On a Roll

From our perspective, spending is going to be slightly on the increase, says Piyush Singh, CIO at multiline carrier RLI Corp. He believes the insurance industry is getting to be a fairly soft market. What really is imperative from an IT standpoint is we have made significant investments in our infrastructure from a distributed computing standpoint, he says. When I say infrastructure, it is application as well as hardware. As we start to reap the benefits, the business community realizes the investments being made definitely bring in tremendous productivity benefits for the long haul. From that perspective, we are looking into new areas of opportunity we had not looked at before and definitely warrant a level of investment.

Were looking at pretty good growthabout 6.8 percent growth in insurance IT spending, which is not too high but not too shabby, either, asserts Susan Cournoyer, principal analyst, global industries financial services, at Gartner. Were looking at a decrease in internal spendingless money being spent on internal staff. We have that forecast coming down 3.2 percent in 2005. This is in response to some of the global sourcing. Thats a part of the equation where the prospects are less bright. Some of that money is transitioning to spending on systems integration, IT outsourcing, and business process outsourcing [BPO].

Saccocia states TowerGroup expects just slight increases in spending for insurance IT. Theres some uncertainty as to whether were in a soft market or a hard market, she says. We still advocate trying to normalize that market so operational efficiencies can drive better pricing strategy. What wed like to see is some diligence in the way dollars are spent. There still is some work to be done in understanding the maintenance budget and putting through some of the same stringent controls [insurers] have placed around development projects so they can allocate more to spending on new technology and start to reduce the expenses around maintaining existing systems.
This can be done by documenting the business processes, she believes, looking for bottlenecks to break down and taking a hard look at how [insurers] can streamline much of what they do.

Weve got a lot of technology supporting a lot of business processes, she says. At some point, you have to ask, Why do these business processes need so much technology?
Blomquists estimates from Data-monitor fall somewhere in between those of Gartner and TowerGroup. Its not going to be a massive increase, he suggests. Were probably looking in the neighborhood of four percent, which is slightly higher than what we saw from 03 to 04.

Shopping List

So what is on the shopping list of insurers in 2005? Cournoyer predicts some substantial increases in the BPO space. Thats starting from a pretty small base, but growing in double digits each year, she says. There also is some increased spending on IT outsourcingthings such as data centers, some security outsourcing. She forecasts insurers will be spending on more areas specific to the industry. Were seeing an increase in interest in spending on underwriting, she says. Theres ongoing interest in spending on channel management. There is interest in claims management and policy administration. A lot of that work in those core systems is what is driving this increase in BPO.
Gartner is hearing about some plans that will take place around automating underwriting, Cournoyer reveals, al-though she adds there were a lot of hard lessons learned in the late 1990s resulting from dramatic, big-bang projects. Its much more common to see projects in these core system areas being carved into chunks and addressed in three- to six-month time frames with a larger plan in place, she says.

Blomquist sees increased interest in architecture transformation projectsmovement toward straight-through processing, workflow automation, and componentization in large core areas such as policy administration and claims. Were seeing a greater uptake in Web services and the establishment of service-oriented architectures, he notes. What we saw before was a lot more in terms of rationalization. Companies are doing what they can to cut down on the legacy infrastructure and the siloed nature of their back office. Were seeing a progression from that rationalization to more of a standardization and then a componentization along that flow. These are all things I would categorize in the area of efficiency or business growth as opposed to cost cutting.

Blomquist contends the huge core areas for insurersclaims for P&C providers and policy administration for life insurerswill lead the way in 2005. Were seeing the biggest cost centers as taking the lions share of the investment attention, he says. I would say companies are going to be looking at doing something such as BPM in claims but maybe not going all the way out to third parties and integrating into some kind of Web portal. [Decisions] still are going to be about targeting the most critical areasand every insurer has to determine them on its ownas opposed to the end-to-end claim scenario.

Singh has noticed the industry is in agreement strategic advancements are necessary, but he understands cost pressures dont always allow carriers to do as much as they would like. Componentization is an important strategy. Weve made a significant investment in document management, so weve handled that part of the house completely, he says. Our claims operation is fully document flow. If you look at the [claims] gamut, it goes all the way from litigation management to subrogation to third-party adjusters. You can do a component-based implementation, or you can find some larger hit in there. The possibilities are there. The impact that can be had, even on a small point basis, can be significant.

Good Partners

With more spending on the horizon, part of a carriers spending strategy in 2005 or in any year is to find the right partner to do business with. That is not always achieved, according to George Napoles, executive vice president, information technology, at Jackson National Life, who has found his own relationship with some vendors sometimes can be erratic. His company has established good relationships with some vendors, such as CSC, he says, but he has run across too many vendors that think they know more about running his business than he does and push for the carrier to make changes the carrier doesnt always need. Many say they listen to us, but what they really do is they use the listening opportunity as a selling opportunity, he says. Im on the advisory board of other vendors where ostensibly youre supposed to help set direction. Almost invariably [the advisory boards job] is not to set directions; [the vendors] tell you what they are going to do.

He doesnt see things improving in that regard, either. In our situation, its one of the reasons we change vendors more frequently than wed like, he says. Changing vendors is not painless, but there are occasions when, because of the direction your current vendors are taking, there are other [vendors] that have a better offering that fits with your systems. You just bite the bullet and change. Weve made a number of changes over the last four years just because of that.

Insurers and vendors have to look beyond inking the deal, Singh believes. Someone gave me this example, and I really like it, he says. When you have a long-distance runner running, hes not looking at the finish line and the tape. Hes looking 20 feet beyond that as the target, so when he reaches the finish line, hes at full momentum. I think negotiations with a vendor are very much the same. If you are all bent on who can win in inking the deal, then nobodys going to succeed. But if you are bent on how you are going to succeed in a partnership, then you truly will find a good partner.

RLI has been lucky in terms of having good partners to work with, according to Singh. If [other parties] tell me my solution will have no problems, I tell them they are lying, he says. There is no solution that does not have issues. But if you can sit across the table and work through the issues to both parties satisfaction, thats the commitment I need from people.

Role of Outsourcing

Another popular option for insurers has been to purchase outsourcing services, according to Cournoyer. She believes some of the work that will be leaving home this year will focus on an insurers core systems and their ability to tolerate changes in volume. Options include dealing with external providers to buy services, such as staffing during busy periods. Those tend to be fairly short-term projectsthree to six monthsthat tend to happen back to back, she says. A small chunk of work will go out and be completed, and then a follow-up proj-ect will commence quickly.

The bigger carriers are starting to see the pressure crunch of outsourcing from a cost standpoint, Singh believes. A lot of them have done significant outsourcing of their efforts, he says. Part of that has brought back some availability for some of them to make investments in a strategic direction internally. While the maintenance and some of that work has been outsourced, some strategic investments also have come about because [outsourcing] has provided [carriers] leverage to be able to do [the work] without dramatically increasing the cost.

There always is some ebb and flow with the outsourcing market, Cournoyer points out. Our clients, right through the [Presidential] election, and all the people we talked to, were continuing to sign outsourcing agreements, she says. We do see a fair number of agreements that are fairly secretive. For instance, vendors can describe contracts they are working on that can be substantial in some cases, but the client has gone to great lengths to ensure essentially no one in the larger market knows they are doing this. I think its a matter of companies understanding outsourcing has some public liabilities associated with it. So, they make decisions, but then they pursue them in private. Theres actually a fair amount of that going on.

Ear to the Ground

No one is throwing money at IT, Cournoyer sums up. Its certainly not like the late 1990speople are using a lot of different ways to do due diligence on their investments, she says. They are asking for much more data from [consultants] regarding the IT budgets of their peers in the industry or the industry at large. They are doing more benchmarking and have much more awareness of what they need to do to stay competitive. I think its that fine-tuned awareness of the competitive nature of ITwhat their peers are spending and how IT could either contribute or detract from their business success.

Those factors are what lead Gartner to believe there are underpinnings for some moderate growth in spending in this sector, she says. Its very targeted, she emphasizes. The growth on hardware is very limited. We see a small reduction on internal services. So, its very fine-tuned in terms of making careful decisions about where they want to spend that money.
In the economy at large, the productivity statistics here in the U.S. are subject to dramatic change, according to Cournoyer, showing when IT initially gets implemented, there usually is a lag as to whether it affects productivity. It seems to take a few years, and then people start to learn how to make that IT productive, not just in terms of finishing a project but making sure people within the company can use IT, she says.

One of the big challenges in financial services, Cournoyer indicates, has been to close the gap between implementation and productivity. Insurers really moderated their spending particularly compared with banking but especially compared with the capital market segment in the late 1990s, she says. You did have some increased spending in insurance, but spending in insurance is not nearly as volatile as the spending in capital markets, which goes up and down dramatically with the changes in economy. Insurance IT spending shows some sensitivity to the economy, but to a certain extent its also fairly resilient because there still are a lot of legacy systems in this industry that are mission critical and have to be maintained and available at all times.

Insurance was one of the earliest adopters of IT, continues Cournoyer, and its never lost sight of that. Its never been a fashionable adopter of IT, she says. The industry has played with that reputation a little bit the last two years with its strong interest in offshore sourcing and even a few companies that may be taking some outsized risks with offshore sourcers as we speak. That would be the one surprise factor I would expect to see come home to roost in 2005 and 2006. There are possibly some proj-ects overseas that wont turn out the way everyone hoped.

The companies that understand what they are, who they serve, and where they are headed are the ones that are making good decisions today, according to Saccocia. There are those embarking on reengineering projects that really are investing in technology and operations and understand they need to do that if they want to continue to run profitable operations, she concludes.

The Primary Objectives

There are six primary objectives insurers need to achieve in spending in 2005 to be successful, according to Cynthia Saccocia, senior analyst in insurance for TowerGroup.

ProfitabilityWere likely to see a lot of work around underwriting, both in P&C and life, says Saccocia. It means putting through the easy risks by managing business rules and processes and then calling out the risks you need to evaluate. Thats the best way to get toward strong profitability.

Operational Efficiency[This involves] a strict look at the business processes so you understand where IT dollars are being spent and the maintenance and support of that, she suggests.

GovernanceFrom a business perspective, we definitely encourage insurers to get the chief compliance officer at the same table as the COO and the CIO so theres a better understanding of pending legislation or potential risks and what those impacts may be, advises Saccocia.

DistributionWhat are all the tools? What are all the needs? And how do you get them working all together so youre not running disparate projects? she asks. What is the framework necessary to have good distribution that can improve the P&L?

Customer serviceWe view that as service to both the distributor and the policyholder, says Saccocia. What are the things that are important to run and manage customer service and all the communication methods available to individuals today?

OutsourcingYou have to have strict governance and someone who understands the nuances of outsourcing, she adds. Outsourcing not only can drive down costs associated with processing, but it also has substantial benefits in the profitability of a company, not just from a cost perspective but also from a tax perspective.