The good news for IT departments in the middle of troubling economic times is technology's enhanced position within the insurance industry. Matt Josefowicz, director of insurance for Novarica, believes in most cases, IT has been part of the strategic conversations at the top executive level among insurance carriers as leadership tries to determine how it is going to get through the crisis and emerge successfully on the other side.
Novarica recently published a report on the subject: "U.S. Insurers 2009 IT Budgeting and Planning During Crisis." One of the most telling points in the report, in Josefowicz's view, addresses the top drivers of IT strategy and why it is important for insurers to reduce expenses organizationwide.
"The pressure to cut IT expenses specifically was relatively low," says Josefowicz, pointing out this is a major difference from the last economic crisis the industry underwent in 2001 and 2002.
"Then, it was about minimizing the role of IT and reducing IT costs, which were viewed as out of control and not delivering value," he says. "This time, there is much more of a sense insurance is an information business, and it is impossible to do it without good information technology."
Policy administration systems remain a focus for many insurance carriers, although Josefowicz observes some are looking at enhancements for their systems rather than full-blown replacements. "But at the end of the day, the core systems are at the core of an insurance company's capabilities," he says.
"One of the interesting things about the crisis is the traditional excuse for putting off big strategic projects always has been: Everything is fine, and we don't have to [make changes] because everything is working," he says. "In a crisis environment, not everything we are doing is working. In a way, it's similar to what you see going on with the new administration in Washington. There is a sense things aren't working, so all ideas are on the table and you can radically change the way we are doing business. I think something similar applies to insurance operations."
A continuing trend for insurers will involve renegotiating vendor contracts and refinancing, Josefowicz believes. "A crisis environment lets people reset the board and try to make relationships more sustainable," he says. "There is a sense, particularly among life insurers, vendors have been talking about being partners for a long time. Partners share the pain. If the vendors want to be committed to these [life insurance] companies coming out the other side and being stronger, strategic clients, the vendors need to think about what they need to do to serve the customers more cost-effectively during the crisis period."
While insurance often is lumped as one financial service, life/annuities and property/casualty are very much different industries. "They share a lot of practices and procedures, and they certainly are lumped together as an overall industry, but the market forces that affect them are really separate," says Josefowicz.
Despite facing larger problems than the property/casualty side, life companies have noticeably invested funds to develop their core system strategy, reports Josefowicz.
Whether both sides can emerge together from the economic woes of the last nine months still remains to be determined because the market drivers in each industry are different.
"If you have a mortgage, you have to have insurance," says Josefowicz. "In order to run a business, you have to have insurance. Life insurance is a more discretionary product. If you don't have auto and home insurance, you can't drive and you can't have a mortgage. If you don't have life insurance, it may not be the most prudent thing, but nobody is going to stop you."
There sometimes is an assumption in a crisis environment companies are going to look to outsource, Josefowicz believes. "Certainly that was true in 2001 and 2002, where there was a negative feeling around IT to begin with," he says. "It's different now."
Most companies are at the outsourcing level they are comfortable with, asserts Josefowicz. There are a few that may expand those relationships, but very few are looking to set up wholesale relationships.
"Companies that are outsourcing 10 percent of their IT work may be looking to outsource, say, 15 percent," says Josefowicz. "That may be a big jump for the outsourcers, but in terms of the overall percentage of the [insurance] company's business, it's not that much. If [insurers] haven't been doing it yet, not many are looking to do it now."
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