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Recession and the Insurance Enterprise: Where Are We Now?

By Ara C. Trembly

When the economy took a severe turn for the worse in the latter part of 2008, few could have imagined that we were in for a protracted period of economic decline that would last for at least another two years.

Having been hit by this economic tsunami, however, insurers, like everyone else, have been faced with the daunting task of riding out the storm, staying competitive in the business world, and preparing themselves for the recovery we all believe will be fully realized at some point.

Meanwhile, what has been the impact of the recession on insurance, and particularly on insurance enterprises, and how has it affected attitudes toward IT spending? Has major economic upheaval changed the way we do business? These and other questions were put to some of our industry's leading experts in an effort to get a clearer picture of where we are now and where we see ourselves going.

Spending is Still Essential
According to Deb Smallwood, Founder of SMA Strategy Meets Action, most insurers realize that continuing to invest in technology is essential to remaining relevant and competitive. "How they spend depends on their strategy and operational plans-meaning about 40% are spending to position for profitable growth so when the market turns around, they are able ride the wave of growth and leap frog their competition. Another 40% are spending to sustain their current position-focusing on operational efficiency, cost reduction and other tactical type projects. The remaining 20% are the insurers that spend minimally in IT."

Novarica, in its "US Insurers IT Budgets and Projects for 2010 and 2011," reports that Insurers continue to focus their IT spending on delivering badly needed business capabilities to support growth and reduce overall operating expenses, but highest priority areas vary widely by size and sector of company."

"Most insurers slowed down their IT project pipeline in 2009-but the project flow has recovered a fair deal this year," says Donald Light, Senior Analyst for Celent.

Indeed, William Jenkins, CIO and Vice President of Information Technology at Penn National Insurance, notes that while core stringent IT spending and stricter governance/prioritization processes are being used at his company, multi-year projects that have strategic value are being continued. He adds, however, that, "only those initiatives that provide internal efficiency improvements to defend and improve margins through this soft market period are being undertaken. IT spending is not being cut back, but is at a 'zero budget-growth' level, i.e., spending is flat."

Light notes that besides the widely-reported effects on spending levels, the recession has kindled greater interest in wrapping and extending legacy systems, and shorter payback period for investments. Says Jenkins: "We are seeing a focus on data as the organization evolves into a 'data driven' model. More emphasis is being placed on BI initiatives including more investment use of predictive analytics and obtaining a 'single view' of the customer, agent and policyholder. Data quality also comes "front and center" in this area."

The Novarica report adds that "the highest priority initiatives among insurers continue to be policy administration and business intelligence, with claims and agent portals also important in some sectors."

Hedging Technology Bets
So how are IT executives hedging their bets against a recession that may end next month, or may continue for years?

"IT executives continue to find ways to add more value for the same or less dollars," says Deb Smallwood, Founder of SMA Strategy Meets Action. "There is an emphasis on renegotiating service contracts, infrastructure outsourcing and consolidation, and blended sourcing models that create the ultimate team." She adds, however, that "the pressure for avoiding any misalignment or missteps in any IT investment is deadly."

"I think most IT plans and budgets tend to look out 12 months," notes Donald Light, Senior Analyst for Celent. "Celent advises carriers to at least do contingency planning for flat revenue levels for several years." Started: more point solutions (e.g. anti-fraud, or new rating systems).

William Jenkins, CIO and vice president of Information Technology at Penn National Insurance adds that Penn National is emphasizing "strong IT spending governance/management and looking to implement systems that are long term solutions and move us toward our vision (business and IT) and mission."

According to Smallwood, there is "still a heavy focus on getting the core applications modernized in a current application architecture. It is difficult to continue to address capabilities and functionality around old legacy systems," she adds. "In addition, BI and analytics and of course any investment around ease of doing business with the agent and brokers" are important.

"Not many projects are being outright cancelled, as opposed to slowed down," says Light, "but some core system projects" have been shelved.

Looking Ahead
Given the stresses and strains already foisted upon the insurance market, how will IT executives react, and what will the IT spending and allocation picture look like over the next two years?

SMA predicts that "spending trends for P&C insurers will remain slightly elevated, and for the first time in a few years, the L&A market will have a slight uptick in spending. Light agrees that there will be a "flat to very modest increase" in IT spending in the years to come, while the Novarica report forecasts that insurer IT budgets will continue to hold [in 2010], with "additional modest increases projected for next year."

Commenting on insurance IT budgets for 2010 and 2011, Novarica says that after the first quarter of this year, "most of the budget projections from our last poll in November 2009 continue to hold, or have proven themselves even a little conservative." Large property/casualty insurers they surveyed foresaw mostly level or slightly higher budgets in November, while the current group is tilted a little more towards increases. Midsize property/casualty companies, which saw slightly greater increases for 2009, have turned slightly more conservative as a group.

Life/annuity/health budgets continue to be split, says Novarica, "with most (perhaps those that hunkered down the most for 2009) having increased spending in 2010, and others projecting continued cuts."

Overall, fewer than 25% of insurers in any category are actually reporting budget cuts in 2010 as compared with last year, adds Novarica. "Projections for 2011 are even more optimistic, with very few firms projecting shrinking budgets at all."

Jenkins says he expects to see a continuation of tight expense controls. "There will be more strategic demand for BI and corporate performance management related systems IT management will need to be flexible and start or stop initiatives going forward as the economy continues to be volatile," he adds.
"One last point worth mentioning," he concludes. "Many companies, including Penn National, are passing on projects that are not `mission critical' even if they possess attractive ROIs."

Ara C. Trembly is the founder of Ara Trembly-The Tech Consultant (www.aratremblytechnology.com), a writing, consulting and advisory practice focusing on technology for the insurance industry.

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