There is technology spending headed for the insurance industry in 2010? After surveying insurance IT leaders for a new report for Novarica, Matt Josefowicz, insurance director for the research firm, found some good news.
"By and large, most companies–especially midsize P&C companies–are ramping up their IT budgets and really focusing on creating new capabilities for growth and improved operational efficiencies," says Josefowicz.
A good number of life/annuity companies were battered by the economic crisis of the past year and find themselves in either a holding pattern or recovery mode, Josefowicz points out. "But even some of those that were hit the worst did a lot of their cutting in 2009 and are prepared for a stronger 2010," he says.
As it has in recent years, spending for policy administration and other core systems remains at the top of the list. "For most companies, it is the main thing holding them back from creating new business capabilities," says Josefowicz.
The lack of flexible systems inhibits carriers from introducing new products rapidly, making appropriate changes to products, supporting new or current distribution channels with service, or creating the kind of data visibility they need in order to be competitive, he adds.
In his research, Josefowicz discovered many life/annuity companies are putting greater emphasis on customer portals. "[Insurers] positioned themselves in the wealth management space as much as the protection space," he says. "That kind of high-quality customer experience–the same kind of experience [customers] get from banks and brokerages–now is expected from life insurers, especially if [customers] are purchasing products that are active investment products as opposed to term [life] or simpler products."
The increase in spending for midsize property/casualty carriers, Josefowicz notes, comes at a time when these carriers sense an opportunity for growth given the changes in the marketplace and the way carriers such as AIG have been shaken up.
It's a different market for large P&C carriers, though. "The larger companies, in a lot of cases, are in a consolidation or efficiency mode," says Josefowicz. "In a flat market, there isn't a lot of room for a giant company to grow. Smaller companies that are more focused on specific niches or specific geographic areas where they have in-depth information or relationships see an opportunity to grow during the recovery."
Large property/casualty companies simply can't afford to put off improvements to their core systems, Josefowicz asserts. Not only is operating efficiency a key factor, but carriers have learned it is the cost of doing business in their environment.
"Every time you make a rate change or a product change, there is a lot of labor and testing that goes into that on a large legacy system," he says. "Larger companies have had the resources to do that, and the project risk to make changes is balanced against having the resources to run an expensive, slow, legacy environment. As companies have gone through the downturn, they realize they need to improve agility and flexibility, and the legacy claims and policy admin environments are not going to be able to do that. They create operating risk if they do not update their environment to something that is easier to maintain and is flexible."
In his survey, Josefowicz didn't find many carriers postponing any projects scheduled for 2010. One reason is many projects are strategic in nature with a multiyear timetable.
"I think it shows carriers are not having their strategies disrupted by trying to react short term to the market unless they have to due to a resource issue," he says. "These are long-needed capabilities. Carriers have realized they need to do something for the last five years. The ones that have made plans to do so are not shelving those plans just because the economy has gone up or down."
Still, life isn't easy for the life/annuity companies. Delays largely can be blamed on resource constraint, indicates Josefowicz. "There are a lot of life/annuity companies that have been hit not only with investment losses, but their demand has eroded more dramatically than the P&C companies," he says. "Life/annuity companies are much more susceptible to the investment markets and the economy because [their products] essentially are discretionary purchases. For P&C, demand might drop by a few percent, even as much as 10 percent or 15 percent, but there are life companies that saw 30 percent revenue declines [in the last year]."
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