Budget Busters: IT Spending in 2011 Part 5

Celent is seeing similar spending patterns to last year, but Craig Weber, senior vice president and head of the insurance practice, believes carriers will be investing in areas of growth and IT spending.

"The same rough estimates seem to apply—three to five percent of direct written premium is typically spent on IT—with little less for life, a little more for P&C," says Weber. "That's also a little less for tier one–$5 billion-plus insurers—and a little more for everybody else."

Weber maintains it is difficult to compare spending year to year because there can be big swings when a carrier does a policy administration project one year.

"There could be a 20 percent budget increase there," he says.

There are carriers aggressively spending in IT, he points out, but most insurers have level spending plans or are growing in the three to five percent range.

The other issue carriers face is premium levels are flat entering 2011 and Weber expects them to remain flat throughout 2011 and probably all the way out to 2013. He doesn't see premiums growing by much more than two percent this year.

"What that says is insurers will be like dogs fighting over the scraps for new premiums," he says. "It's a very tough environment."

Weber feels competitors will be going after the best customers  while looking for ways to dump their own worst customers.

"We see that trend being extended out to not only top tier insurers but also some regional players who are starting to get a better feel of who they really want for customers," he says.

Carriers are embracing analytics to help them determine both the best and worst customers. That means carriers need to invest in a data program, particularly one that will clean the data.

"We've seen a lot of investing in data storage, cleaning, and analytics in the last three years," says Weber. "You would like to think that's now paying off. This may be the year [carriers] are starting to produce changes in business behavior. The data is available, it's clean enough, and you can apply the analytics and a business strategy that reflects what you are seeing in the data."

Each year, Celent asks insurers what their top three projects are and what the budgets are for those projects. This year, Weber sees a good mix of core systems renewal almost across the board.

"For P&C insurers there is more spending on distribution systems, analytics, and some infrastructure rationalization," he says.

Life insurers are more conservative in their IT strategy, he explains.

"We see some investment in policy admin and some in underwriting and new business, but it's not like P&C, which is aggressively going at it," says Weber.

Cutting Costs

Weber believes expenses are still a lever that most insurers can pull.

"It's not a question of knowing where your costs are, it's a question of being willing to take the cultural hit you have to take to aggressively do that," he says. "Our industry has known where the costs are forever, we just aren't willing to excise them and go through the pain. Some carriers do, but the vast majority—even some pretty effective organizations—have little pools of cost savings they have not yet tapped."

Ready to Go

Weber feels carriers with projects scheduled for 2011 are already working on their list. He maintains this is a little different scenario from the last couple of years when there was uncertainty over how low the economy would take us.

"I think we've bottomed out and the feeling is we are starting to bounce back," he says. "The second half of [2010] was OK for premiums for life and even for property/casualty. That reflects lower unemployment and some improvement in the housing market and the job market."

There are several indicators that Weber feels will slowly start to crank up insurance as an industry, but he believes if carriers wait for those indicators to be cranked up before companies start investing they'll be too late.

"The time to invest is before that run-up gets started," he says. "Think about the old saying: A rising tide lifts all boats. We will have a rising tide, but it's going to come in very slowly. No one wants to wait for the tide to lift them. They have to go find some water somewhere."