is the direction in which many carriers will be heading. More and more companies are opening up their Web sites to allow customers to get access to policy and claims data, he says. Its faster, more customer friendly, and more efficient. By partnering with distributors, carriers can offer quicker quotes on policies, and policy changes can be received electronically.
Insurers are starting to recognize the power of the Internet, Gohsler adds, and agents no longer have to fear that e-commerce will run them out of business. In the majority of cases, carriers are trying to partner with agents because the agents can provide better customer service.
Thats not to say insurers would refuse to deal with a better mousetrap. Distribution is a significant expense, he says. Its also a significant success factor. If someone could do it right [selling electronically], it would be tremendous. Selling direct without compromising underwriting would be a big factor.
In the life insurance field, such PRM has been translated into wealth management. Carriers are trying to have their insurance agents and producers do more financial advisory services, says Harris. To do that you can see why they would need greater technology and greater training on the front end.
Containing Two Kinds of Risk
A crucial area for improvement this year will be more stringent underwriting, according to Harris. With these drivers going on in the economy and in the market, carriers are going to be forced to return to the basicsbeing able to contain risks through better underwriting and taking some of the manual underwriting out of there and making it more technology supported and enabled, she asserts.
Gohsler says his discussions with insurers have made him believe there is a great deal of interest in commercial underwriting automation for the property/casualty industry. But such interest doesnt always mean there are mature solutions available. One of the things weve found in the P&C arena is there is a paucity of major applications that fit needs, he says. There are one or two vendor names being mentioned, but it seems there is a lot more work being done internally.
Gohsler believes insurers would opt for a commercial application if it filled their particular needs. A lot of companies are telling me they are spending a lot of time seeing whats in the marketplace and testing, doing the due diligence, he says. But I havent heard a lot of people express a great deal of confidence the vendors have what they need.
Another area for spending that could prove critical is security. Spending money for security will only affect a companys survival if the business comes under attack. But with companies today opening their back-end systems to partners and customers, the danger becomes greater. Security is something youve got to do and do well, Gohsler says. There is an increased risk because of the nature of the way insurers are operating today. Fortunately, he doesnt think it will require a great deal more spending, but that doesnt mean its not important. Privacy and security are not things that are debatable. You have to have the highest degree of security. It gets a higher profile because risk is increased.
Harris believes underwriting will be a key initiative in 2003, but she also feels another area that will be closely watched will be the back-office functions and a companys infrastructure. Companies are so overwhelmed by the tactical survival mechanism they cant break out and think strategically when it comes to some of the long-term architecture or infrastructure requirements, she says.
The Rich Get Richer
A tight economy is tough for large and small businesses, but Harris believes there are more opportunities available today for larger carriers than for the regionals. If the top companies invest in the tight market, they can get some market advantage, she says, adding the larger companies can afford to proceed with projects while their smaller counterparts sit out the hand. The market is really scary at this point because smaller companies really have no options. The gap between the big ones and everybody else is getting wider and wider.
In the past, that led to larger companies swallowing up smaller ones, but Harris doesnt believe there will be a great deal of mergers or acquisitions over the next year. Companies were acquiring other companies for a number of reasonsmore customers, more productsthen they realized they couldnt cross-sell, and there were more political battles internally, so they didnt really get anything accomplished by these acquisitions.
What Harris is hearing from the smaller and mid-size companies are plans to differentiate themselves in the market. She explains: Most of them are taking the banking model: Lets be small, hold our customers hand, and provide them really intimate types of services. They are trying to focus on something that could make them different from the large guys.
Rubin asserts finding ways of growing your business in a tough economy is difficult, but insurers are fighting back. Insurance is under a strain, but [the industry] has changed as it gets into CRM and wealth management, he says. Future success will be based on the experience it gains there.
The top five IT priorities for U.S. companies:
1. Reduced costs
2. Business alignment
3. Increased productivity
4. Project management
5. Improved software quality
From Meta Groups 2003 Worldwide IT Benchmark Report
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.