A new consulting firm report concludes that the current financial crisis will inhibit growth in insurance information technology (IT) initiatives slightly, but will also present new opportunities.
Boston-based Celent announced the findings in a report–"Bad News on the Street: Insurance IT Strategy and the Financial Crisis"–which looks at the global financial crisis and what it means for insurers' IT strategies.
The firm said IT spending will not reach a level of up to 3 percent it earlier projected.
"A tidal wave of bad news has swept Wall Street and Main Street, and debris is coming ashore across the globe. This crisis is sure to affect insurers the world over for years to come," said the Boston-based consultant.
"Celent believes that the unprecedented breadth and intensity of issues currently facing the insurance industry will severely constrain future growth but also provide an opportunity for carriers that position themselves correctly," the announcement added.
The report examines how the current economic crisis will impact the insurance industry's financial results, capitalization, and competitive positions, said Celent. It describes how insurers' operational strategies may shift, and how those shifts make this the right time to reexamine the tactical and strategic value that current and new IT initiatives will provide.
"The world has changed, but not ended," said Donald Light, senior analyst with Celent's insurance practice and coauthor of the report. "Insurers, their technology groups, and technology vendors need to recognize this change and adapt to it."
"Adapting includes an examination of implementation plans and budgets with an eye toward short-term, tactical payback," said Mike Fitzgerald, senior analyst with Celent's insurance practice and coauthor of the report.
Major areas where the financial crisis will change how insurers function include financial results, capitalization and solvency, losses, soft market, market consolidation, and regulatory and rating scrutiny, Celent noted.
"Carriers will need to reexamine their IT projects against a combination of strategic goals, including getting bigger by growing revenue, getting leaner by reducing expenses and increasing productivity, and getting smarter by making better use of their data.
Many of these elements rely on IT as a catalyst, so Celent said it expects 2009 IT spending to decline only slightly from our previous projections of 2 to 3 percent growth," the announcement said.
"In any economic contraction, the overall insurance market shrinks. Celent believes this process is already underway and will accelerate if the turmoil does not subside quickly," the analyst firm continued. "This lower revenue stream will worsen an already difficult expense situation. Insurers have been under expense pressures for some time. Across all lines, lower sales mean less revenue to support fixed expenses.
"To adjust the cost base, companies will reexamine spending, including technology. Reductions in force (i.e., layoffs) may increase in prominence. Although the unprecedented breadth and intensity of issues currently facing the industry will constrain future growth, they also represent opportunities for carriers that position themselves correctly," added Celent.
The report also said that regulatory pressure will increase interest in technology that provides more robust analytic and modeling capabilities.
"The Q4 timing of the crisis means that some insurers may rethink their 2009 IT budgets, which are already well into the review and approval process," said Celent, adding that there will be downward pressure on IT budgets for at least the next 12 to 24 months.
"However, the result will likely be a flat IT 2009 budget versus 2008," the analyst firm concluded. "Carriers know that a large portion of their IT spending is essentially fixed by maintenance requirements, and relief in this category is hard to come by. In addition, projects that span budget cycles cannot be unplugged easily without sacrificing the strategic value that is already partially paid for. The trend in subsequent years may be more open to downward revisions."
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