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Sharon Cooper, Selective's senior vice president and director of communications, adds, "All of these tools we've been putting in place in a more soft market help us to hone in better on which accounts you can price to keep in a softening market and which accounts you are more willing to let go should you need to because you have much better information available."

Ruffalo points out a lot of national writers, especially those that write on the coastal areas, have been making a killing in 2006 with no hurricanes to deal with. "At the end of the day, their cash balances have grown, and they can be a lot more aggressive in cutting prices," he says. "We're seeing more competition coming in from the national writers into the midmarket space because there isn't the huge ebb and flow you see on the coasts."

Analysts at BearingPoint are expecting technology spending to increase in 2007, according to Paul McDonnell, senior vice president, managing director, and insurance segment leader for the consulting firm. "We've seen some degree of pickup in '06 and continued increases in spending," he says. "There is a lot of pent-up demand across the board."

McDonnell observes many carriers stepping up to solve some of the core issues they face. "We're seeing a tremendous amount of spending around policy administration systems," he says.

There's a new breed of policy administration system providers that have come to market in recent years, McDonnell remarks, and these vendors are getting significant traction in the market. "They have solutions that are completely architected on the latest technologies," he says. "Some of them are using Java J2EE, and others are using .NET. They are offering solutions that are highly configurable. Policy admin is the big area we are seeing both for property/casualty companies as well as life/annuity companies."

Budgets for 2007 should remain steady at the 2006 levels, predicts John Del Santo, managing director of the insurance industry at Accenture for North America and Asia-Pacific, although in some cases carriers may hold back a part of their spending for a quarter or two to make sure the business is operating appropriately.

Del Santo anticipates more spending on strategic initiatives than he's seen in many years. "The initiatives typically are around core systems functionality," he says. "I see a lot of dabbling in SOA-type work, building out services, and investing in the infrastructure and architecture. Typically, that's part of a bigger core system replacement–claims or policy."

There is a slight increase in investments among carriers for front-end systems, such as agency automation and call centers, Del Santo believes. The spending might be less in the enterprise space–HR systems or financial systems–with a bit more bias to the core business, he adds.

There will be continued investment to support growth, to meet the market demands of time to market for new products, and for rapid distributor service in 2007, Josefowicz contends. In addition, he expects there will be more carriers on the life side looking at core systems. On the property/casualty side, he notes a little bit more caution among the large carriers with the anticipation of a softening market. "Some of the large P&C players may be deferring their projects and dialing it back a little bit," he says. "The smaller carriers still are spending aggressively because they know they have to catch up."

The Celent staff is seeing the ratio of budgets for maintenance/new project edge down to 60/40, which Josefowicz feels is a big improvement over what it was a few years ago when the ratio was 70/30. However, large companies are being more conservative toward new projects, he points out. "It's not like they are going into the deep freeze and the total cost-cutting mode they were in a few years ago, but it's a little more conservative," he says.

The drive to reduce maintenance costs is consistent across every company, according to Del Santo. One particular method involves the use of strategic sourcing. "I don't know of any company that doesn't have a significant sourcing approach to taking their maintenance costs down," he says. But Del Santo also is hearing clients talk about their aging work force and how they don't have the domain expertise coming up through the ranks that knows the core systems or the old legacy systems. "[Outsourcing] isn't necessarily about saving money; it's just as much about our ability to modify these systems over time," he says. "We have to transition that knowledge to someone else. Quite a bit of it is offshore, a lot is onshore."

The downside to outsourcing arises when carriers fail to focus on their operating model in IT, Del Santo warns. They run the risk of adding a lot of redundancy to the process. "There is a short-term incremental benefit to outsourcing. After that, companies have to do a good job of designing what the IT operational model for the future looks like," he cautions. "If that hasn't been thought through fairly well, it can lead to not terribly sustainable source savings."

Sourcing is driving down maintenance costs significantly and has the opportunity to drive them even further if IT groups would take more of a transformational approach to it, advises Del Santo. "We see that a lot in the banking and the capital markets space, but not as much in insurance," he says. "A few companies have moved maintenance offshore to a third party and focused their internal talent on strategic initiatives, architecture-related projects, project management, or big-change initiatives," he says. "Most insurance companies are taking more of an incremental approach to third-party sourcing."

Selective has a couple of retiring applications the carrier currently outsources offshore. It also uses offshore development in a targeted way, Connell explains. "All the business and design requirements are developed here," he says. "The development of the code is done offshore, and then it is shipped back for testing and integration. We're careful to protect our intellectual capital."

The carrier prefers to do outsourcing in a targeted way. "I've heard analysts talk about outsourcing, and I've seen numbers that indicate people are moving in one direction and other numbers that indicate people are moving in another direction," says Connell. "Clearly, something is happening because there are a lot of people in India writing programs."

Many carriers are looking for opportunities to reduce costs, affirms McDonnell. These carriers are focusing on data center consolidations and server consolidations while moving efforts such as application maintenance offshore. "I don't see outsourcing picking up, but I see it continuing at its current pace," he says.

A comparison of the U.S. marketplace with the rest of the world shows the insurance industry has done some consolidation, McDonnell reports, but there still is a long way to go. "Often, a lot of that is the driving force behind cost reduction," he says. "Two companies merge, and they expect to be able to gain economies of scale through the merger. Many companies find it takes two or three years to integrate their operations, and much of that is related to the products the various companies support–especially in the life/annuities side, you can't retire products overnight."

Another target for potential cost reduction is the high degree of redundancy in carriers' existing systems, McDonnell continues. "You have insurance companies with 15, 20, 25 policy administration systems," he says. "There are companies pursuing dramatic reductions in the amount of administration systems as a way to reduce costs."

Successful insurance companies marry IT with business, states Ruffalo. "Business needs to lead the charge, and IT needs to be there to support the business' wish list," he says. Ruffalo feels fortunate to be at the table with business leaders for strategic discussions, and he has the support of the company's CEO. "Our CEO wants to continue to leverage technology as a competitive advantage," he says. "I'm seeing a constant pressure to deliver products faster, and that's one of the biggest challenges we have: How do you keep refining your processes to roll up new products, new states, and new twists to your bag of goodies you have available for the agents to sell?"

Looking to expand its markets has been one of ACUITY's key goals over the last several years, and it will continue in 2007, according to Ruffalo. "We have been growing agency forces in new states," he says. "Our model is to carve out the middle part of the U.S. We leave the coastal areas alone."

One of the new initiatives being put in place at Selective is known as the knowledge management program, notes Connell. There are three pieces to it, starting with predictive modeling. "We've built predictive models for a couple of our major lines of business, and we are continuing with models for the other lines," he says. "That helps us identify the right price for a particular piece of business by looking at various characteristics."

The second piece of the system is a business analytics component. Selective has moved its data from the transaction systems to the data warehouse, and from the data warehouse it is moved to various data marts, explains Connell. From there the data goes to various online analytical processing cubes. "It allows the project managers in our business units to look at the various pieces of business in a variety of ways over a long period of time," he says. "We have a lot of history built into the warehouse. It allows us point-and-click access to information over the entire book of business."

The third component is what Selective calls decision support. The information on predictive modeling and the book of business is delivered to the desk underwriters in the carrier's regional offices and to the agency management specialists, each of whom works with 10 or 12 agencies. "That gives them real-time access to information to price the risk correctly and to look at the various characteristics of the business," says Connell.

"Insurance companies have tremendous amounts of amazing information," adds Cooper. "We're putting this information together in the most useable way possible and getting it directly in the hands of the people at Selective who are making the business decisions."

While IT organizations are sold on the value of service-oriented architecture, Del Santo isn't sure whether their business partners are convinced at this point. "[The business side] wants to see something first," he says. "We haven't seen that business case yet." Del Santo is reminded of the craze over middleware some five years ago. "A lot of money was spent, but it's not clear a lot of money was saved [with middleware]," he asserts. "The insurers we work with are taking a practical approach with more incremental, architectural changes to expose services to different parts of their business. [But SOA is] likely to have a dramatic impact over time. I don't think it's going to be overnight. But insurers are spending money on it. Anything they implement now, they want to be sure is SOA compliant."

Josefowicz has seen SOA projects in a lot of places but feels there is a diverging perception around Web services. "If you are talking about XML soap messaging, a lot of people are doing that," he says. "They have reusable message points, and they are leveraging them to integrate internal systems and [connect] with partners."

More than half of the respondents to a recent Celent survey are using Web service messaging in one way or another, reports Josefowicz. However, "if you look at the second level and ask how many have a true enterprise service architecture, that number gets very low," he says. "I think the days of investing for the sake of architecture are few and far between." Carriers are using Web services and SOA as a tactic in their architectural strategy, and very few have a massive project to upgrade their infrastructure to a services infrastructure. "There are very few checks being written for pure architectural plays," he says.

Last year Selective implemented what it calls its xSELerate product, which is a collection of products the carrier uses to connect the agency management systems to Selective's policy writing systems. In using it, agents can enter information once in the agency management system, and the data is sent into the carrier's commercial lines automated system so the policy is quoted in real time. "If the policy is going to be issued, most of the information already is in our policy system, and [agents] can jump on and finish the rest of the interview," says Connell. "That's part of an overall strategy we put in place about four years ago when we brought our policy systems into a real-time environment. Ease of doing business was the driver for that. There are a lot of carriers that build good systems, but they build them for themselves, and then the agencies and employees have to learn how to use them. We really get feedback from CSRs and employees on what is most efficient for them and build the systems that way."

Ruffalo believes there will be continuing pressure to find connections with independent agents. Since ACUITY does all of its business with independent agents, he indicates the carrier's focus is to do whatever it can to make life easier for the agents. "At the end of the day, it really makes a difference," he says. "If you have systems that are always available, consistent, responsive, and easy to use, it's hard to lose those agents unless your pricing is way out of whack. We focus a lot of our energy on making sure we can support the lifeline. They are the glue that puts everything together."

One other change in the market is the consolidation of technology vendors. Larger insurance companies generally view this as a positive, according to Josefowicz, because the companies with innovative, small applications will have deeper corporate pockets when they are purchased by larger vendors. This raises the comfort level for large insurers. Some of the smaller carriers are concerned about the trend, though, especially when their favorite small vendor gets rolled up and they may no longer be an important client to that vendor.

"There's a lot of private equity in play," says Josefowicz. "A lot of the big companies are definitely out there shopping. It's going to be interesting to see what turns up. I think there will be a lot of activity this year. By the end of '07, I don't think there will be anything interesting left to buy."

Despite this and other changes, Josefowicz predicts 2007 to be a repeat of last year, a forecast he finds largely positive. "Last year was a year of strategic investments to build capabilities for growth," he sums up. "I think that will continue." TD