Insurance IT Vision Test

Stephen Applebaum compares the movement in insurance IT to newer, more agile systems to that of a huge ocean liner. "It takes a great deal of momentum to move it at all," he says. "But once it starts moving it's very hard to stop. When I see shifts (in IT spending plans) like this, it impresses me because it takes a lot of energy—and a lot of good business cases—to move projects." 

Spending patterns of recent years have remained fairly consistent, according to Applebaum, senior analyst for property & casualty insurance with the Aite Group, adding that making generalizations across an industry made up of some 2500 companies is a dangerous thing to do. 

"Probably the biggest shift in terms of change in momentum is the increased spending on customer experience and channel optimization," he says. "In some of the surveys we've done those areas have almost doubled in the amount of investment and rank of priority. That's a pretty big shift in this business. Typically things don't shift a few percentage points, so to see a 10 percent shift in one year is pretty strong."

Another industry analyst believes this will be a busy year for insurance industry CIOs. 

"There are unprecedented demands on IT resources," says Leah Hollstegge, manager at the Ward Group. "There also is a lot of excitement about the business impact these demands will bring. There's always going to be budget pressure, but now it's focused on prioritizing the initiatives and making sure those initiatives align with business strategy." 

Spending Habits

Unfortunately, there isn't nearly enough money available for carriers to do everything they want done. Applebaum maintains spending will increase by no more than three percent industry-wide with an even split among companies in terms of how those budgets will change. 

"Approximately one third will grow by three percent, one third will remain flat, and another third will decline by three percent," he says. 

Applebaum finds the increase in spending Aite sees in the customer experience category to be interesting because if insurers plan to double their spending on customer experience and channel optimization where will they get the money to do so if budgets aren't going up by any more than three percent. 

"I wish I knew the answer," he says. "I fear [the cuts] might be in financial systems or security because those always are low on the list."

After the Nationwide breach in the fourth quarter of 2012, Applebaum thinks there needs to be a reassessment of security spending. 

"That's an intolerable mistake," he says of the breach. "I think security is going to have to go up. There is just too much going on. If I was an insurance CEO, I'd call in my CIO and ask if we are doing everything we can do. 'Do you need more money to harden things up?' I would rather give [the CIO] $25 million today than have to pay $150 million tomorrow."

Deb Smallwood, founder of Strategy Meets Action (SMA), believes spending for 2013 will be stable with some slight increases. One reason for this, she explains, is strategic initiatives are being funded outside the IT budget. 

"If business executives find value and want [a software solution]—especially core system replacement, underwriting automation, business intelligence, or portals—only about one-third of the industry said that would be part of the IT budget. Many others said it would be outside IT," she says. 

Moving Forward

Frank Petersmark, CIO Advocate for X by 2, believes there is a shift in thinking within the halls of insurance carriers as they move from trying to manage expenses to where IT is expected to deliver the tools that will enable the business to move forward. 

"The good news for most CIOs is they no longer have to justify their core spend," he says. "Most have that under control now and are looking to do something more. Those that didn't get it under control probably aren't CIOs anymore."

As IT prepares for 2013, Petersmark maintains CIOs have to make the IT function as transparent as possible because some business people still struggle to understand what's going on behind the proverbial curtain. 

For new projects, Petersmark feels it is fundamental to collaborate with business peers. 

"If the project is automated underwriting, you get with the vice president of underwriting to go in on this as a united front," he says. "That way you can break things out so you don't go to the table and ask for money without detailing what is needed. If you can trend the costs over the last few years and keep expenses at a steady level within that budget number, you can make money for IT to push out infrastructure costs and roll in more development costs."

The priorities SMA is tracking for 2013 are similar to 2012. Smallwood explains the top 10 business application projects have shuffled in terms of order, pointing out that spending on portals appears to be down while spending for policy administration systems is expected to grow. 

Underwriting automation is ranked first for industry specific projects, although looking at horizontal technology investments, data leads the list.

One technology that rose from the bottom was mobile, which Smallwood believes will be one of the top five spending categories in 2013. 

"[Carriers] have gone beyond bring-your-own-device (BYOD) to start building applications, getting websites to be mobile-enabled, and things like that," she says. "The other area that rose significantly is big data."

"Priorities appear to be fairly consistent year-to-year," says Matt Josefowicz, partner and managing director of Novarica, of the 2012 and 2013 budget surveys. "There's some shift in terms of mindset and areas getting the most interest, but in terms of where the dollars are being spent it looks a lot like 2012."

The Novarica survey showed that insurers are critical of their own technology-enabled capabilities, according to Josefowicz.

"A lot of that has to do with user experience," he says. "The culture of insurance IT for the last couple of decades has been very much a closed system. Over the last 10 years there's been more openness in terms of opening systems to agents and starting to open some systems to customers."

Over that time, technology has become more pervasive in everyone's life away from the workplace, so the level of expectation for technology applications by employees and executives has grown dramatically.

"Insurance IT used to be a fairly insular culture and was all about record keeping and the transaction process, now it is more focused on empowering knowledge workers to do their job," says Josefowicz. "The areas where companies rate themselves as unacceptable are things like agent portals, customer portals, CRM, underwriter work benches, and BI capabilities. Those areas have to do with providing information to people who need it in a useful and easy way."

System replacement remains a top priority for insurers, according to Hollstegge, along with business intelligence projects. Support for vendors remains high, she added.

"We see a lot of implementations taking place over the next two years," she says. "In 2011, we saw people focusing on existing projects with not a lot of project starts. We saw a lot of projects start in 2012." 

Core Systems

Spending on core systems replacement appears as if it will be about the same in 2013. Policy administration increased to No. 2 on the list from No. 5 a year ago, according to Smallwood. Both policy and claims systems are getting significant investment. 

"I think it's the nature of our industry that there always will be a significant amount of sales and implementations in those two areas," says Smallwood. "Many insurers have multiple systems so they are always looking to replace, re-plug, or retire them. It will take a lot of years to get everyone to replace their systems and the next thing you know they are 15 years old and the cycle starts again." 

Policy administration systems cannot be ignored, according to Applebaum. He sees replacement systems continuing to receive the greatest amount of investment in 2013. 

"If anything is new about policy system replacement it may finally be the will to replace multiple policy systems that insurers have acquired through a series of actions over time into a single platform," he says. 

In looking at what insurance technology leaders are focusing on for 2013, Petersmark explains most carriers remain focused on the core.

"There are sexy things like mobility and telematics—which are very important—but my strong vibe is core system transformation is still No. 1 for CIOs," he says. 

Insurers are looking at all areas of the core, from policy administration to claims to billing, according to Petersmark. The good news for carriers is there are better choices in the marketplace than ever before and the benefits that come from the implementation of new systems will be seen quickly.

"It's hard to do the other stuff—advanced analytics, predictive modeling, data, end-to-end portals, mobility—if the back end is still a mess," says Petersmark. "Carriers are pushing hard for [core systems] and in 2013 that will be No. 1. It will get the bulk of investment, at least for another year."

Core system replacement is a pattern that has been in play for most of the last decade. Josefowicz believes this direction will continue for at least the next three to five years, but he points out that could just be the beginning of another cycle in core solutions.

"At that point the systems put in during the late 1990s and the early 2000s are going to begin showing their age," he says. "The industry has to get over this 20th century idea that a core system is going to last 20 years or more. Companies need to think about their technology environment continuing to evolve with the business environment. With the advances in technology, I would tell anyone putting in a core system today that they shouldn't expect to get more than 10 to 15 years of service out of it, assuming the vendor upgrades and modernizes the system during that period. Companies need to think about these systems being evolutionary rather than static. "

Josefowicz doesn't feel this is a problem with the products that are available.

"No technology is built to last that long," he says.

The desktops and the telephones that were used 15 years ago are nowhere near as powerful or effective as the products on the market today, so software shouldn't be any different.

"Technology moves," says Josefowicz. "People need to plan on evolving with technology rather than fixing it and figuring a way where they won't have to deal with it for 10 or 15 years. That's not how things work today."

Ahead of the Game

Hollstegge believes it is no longer enough for insurers to have a data warehouse; they need to be able to turn that data into actual information. She also is seeing carriers work on mobile apps, website updates, and agency reporting. 

"A couple of years ago we saw more focus on expense efficiency, but now we are hearing the big driver is projects that will support revenue growth," she says. "We are projecting premium growth in 2013 across major lines. Companies have been preparing for that. That's why revenue growth is a large driver in their IT initiatives."

Those carriers who have led the way in spending for new systems have a great opportunity to achieve a competitive advantage, adds Applebaum. The replacement of the policy system itself is not that much of a differentiator in terms of market advantage, he explains, rather it is an internal cost advantage. 

"If carriers can leverage the capabilities of these policy systems with the integration of other third-party solutions, such as predictive analytics, they really will have a competitive advantage," he says. "This next cycle in insurance is going to be all about writing the right product for the right customer at the right time for the right price. You can't do that without a sophisticated policy admin system."

Smallwood explains she is changing her stance on the importance of having modern systems to handle the new data streams available to carriers. 

"If [a carrier] has a legacy system but they can somehow make a call out to a predictive model, a rules engine, or to be able to accept data, they don't necessarily need a new policy admin system," she says. "It depends on what the system is. A company I was speaking with can do web service calls to external systems, but their issue is hard-coded rules—the legacy system doesn't have a rules engine, workflow or a robust rating system. Their time to market is long. It all depends if the legacy system allows the ability to call out. It doesn't even have to be web services. That made me stop and think because I was on the bandwagon that felt everyone needed a modern core policy admin system."

The lucky carriers—those that have already tackled their legacy issues—have an opportunity to gain considerable advantage over their competition.

Petersmark believes about one-third of U.S. carriers have addressed their core system needs and those carriers will push hard in the advanced analytics, information modeling, and predictive modeling space. 

"That's the next holy grail for IT shops," he says. "There is so much untapped insight for carriers in the information they hold. They are going to be pushing hard on information."

In tracking projects for the last four years, part of SMA's message is carriers are working on similar projects, but they need a roadmap to determine how they will integrate and also a bigger picture on conjoinment. 

"There is a lot of overlap in terms of capability," says Smallwood. "If you are building an underwriting system and you have a portal and a policy admin system, where does the workflow start and stop and where do the business rules reside? There are a lot of insurers that don't have the big picture. They have a roadmap for a portal or a policy admin system, but what they need is to tie them together and look at investments holistically."

Smallwood admits she loves hearing that more focus on software solutions is coming from the business units. 

"If there is an IT project within an IT budget vs. a company initiative that the business is funding outside the IT budget, the business takes more ownership," she says. "This has been going on for years, but we're seeing more of it today. More insurers are working with the business folks to take on initiatives, inviting in IT if they want to participate, and driving vendor selection or even the strategy."

Petersmark believes the mood among insurance CIOs is brightening. 

"They've turned the corner from cleaning up messes," he says. "They are looking at what's next for the business. For p&c carriers, if the market is hardening a wee bit—and it seems to be—there are going to be business opportunities and they want their companies to be in good position to take advantage of it."

Hard Market

Hollstegge doesn't see a hard market just yet, but Ward Group is projecting premium growth in 2013. 

"We expect IT budgets to grow modestly in line with that premium growth," she says. "The main reason we are seeing modest growth is insurers are still facing the bills from large on-going systems projects. They will have to begin depreciating expenses when those systems are implemented. They have spent the money, but they still have to pay for [the implementations]."

The hard market could mean more money for IT shops, particularly for those carriers whose IT budget is determined by a percentage of gross written premium. 

"If the market hardens, the carriers make a little more profit, revenues are better, and underwriting results, hopefully, are better," Petersmark says. "A hard market is a good thing because the carrier will have more money. IT spending floats up with [more revenue]."

"I think [a hard market] kicks off more projects for predictive analytics, for precision pricing, risk appetite, and also more data initiatives to do some predictive modeling and business intelligence," says Smallwood. "It will also bring more automation to help cut expenses. I don't think budgets will jump, but strategic initiatives will get kicked off."