What Rain?

Over the last three months, there has been scant positive news to report about the state of the financial services in the U.S. and across the globe, but except for carriers such as AIG and The Hartford, the economic problems mostly have arisen in the banking and investment world–not insurance. Those in the insurance industry, particularly the property/casualty field, are not singing the blues the way other industries are. In fact, some analysts are predicting a strong year for insurance in the area of IT spending.

The reason for this is companies have wisely invested in technology over the last few years to improve efficiencies and operations, and now it is time for IT to display its mettle. As Craig Lowenthal, CIO for commercial lines and marine carrier NYMAGIC, says, "For the IT shops that have been investing in recent years, it's show time. Show the company how you really can leverage the investments made in past business intelligence projects, do some key analytics to determine where there might be some staff or resource bloat, move resources to more profitable areas, or find ways to reduce staff."

No one is implying life will be easy this year, however. "It's a very challenging period coming up," says Matt Josefowicz, director of the insurance practice at Novarica.

P&C carriers will see some decreasing demand due to reduced business activity, reduced payroll, fewer new homes, and fewer new cars, but Josefowicz believes volume is not going to fall off a cliff. "People still need car insurance, and business people need insurance to operate," he points out. "The basic demands for the products are going to face some challenges, but [the products] are not going to disappear."

Life insurance, on the other hand, is more discretionary. "The investment element of the [life] industry, where it has been making most of its profit lately, is going to face a big challenge," predicts Josefowicz.

It has been seven years since the insurance industry was at a low point, and Deb Smallwood, cofounder of consulting group Smallwood Maike & Associates, contends the reason insurance will be able to avoid a repeat of 2002 is because of the technology investments and advances made since then.

"Think about where the industry was [in 2002]," states Smallwood. Among the major changes for insurers since that time are predictive analytics, straight-through processing, agency and carrier portals, self-service by customers, data projects and business intelligence tools, and upload/download with agents.

"If you think of the significant investments of the last seven years, they are interwoven between technology and the business processes in allowing [carriers] to compete at a different level," says Smallwood. "[Insurers] can't stop now. They see the impact [the investments] have had on their financials. They understand the value, and they realize they can't compete in today's world without it. These aren't things that give a carrier competitive advantage; they are things that allow it to compete."

Josefowicz sees property/casualty companies as being cautiously optimistic about market conditions and their ability to compete. Life companies are getting hit with what he calls "the double whammy" of lower investment returns and diminished demand for their products due to less discretionary income and lower demand for investment products. "The life companies are going to be conservative, and the property/casualty companies are continuing to make strategic investments," says Josefowicz.

The predictions of even flat spending in insurance IT is viewed as good news by Smallwood. "The insurance industry knows how to weather these storms," she says.

Smallwood believes 2009 will be difficult, though, because of what she calls a "triple whammy"–the soft market, bad economy, and bad investments. "The mutual and privately owned companies continue to do what they want to do and need to do," she says. "The stock companies are a little more fickle because of the pressure from their stockholders, but I don't hear anyone slashing budgets."

Smallwood anticipates there is going to be more emphasis on strategic alignment this year. "The midtier and the large players have seen a shift in market share, so they are going to be doing portals to provide connectivity to agents and the brokers/wholesalers," she says. "I also think money will be invested in external data and other services to help really understand the market."

She doesn't see any slowdown on the P&C side for policy administration systems, although projects will be slower on the life and annuity side. "What's going to be interesting to watch on the life side is, given how bad the market has been for investments, you wonder whether there is going to be a shift to safer investments around annuities and long-term life insurance investments," she says. "Now is the time for [life insurers] to seize the moment."

On the other hand, if there is going to be any pressure on budgets, Smallwood feels it will affect the smaller enhancements to the business. "Infrastructure projects and server consolidations and upgrades are the ones that are going to get squeezed," she says. "No one is going to buy new hardware unless the company absolutely has to."

A survey by Forrester on IT spending in various industries for 2009 found insurance spending is going to increase by four percent, according to Ellen Carney, a senior analyst with Forrester. "[Insurance] is coming through relatively unscathed, which is why some technology vendors are looking at the insurance market," she says. "There are some revenue opportunities there [vendors] might not have looked at so closely in the past."

Insurers that have worked to expand the online experience for their customers should be rewarded in 2009, according to Chad Mitchell, also a senior analyst with Forrester. He has seen predictions online ad spending and e-mail acquisition marketing actually are going to grow about 10 percent this year. "[Consumers] still are going online, but because of the economy, people are looking to cut back," he says. "The message we see from P&C auto and homeowners insurers is they can save [consumers] money. You have the confluence of customers hurt in their wallet needing to pull back while you see hundreds of millions in ad spend still going after that auto insurance buyer by guaranteeing [customer] savings."

The attitude toward e-commerce is going to continue to drive investments in site personalization, quote engines, and online policy admin, adds Mitchell. "The types of things that either are in the works or are where they need to catch up," he says, "that's where I think you'll see that four percent increase, at least with P&C."

Carriers are going to work on improving the independent agent distribution channel, as well, asserts Carney. "Carriers are looking at better ways to connect with agents to quote and bind the policy quicker," she says. "Another big thing they are willing to invest in is a way to accelerate new product creation. Instead of taking months and months with a lot of IT involvement, they are looking at business rules engines to support new product development tools."

Josefowicz sees a major difference between today's situation and the last economic catastrophe that followed 9/11. "The difference between this storm and the last storm is in the last storm IT was the first overboard," he says. "Now, IT is up there with the captain making decisions on how to survive."

Over the last five years the industry's recognition of the critical strategic nature of IT to create advantage for insurance companies has grown and been more widely accepted, Josefowicz remarks. "So, when insurance companies hit a crisis situation, their first instinct is not to shut down IT," he says. "Their first instinct is to look at IT and ask how they can be more efficient and effective in order to weather this storm."

One reason for the improved standing of IT among carriers is regulatory demands, such as the Gramm-Leach-Bliley Act and the Sarbanes-Oxley Act along with the expansion of the model audit rule for private companies, according to Karen Pauli, research director for TowerGroup. "All that has helped carriers stay out of the mess or at least stay neutral in the midst of the mess," she says. "Those that have invested in technology are in a much better place."

Carriers have not returned to the "back-to-the-basics" formula that marked 2002 and other difficult times and instead are looking for ways to gain efficiencies. "This is the perfect time for carriers to take a look at where they have invested in technology and use [that technology] across the enterprise," says Pauli.

For example, she points out, now would be a good time for personal lines carriers that are underwriting with predictive analytics to take that investment and use it in another line, such as small business, where there is a lot of data. "This is a time when carriers need to stop internal wars between divisions," she says. "Now is the time to put that aside and leverage the investment."

Insurance carriers must make some bold decisions this year, suggests Lowenthal. "Now is the time really to invest in IT, if you are smart," he says. "We are probably 12 to 24 months from gaining any momentum [in the economy]. If you can absorb an IT investment in the next 12 to 24 months and are ready to charge as the economy starts going up, you are going to be 12 to 24 months ahead of your competitors."

NYMAGIC currently is in the middle of a legacy replacement project that Lowenthal maintains will position the company for the future. "It's going to keep us nimble and agile so we'll be in a good spot for competitive advantage," he says. "And in the short term, it will bring us efficiency."

Some carriers will eliminate projects, predicts Lowenthal. If a company is unsure where a specific project is going or what the value is, the right answer probably is to kill the project, he continues. But those companies that find themselves in the middle of a major project need to maintain the course if the project is going to provide specific benefit and pay dividends. "I would vigorously protest any attempt to stop our legacy replacement project now because that would be detrimental to the company," he says.

Market conditions change in the insurance industry, notes Josefowicz, so insurers should not focus on the hard or soft market. "The most important thing now is to get away from the reliance on the cycle and focus on underwriting profitability no matter what the cycle is," he says.

Lowenthal anticipates the soft market will begin to fade away in 2009, although he believes it is premature to say the hardening already has begun. "Certainly capital has dried up, and that's the formula for what drives the market," he says. "When you have too much capital, the pricing gets crazy. I don't think you are going to see a terribly hard market until 2010, but I think you will see stabilization."

He contends more than improved underwriting is needed to deal with the changing markets in property/casualty insurance. "Whenever a market is hard and there is a need for insurance, you get capital infusion," he says. "Then you have too much capital in the market, and you get competition. Some of the new capital entrants lowball the market, and that drives pricing down."

Like some companies, NYMAGIC has refused to play that game, explains Lowenthal. "What we've done over the last two years is not write some business," he says. "We're not going to sacrifice our profitability for this game. We'd rather lose some revenue and make sure we're a going concern for the future."

"The regulators aren't going to let the insurance companies lose too much money, so I think [the market] is going to start to harden," says Smallwood. "We've seen some conflicting reports on whether the hard market is coming, but I think it is coming, although it is going to be slow."

Carriers need to look at their particular lines of business, their current clients, and how they can grow and then start to position themselves for the hard market, which Pauli also feels is coming. "More money is being spent on ease of doing business–upload/download and seamless connectivity to the agents," she says.

Pauli believes any vendor with a solution involving a short-term installation and impacting bottom-line results is going to be fine in 2009. On the other hand, software that is complicated to install or involves a new skill set carriers don't have on staff could be headed for a difficult year.

Smallwood expects it is going to be another strong year for policy administration, underwriting, and agent-connectivity vendors. "The horizontal players might have a harder time unless they have a pinpointed solution with content–such as a BPM provider or enterprise content management," she says.

Merger and acquisition activity among insurance software vendors is likely to accelerate this year, according to Josefowicz. "We may come back to an age of the mega-vendor, where there will be five or six strong portfolio companies with comprehensive solutions and infrastructure," he says.

If the market for software deals slows down in 2009, it may be hard to handle for some solution providers, Josefowicz notes. Such companies may be inclined to hook up with a deeper pocket. "What remains to be seen is how the credit crunch affects the M&A market," he says. "People aren't going to be borrowing money to buy things. A lot of people already have money in hand and are looking to buy things."

Money is tight right now for M&A activity, observes Smallwood. "No one is going to take a risk right now," she says. "Once we get into 2009 and we show patterns of similar spending, it may open up, but I've spoken with a few [investment] firms, and they are nervous."

Josefowicz doesn't believe carriers have changed their spending priorities despite the difficult financial conditions. "If anything, they may have changed their speed," he says. "Most still are focused around the four main drivers–time to market, ease of doing business, operational efficiency, and BI and data accessibility," he says. "Those things continue to drive projects."

Forrester recently surveyed P&C carriers with revenues between $250 million and $2 billion in gross or direct written premiums and found every single respondent is doing something at some stage or another with one of their core applications, primarily policy administration, reports Carney.

Mitchell believes the reason the insurance industry is somehow coming through the current financial crisis relatively unscathed is because of the risk-averse and investment-structured foundation of the industry. "If you look at providers in the U.S., we actually are forecasting some potential growth from an IT spend perspective," he says.

Many insurers are going to focus on the online or multichannel experience, suggests Mitchell, which means investments in areas such as lower-cost Software as a Service implementations. "Things such as improved online search, application prefill, the types of things directed at either acquisition or recruiting, the online quoting and purchasing experience for existing customers," he says.

The key point for insurance carriers today is to invest in technology where they can see a return relatively quickly, points out Mitchell. "If you look at the investment in self-service or online policy admin, the cost savings and the ROI and economic value are there for the investment in that technology," he says.

"I don't see all doom and gloom for the P&C world," asserts Pauli. "The degree to which carriers understand what technology can do for them is going to make a difference. That's the deciding factor."

Smallwood is confident insurance IT executives know how to ride the wave today. "A lot of them realize in putting projects on the back burner in 2002 they lost significant time," she concludes. "They know they can't afford to do that again."