Holding steady is not ordinarily seen as a sign of strength, but with everything that has gone on in the financial services world of late, the fact that insurance IT budgets are able to stay the course says something positive about the industry and the direction it is headed.
"Budgets are holding at about three percent of premium," says Matt Josefowicz, director of the insurance practice at Novarica. The research and consulting firm joined up with the Insurance Accounting & Systems Association (IASA) for a survey of IASA membership on a variety of technology topics.
He points out the three percent figure has been the overall average in the industry in recent years and believes it is a good sign the figure is remaining intact. "I think it's a confirmation of the trend we've seen the last couple of years–people are spending on strategic projects and they are viewing IT as not so much a cost center but as a true operational expense and are willing to make investments to achieve new business capabilities," he says.
Josefowicz sees differences between today and the last difficult time the industry faced after 9/11. "People cut off all strategic projects, plus there was a significant pullback on maintenance spending," he says of that period. "Any new project spending [at that time] had to be cost justified–how we can take out ongoing expense–whereas now, more of the business cases are around creating and enabling business capability rather than cost takeout."
The study found among those carriers surveyed the most significant return on investment today is in the area of agent e-business projects. "They are highly visible projects that have a direct impact on the ability to take in and process new business," relates Josefowicz.
As examples, he cites projects involving agent portals, agency management system integration, and electronic applications. "[These are] the type of things that make the distribution channel more effective and drive new business," he says.
It is easier to calculate ROI on distribution channel projects because insurers can correlate the investment to an increase in sales, Josefowicz explains. In addition, in most cases, such projects are not as expensive as a major core-system replacement.
Still, for agency e-business projects to show their value, he contends they need to be backed up with straight-through processing and access to data, which also will require some internal spending. "In a lot of cases, an agent e-business initiative will require some back-end investments," he says.
In addition, replacing older policy administration systems remains a top priority for insurance carriers, reports Josefowicz, but because of the expense of such systems, they are falling under the heading of major strategic projects. One reason they continue to be on the board is because the P&C industry made an overall profit last year. "There is money still in the budget for those types of projects, and they are not experiencing a wide pullback," says Josefowicz.
In contrast, predictive analytics is an area Josefowicz considers as yet under evaluation by insurers. "It's mostly because it's a new area and insurers are trying figure out what it means to them," he asserts.
Predictive analytics is being hampered by the inadequacies of many carriers' data infrastructure, which creates a dilemma for them. "You can bring in a fancy analytics tool and put it into your underwriting workflow, but if you can't feed it with a good model based on your own history, it has limited value," Josefowicz cautions. So, insurers need to be on top of what they are doing with analytics to avoid costly mistakes. Too many insurers know that feeling, too. "The amount of shelfware in the insurance industry is pretty astounding," he says.
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