Picking Up the Pace

Insurance IT leaders and analysts have thrown the often used and by now very familiar word caution to the wind for their spending forecast for 2006, focusing instead on an optimistic view technology projects will pave the way for improved performance over the next 12 months. “I think 2006 looks a lot like 2005, and 2005 was a very welcome change from 2002 and 2003,” says Matt Josefowicz, group manager in the insurance practice for Celent.

Budgets in the early years of this century proved to be tight before the environment began easing up in 2004. “Things started to open up a little bit more in 2004, and 2005 was a lot more open,” comments Josefowicz. “I think 2006 will continue that trend. The Y2K/dot-com boom is not coming back, but insurers are continuing to improve their infrastructures and their systems, and they understand there is no way to achieve competitive advantage without corresponding systems investment.”

At Grange Insurance, CIO Charlie Carter indicates the carrier is not increasing its IT budget a large amount, but it is not going backward, either. “We are making some major investments heading into 2006,” he says. Among those are initiatives in business intelligence and business continuity–areas insurers only dreamed about three years ago but didn't have the resources to invest in.

TowerGroup doesn't anticipate much shifting from what it forecast last year. “We don't see any major changes,” says Cynthia Saccocia, research area director in the insurance division for TowerGroup. The reason for this, she claims, is there haven't been any major events that require substantial investments or substantial increases in investments. As attention-getting as were the industry issues in 2005, such as the hurricanes and the criminal investigations in New York, none of them had an effect on IT spending, she contends. “Those [events] are concerns of the CEOs and the line of business heads, but we're yet to see some of the things that occurred in 2005 turn into any substantial changes for the industry to make a sweeping investment that would drive industry spending,” says Saccocia. “Without a substantial shift, there is nothing being adopted every competitor needs to have. Demographics haven't altered dramatically such that new products have to be built that only a certain type of application could support. There is no triggering event that says IT spending wouldn't be commensurate with inflation or net premium growth, such as the Internet bubble and Y2K.”

Since each institution is going to be making decisions about its IT spending based on its individual needs, Saccocia asserts it's difficult to ascertain key trends for the industry. “We've tested much of our IT spending projections over the course of 2005 in a number of different forums, and we still believe the breakdown by category is going to persist–about 38 percent on maintenance, 32 percent on development, and 30 percent on software/hardware/networking,” she says. “We feel pretty strongly less than 10 percent of the development budget is being spent on innovation.”

For 2006, Saccocia predicts IT spending in the industry will be $38.2 billion of which, she estimates, property/casualty insurers will spend $18.1 billion and life/annuity insurers will ante up $20.1 billion. She claims TowerGroup analysts have been testing these numbers at many industry events with little argument from industry leaders. “Everybody's pretty clear: There's not a lot of nondiscretionary dollars to be spent on development,” she says. Most insurance carriers tend to run their IT spending budgets at between three percent and five percent of net premium written, she observes, with about 50 percent of IT costs personnel related.

Celent's Josefowicz agrees IT spending in 2006 will see no major shift from 2005. “I think '05 was a very strong year in terms of building for growth and making strategic investments,” he says. “The pure cost-cutting mind-set of a few years ago has been pretty much laid to rest. Obviously, cost takeout is a strong concern, but as we look at plans for '06, there's a greater concern for building for growth and for meeting market demands. Whether those market demands are better service, faster turnaround for information requests and transaction requests, or getting new products to market more quickly, we see a lot of emphasis there.”

However, IT budgets still are growing in single digits, Josefowicz continues, essentially tracking overall industry company growth. “[IT budgets] are not outpacing company growth or lagging behind it too much,” he says, agreeing with Saccocia most insurers set their budgets as a percentage of premium but stipulating the average is 2.5 percent to three percent of premium. “Our average growth figures [forecast] for IT are around five percent to seven percent, but those basically are tracking premium growth,” he says.

Celent continues to expect a focus on policy administration systems and other core systems among carriers (see “Power Toolbox,” p. 16). “Those are the biggest projects and tend to dominate in terms of dollars spent,” notes Josefowicz. “But they are not the exclusive focus. I still see a focus on document and content management.”

Over the past year, Republic Group has had several initiatives under way to improve what Glenn Headley, CIO, calls the foundation systems. Among the changes are a new billing system to replace the old mainframe-based system and a new commercial lines rating and policy-issuance system, which he believes is a substantial improvement over how Republic did commercial lines before.

Most of Republic Group's investments in 2005 and moving into 2006 have been with the intention of either rebuilding those foundation systems or adapting systems with new functionality so the carrier can invest and build systems that give it a competitive edge. “We have a lot of money and effort going into Web-based systems, which we believe are a necessity for the industry to transact business,” says Headley. “By putting transactions out to the point of sale, you take some of the costs out of processing those transactions–and that's good for us, good for the agents, and good for the insureds. It also speeds up transactions.”

Data projects will come to the foreground this year, according to Josefowicz. “If 2005 was the year of the policy administration system project, I think 2006 is the year of data as a strategic asset,” he states. “We see a lot of investment in business intelligence and data warehousing. We see investment in data standards, Web services, and enterprise data models. As insurers continue to focus on profitability, they need to know what is happening inside their enterprise.”

He'll get no argument from Grange, where one of that regional carrier's major projects this year involves business intelligence. “It's an extension of our data warehousing project we've had going on in 2005,” says Carter. “We've decided to make a major investment in [BI] going into 2006.” The project involves taking what Carter calls terabytes of information and turning them into useful information. “We're placing heavy emphasis on things such as predictive modeling for the purpose of being able to cross-sell among our property/casualty company, our bank, and our life company,” he adds. “We're producing new credit-scoring models off our business intelligence. We're trying to analyze the characteristics of our drivers and change the way we order our MVR reports.”

Grange scratched the surface of this in 2005 with a data warehouse the carrier developed over the last couple of years. The results Grange has received from this process, Carter claims, have opened the company's eyes to the possibilities that exist in the future. “We are in the process of making a major upgrade not only in hardware and software but in some of the approaches we are taking, such as predictive modeling and some of the other ways we are looking at our historical information,” says Carter. “One of the things we never had the ability to do before was to combine our multiple companies together and look at them collectively. This has offered us real opportunities in the area of cross-marketing.”

TowerGroup analysts have noticed some increasing interest in business process management and the use of applications in that area along with front-office investments in data integration and rules-based technology to support underwriting, according to Saccocia. “I think the activities over the course of [2005] in catastrophe management have brought new issues to the table, such as re-looking at disaster recovery plans,” she says. Catastrophe modeling and using predictive analytics are two practices insurers need to examine closely, she adds.

Grange has done most of the work on its data project in-house with IT working closely with the business units. “We've hired business analysts and product managers in those areas, and we are doing a lot of drilling down into our data to try to understand what we have,” reports Carter. Grange has used a phased approach. “We don't look at this as being a one-year or two-year project,” he says. “We look at this as being an ongoing application.”

Most of the Republic initiatives are associated with some form of vendor system rather than being internally developed, explains Headley. “Those systems have taken a little longer to implement than we planned,” he says. Reasons for the delays include problems the vendors had that called for a reallocation of resources by the vendors to fix their internal problems.

Headley contends any time you have long-term projects–and he defines long term as over three months–those projects become fluid in nature, and you must recognize the scope of the project is going to change over a four- or five-month period. In his opinion, carriers have to be willing to accept some changes in business requirements as they enter the process of developing a solution. “That's the biggest challenge anybody faces when trying to put in a significant system,” he says. “You have to adjust accordingly. That tends to have an impact on the planned delivery date.”

Companies are trying to balance both the long-term and short-term view, Josefowicz believes, focusing on short-term projects that will deliver business value quickly but lead into a longer-term enterprise strategy. “If there are different units in the company trying to do, say, business intelligence for their own purposes, they need to make sure they are all on the same page and have a common platform [with other units] that eventually will lead to an overall enterprise strategy,” he says.

The length of projects has changed, as well. Josefowicz points out in 2001 and 2002, any initiative that didn't have a cost takeout justification wasn't getting approved, and ROIs were tight. “Most companies today are not requiring six months or less for ROI,” he says. “More than half of our large respondents and even a good number of our smaller respondents say they are willing to live with 24 months or more, and the majority is between 12 and 24 months. People are not fixated on the six-month payback anymore.”

Republic Group has demonstrated efficiencies in its personal lines area, in particular where 100 percent of business comes in on the Web. “We still continue to enhance our personal lines system, but we've been focusing on using the same business model–what people are calling straight-through processing–with some initiatives that will do the same things for our commercial lines area,” says Headley. “We hope we will get the majority of our straight-through processing automation deployed for commercial lines in 2006. We've spent a lot of time and effort [in 2005] on it, and deployment will begin [this year] with additional development line by line.”

Carter is proud of Grange's agent portal–grangeagent.com. “We plan on making some further enhancements to that, including integrating our data warehouse with the agency Web site and giving agents access to their data, providing them with some statistical reports, and letting them do some modeling and cross-selling,” he says.

Saccocia believes the Web offers a few things necessary for insurers to maintain a competitive advantage. “First and foremost, [carriers] have to deal with distribution automation for new business–integrating producers, customers, and the insurance company,” she says. Additional investments are required in front-office tools–data capture, business rules, and creating an environment based on ease of use and efficiency–to attract and maintain the most profitable agents and their customers, she suggests.

“Mega-insurance companies are very focused on retention of high-value producers,” says Saccocia. “They may tend to use things such as utilities and automating a lot of the data exchange. The large niche regional insurers, when it comes to retention, are focused on market-share gain, determining what it is going to take to attract new producers and retain the ones they have. A mega-insurer can go buy a block of business and solve some of its problems, but the large niche regional insurers really have to differentiate themselves.”

In P&C, Saccocia believes areas such as catastrophe management, regulation, profitable growth, and capital management are interesting. “There is real opportunity for niche regional insurance companies,” she says. “Whether that's a niche in product or a niche in a particular area of the country, there are some real opportunities being crafted because the mega-insurer can't afford to support some of this business nationwide.”

Republic Group went public in 2005, which created a new set of problems, particularly in the area of compliance with the Sarbanes-Oxley Act. “Most insurance companies if they are public still are wrestling with Sarbanes-Oxley issues and spending a great deal of time and money on the SOX issue,” observes Headley. (For more on Sarbanes-Oxley compliance, see “The Road Ahead,” p. 16.) Republic started its SOX initiative in January 2004. “The date of our public offering was very unclear at that point, but we knew we were going to do it eventually,” he says. “We thought we could do it inside, but we realized after a couple of months there was no way we could do it without outside help, so we looked around and found a consulting group we liked.”

As have most companies, Republic has spent a lot of money and effort on SOX, and it's not over yet. “Whether you are a brand-new company or an existing public company, at this point in time, everybody still is wrestling with Sarbanes-Oxley,” he asserts. “Some companies are further ahead than [Republic], but now they are wrestling with the second year.”

Compliance will continue as a major track, as well, Josefowicz believes. “Insurance companies are not so much worried about rogue employees doing naughty things; they are worried employees inadvertently will lie to a regulator because they don't know the truth,” he says. “For large companies, data is a larger problem, and they are being more aggressive in addressing it, but it also is an issue for a lot of smaller companies.”

Grange also will invest heavily in business continuity in 2006. “We have a large platform of servers and a large mainframe,” says Carter. “To try to develop a business continuity plan is just a nightmare.” Grange has developed a game plan and is in the process of putting it in place for 2006. “It's very expensive to do this because we're actually generating a second data center,” says Carter. “In the old days you would ask, 'What are your critical systems?' and those would be the ones for which you would provide backup at an off-site location. Today, all our systems are so integrated. You can't remove one from the other, so it's easier to leave them together than pull them apart.”

Headquartered in Columbus, Ohio, Grange will have its second site also in Columbus in another data center. The decision to keep the backup center in the same city was the best way to provide backup, Carter claims. “We are creating an entire data center, and we will be mirroring all of our production in a synchronous mode,” he says. “There are some mileage limitations on synchronous mirroring that required we stay within a 50-mile radius. We are converting over to a storage area network solution and do 100 percent mirroring between the two data centers, and that will allow us to switch production from one data center to another. It's very labor intensive and very expensive.”

The next five years are likely to be difficult for CEOs, Saccocia believes, as insurers look to survive issues such as competitive advantage, catastrophe management, regulation, profitable growth, capital growth, demographics, and strategic resource management. “To survive over the next five years, you have to have investments in what it is going to take to increase revenue, decrease expenses, and drive shareholder and policy value,” she sums up. “Status quo is not going to be a leading strategy. Good enough is not going to give you the competitive advantage of ease of use and efficiency for producers. Producers will find the top-tier carriers they are going to do their commoditized business with. They then will seek small niche insurance companies to provide them with the unique value they need for their select customers. That's reality.”