Game of Strategy

Despite the insurance scandals that rocked the first half of the year, 2005 is looking up for IT departments as carriers focus on a strategic view of the future. And the early word on 2006 is the same spending plans lie ahead.

BY ROBERT REGIS HYLE

Industry watchers often see trends where only fleeting events occur, but in the case of IT spending, many fingers are being crossed as the outlook for the remainder of 2005 and the budget process for 2006 appear promising. After a few years of slumping IT budgets, Firemans Fund has increased technology spending each of the last two years, according to Fred Matteson, the carriers CIO. Last year and this year weve been up, he says. But not in just general expenditures. Were trying to be very focused on where we spend our money and what projects we support rather than just generally allocate more dollars to IT.

The insurance industry is focusing on investments in infrastructure to integrate more of its business processes, TowerGroup research director Cynthia Saccocia believes. Some thoughtful planning and strategic vision need to take place for the business and then modeling the technology to support that, says Saccocia. Were optimistic, but were still pretty concerned about the siloed spending that persists without an enterprise direction.

Firemans Fund is taking a strategic look at what the carrier needs to do to further the companys mission, which Matteson reports is focused on changing the relationship with distributors and improving operating-efficiency models internally. We have a series of strategic investments we are making, but the net of it is the budgets are up and they are up in a specific and strategic way, he says.

Better Than Expected

At The Hartford, the 2005 budget appears to be going according to plan, Libbie Bock, CFO of e-business and technology (EB&T), indicates. One reason for this is because the carrier has been able to avoid the flavor-of-the-month mentality, notes Bock. We try to be a little more strategic when were thinking about our technology investments. There always are going to be things that come up in the middle of the year we didnt budget for, but what we are doing is to try to look at our technology investment portfolio as a portfolio rather than just individual projects.

The way The Hartford used to handle its expenditures was a technology proposal would come up, and if it looked good, it would go in the queue and be done in turn, explains Bock. What were trying to do now is spend a lot of time upfront venting out the proposals, looking at more than just the financial return but the strategic fit, she says. Then we prioritize the projects so we understand where we should be investing our money and our human capital, as well. It is part of a broader effort we are undertaking in EB&T.

TowerGroup projected IT spending to remain relatively flat from 2004 to 2005, and Saccocia is not expecting any changes to be made over the final seven months of the year. In her spending forecast for 2005, Saccocia predicted U.S. insurers would spend $36.4 billion in the IT area with life/annuity spending totaling $19.1 billion and the property/casualty side spending $17.3 billion. For 2006, she estimates total IT spending at $38.2 billion, a five percent increase. Life/annuity spending in 06 is projected at $20.1 billion, with property/casualty spending at $18.1 billion.

Compared with his forecast for 2005, Forrester Research vice president and research analyst Andrew Bartels be-lieves it is possible spending may turn out to be greater than expected for insurance IT departments this year. Bartels had predicted a flat year for insurance IT spending, and one of the reasons for that prediction was the cloud that hung over the industry last fall after revelations made by Eliot Spitzer, New Yorks attorney general, concerning broker compensation. Other insurance carriers are realizing [the Spitzer effect] is not going to be quite as broad based as we thought, says Bartels. They dont have to be quite as nervous about it. So, if anything, there is upside in the forecast rather than downside. Its more likely to be stronger rather than weaker.

In his 2005 study, Bartels found 36 percent of insurers surveyed reported their 2005 IT budgets would be higher than what actually was spent on IT in 2004. Fifty-one percent of insurers reported spending would be flat, and only 13 percent said spending would decrease.

Spitzer Effect

Saccocia doesnt believe insurance carriers support of some type of federalization of the industry or information disclosures are going to play a larger role than they do currently. Individual companies are interpreting their risks and reacting differently, she says. Some are looking to disclose as much information as possible concerning compensation arrangements, and others are taking much more of a wait-and-see attitude. Internally, they are doing better evaluations of their own policies and procedures and examining their compensation models. They certainly have been adamant that sweeping legislation is not necessary to get this situation under control, so as a result, there is no demand or drive on an industry level that is going to warrant any technology changes.

The factors that affect budgeting are the usual ones in the industry, according to Matteson. Were in a softening market, he says. Clearly there are things happening around the industry and packets around compensation that are a result of Spitzer, but I havent seen an effect in any sort of material way regarding how we are budgeted and how we think about investments.

Carriers have made some investment in Sarbanes-Oxley-type regulations in terms of transparency information, the reporting of data, and real-time disclosure. Regulation is an ongoing challenge for the industry to deal with, says Saccocia. Without federalization, insurers have every state calling on them for different things, and they end up with new NAIC model laws to respond to. When you throw all the rating agencies into the mix, all of a sudden you are answering to many masters who have different perspectives and philosophies on what is appropriate risk, how you are positioning your company, what vision and strategy you have in place, and what do your distribution and your product mix look like. Those are a lot of masters.

The ability to build new solutions as well as purchase them creates interesting budget problems for The Hartford. It affords us more flexibility, says Bock, but it could add some additional time in terms of the analysis upfront because not only do we have to decide whether to do the project, but then we also need to make a build-or-buy decision.

Matteson says he tells his colleagues they get April off in the budget cycle. We start in May with preliminary stuff, you get really wound up in July and August, you set the budget in October or November, and you take a break around the holidays, he says. You then start evaluating whether or not you budgeted correctly when premiums start getting written in January. You modify the budget either up or down in March. You take April off, and then you start again on next year.

Sharp Focus

One focus throughout the industry has been on policy administration systems, and Matteson reports Firemans Fund is right in the middle of that trend. Everybodys policy administration systems are 25 years old, he says. At this point they now become an impediment to fundamentally changing your operating model. There is business process upon business process layered on top of systems. As I talk to my colleagues, we still tend to make decisions line of business by line of business, product by productgenerally short-term fixes to get something to market rather than taking a fresh look at how you simplify your environment and put new capability out there.

In his 18-plus months at Firemans, Matteson maintains he has been committed to avoiding the easy way out and to looking at the strategic bets the carrier needs to make in a new fundamental infrastructure that will support the business. You cant tell your CEO to leave you alone and come back in five years and youll give him a cool new system, he says. You have to marry that with short- time-to-market kinds of benefits. What we are doing is taking policy processing and making an enterprise approach buying and building enterprise tools.

A key is to be focused on where to deliver the new technology first. You find passionate business sponsors who are interested in the benefits the system will give them. You deliver it for them first, but you do it in a way you are building enterprise tools at the same time, says Matteson. I call it, Think globally but act locally. You build enterprise capability, but you deliver it one business unit at a time.

Next Year

The insurance industry is looking at a continually softening market, so Matteson believes it is hard to say what 2006 will bring. But he feels certain business partners will continue to invest in technology. Fundamental changes in operating models are going to require technology support, he says. Theyve been able to skirt around that issue for a while, but I think they understand technology is an impediment to them right now, and it is going to require some significant investment, and that investment will have a huge payoff in terms of operating efficiency going forward.

For 2006, The Hartford wants to make sure the company is expense efficient, according to Bock. We will be looking at a number of initiatives for 06 that will help us in that area, she says. There always are initiatives to support revenue growth. Its a little bit harder for us to measure an IT investment on the back end. If we put a new system in place, its sometimes hard to trace back the premium that came in and say that premium would not have come in had you not made that systems change. Were trying to be prudent in making sure we can track benefits. Its sometimes easier doing that when you have a project aimed at expense efficiencies.

The industry is going to see more of the same in 2006, Bartels believes. I think it is a very good prospect budgets will be higher next year, he says. Some of the fear factors that have dampened spending will fade away. Some of the concerns about the economy will get clarified, and that will help. The carriers themselves recognize the stock and bond markets are not creating great returns and have reduced their emphasis on investment income and have tried to structure it so they are getting more revenues from premiums.

Insurers are less sensitive than they were a couple of years ago to the continuing softness of the stock market and higher interest rates reducing the value of bond portfolios, Bartels asserts. If carriers get a steady stream of revenue coming out of the premium side, they dont have to scale back, he says. A couple of years ago when the investment markets cratered, this was a real crisis for a lot of insurance carriers that had been underpricing their coverage and making it up on investments. Were not seeing that kind of pressure. Carriers by and large are seeing very healthy premium income. As a result, that is going to reduce any pressure for them to cut spending we may have seen in the past.

In terms of spending, Bartels claims data storage continues to be an issue, along with regulatory compliance, and security. I dont see the overall picture being dramatically different, he says. Maybe there will be a bit of an uptick in software spending, a little less in servers, but overall more similarities than differences.

Where to Save

Insurers have to focus on the business architecture, Saccocia believes. Carriers have to determine whether they are meeting expectations in terms of distribution, risk management, service, and pricing. Looking across those organizations, you come to find a number of common processes where a shared enterprise or some sort of integration really could take it to that next level, she says. Ultimately, you can drive only so much cost out of the silo. It comes down to componentizing some business processes and sharing across the enterprise to get much more out of your dollar. You can cut only so much, and then eventually it is going to take the next step. The next step in cost reduction is going to be enterprise integration, not for everything, but to get the basics down so you have architecture for the business process, content, data, and infrastructure. The infrastructure and data need to be far more shared than they are today.

Proliferation of products in the life industry also has to be addressed, according to Saccocia, because it has created a complex environment not only for the IT operation to support but also for the customer service representatives to handle. The touch decisions involve managing some of these closed blocks of business, she says. How do you segment your customer model so youre not providing the same level of service to everyone at the same time and you are providing optimal service to your high-volume customers? Carriers need to look at outsourcing for some of their closed lines of business, she believes. The life business has taken a bit of a back seat in technology investment because annuities were the predominant driver of premium, she says.

Matteson relates he had a conversation last Christmas with a Firemans Fund agent who told Matteson he hated to hear carriers say they are going to work to be more efficient. The agent believed that usually means more work for the agents. Many carriers have cut claims staff and processing staff, so the agents have to work harder in order to get the tasks done. I committed to him that is not what we are talking about, says Matteson. What we are talking about is streamlining the process from their office to our office and trying to simplify it for both of us. I know other carriers are doing the same thing, but I think its been a long time coming to spend some time on the fundamental operations of getting a submission identified, submitted, issued, and billed on an efficient basis. Were certainly investing in those areas.

What Insurance Does Well

An interesting trait among insurance companies Bartels has observed is carriers rank high in the adoption of what he calls IT management best practices. One example is business alignment. Insurers have business relationship leaders or business process managerspeople in the technology world whose job it is to work directly with the business side to understand requirements and make sure the business side is aware of whats available and realistic in a technology sense. The consequence of that is you have a smaller ratio of failed technology projects in insurance, he points out. Most projects have a clear business sponsor, a clear business case, and the metrics for what their goals are going to be. [Insurers] try to do things incrementally so they dont get into big projects that get out of control. They minimize scope creep, and they minimize changes, all of which reduces the cost of technology projects. Because technology budgets have been so limited, the CIOs have gotten good at squeezing every penny of value out of those budgets.

Bock feels confident in the way The Hartford examines its projects upfront. We spend a lot of time analyzing not just the financial impact but other things, as well, she says. That makes us pretty comfortable regardless of how long it will take to complete the project.