|
From Resource,
May 2005
Copyright by LOMA
Insurance IT Spending
Looking Up
Resource talks with Celent’s Matthew Josefowicz about the rise in IT
spending among life insurers and what to expect going forward.
By Tammy J. McInturff
Celent
Communications predicts that
U.S.
insurers will spend U.S.$28.8 billion on IT in 2005—a figure that will grow
to U.S.$42 billion in 2010. Celent’s U.S. L/H Insurer IT Spending 2005-2010
and U.S. P/C Insurer Spending 2005-2010 reports project modest growth over the
next five years.
“
U.S.
insurers spend between 2.5 percent and 3 percent of premium on IT,” said
Matthew Josefowicz, manager of Celent’s insurance group. “Celent believes
that over the next five years, this will increase to between 3 percent and 3.5
percent as IT becomes even more essential to insurance company operations and
consumes a larger portion of operating ratios. As overall premium grows modestly
over the next five years, IT spending will essentially keep pace.”
According
to the Celent reports, property and casualty insurance IT spending is expected
to grow from U.S.$13.2 billion in 2005 to U.S.$20.8 billion in 2010. Over that
time, new project spending will shift slightly away from policy administration
and claims and toward product design and distribution. Life and health insurance
IT spending is expected to grow from U.S.$15.6 billion in 2005 to U.S.$21.2
billion in 2010. Over that time, new project spending will shift slightly away
from policy administration, underwriting, and IT infrastructure and toward
product design, distribution, claims and billing.
Resource
recently had the opportunity to talk with the author of the report, Matthew
Josefowicz about life insurer IT spending and what to expect over the next five
years.
Resource:
Why do you believe that life insurer IT spending will increase over the next
five years? How did you arrive at these results?
Josefowicz: Life insurer IT
spending is basically going to keep pace with modest increases in premium
growth. The overall percentage of premiums dedicated to IT is going to increase
slightly over the next five years and that is primarily due to the fact that
more things are being automated. So as a percentage of operating expense more
things will fall under IT rather than other areas. But I don’t think it is
going to be a dramatic increase, I think IT spending will increase
proportionately as the pace of automation increases and as premium growth
continues.
The
results are based on industry averages that we determined through a survey.
Basically we came up with an average percentage of premium and then average
percentages of IT budgets and then we applied those to overall premium numbers.
Resource:
Will life insurance companies be spending more on IT maintenance or new
projects over the next five years?
Josefowicz:
Even five years out it will still be primarily maintenance, but the proportion
from maintenance to new projects should shift as their infrastructure becomes
less expensive to support because of previous investments. A lot of investments
are designed to lower total cost of ownership and maintenance burdens, so as
more of those things take hold more of their IT budget will be freed up for new
projects.
Resource:
What technologies are life insurers investing in this year?
Josefowicz:
There are a lot of different things on everybody’s list. One of the big areas
is business intelligence and what we call data mastery, enterprise data models
and things along those lines. In terms of more technology oriented things, Web
services and service oriented architecture will also start really taking hold.
And if you look at functional areas there is a lot of emphasis on policy
administration systems and product design systems, basically anything that is
going to improve speed to market.
Resource:
What technology investments are insurers considering for the next five years?
Josefowicz:
Some of it will be in some of the same areas as they are investing in
this year. I think you will see proportionally more investment around billing
and claims, as you get into more of the nontraditional life products like long
term care and other things. In terms of underlying technologies, it will be to
continue to consolidate systems onto less expensive platforms. We will most
likely see a slight shift of functionality away from the mainframe and towards
more inexpensive to maintain platforms. I also think you will see continued
investment on anything that is service-related because that is going to be where
the competitive advantage is going to come from.
Resource:
Do you think that life insurers are still looking at IT as a way to gain
competitive advantage or are they investing in technology more to keep up with
the market, regulatory changes, security requirements, etc.?
Josefowicz:
I think it is a combination. Certainly I think that, while IT itself is rarely a
source of competitive advantage, it is impossible to create any competitive
advantage in business practices without a solid IT base for them. So nobody’s
competitive advantage is going to come from the fact that their bits flow
smoothly and their data is really organized; but if a company’s competitive
advantage comes from high service levels, great responsiveness to agents, or
from product innovation, all of these areas are impossible to improve without
improving the technology that powers them.
Resource:
Where do you think most life insurance companies need to be investing
their IT dollars?
Josefowicz:
It is really very dependent on the individual state of the company in
terms of what their business goals are and what the existing state of their
infrastructure is. It is very difficult to give a single answer like platform
consolidation or online service because it really depends on what previous
investments have been made and what their overall business focus is. The real
key is to make sure that IT investments are tightly aligned with business focus
at a strategic level as well as at a tactical level.
Resource:
Right now the life insurance industry might be characterized as behind in
their use of IT compared with other financial sectors. Do you think this will
change by 2010?
Josefowicz:
No. The banks and the securities firms are probably always going to be more
aggressive; but I think that life insurers, and insurers in general, have a real
opportunity to improve and probably a greater opportunity to improve relative to
their peers in other financial sectors. I think it is unfair to compare insurers
to other financial sectors because the products and the complexity of the value
chain is just so different with agents and third party data providers and all of
the network of relationships that go into selling and servicing life insurance.
With all of the complexity of data to be managed and all of the regulatory
complexity, I just think it is a much greater IT challenge than banking or
securities.
Resource:
What will large life insurers be focusing their IT dollars on compared to
the smaller insurers?
Josefowicz:
I would say larger ones are more likely to
be focused on rationalizing infrastructures; whereas smaller ones will be more
focused on improving service levels to make there companies competitive in the
marketplace with the larger ones.
Resource:
What is the greatest technology
hurdle that life insurance companies are facing?
Josefowicz:
For most life insurance companies the biggest hurdle is the state of their own
infrastructures, with the disaggregated systems and disaggregated data models
where it is very difficult to achieve any kind of straight-through processing or to achieve any
kind of data transparency. And unfortunately, there is no magic bullet for this
problem. It is a matter of first understanding what there is and then coming up
with a strategy for fixing it.
Resource:
What do you think the business and IT alignment will be like five years
from now in the life insurance company?
Josefowicz:
I think it will be greater. One thing that we have seen over the past few
years is a greater awareness on the business side of how dependant they are on
IT in order to achieve any kind of important results. So hopefully we are moving
towards a more equal partnership. The business and IT relationship swings back
and forth. In the late 90s there was what I call the “CIO Rock Star Period”
during the tech boom and a lot of CIOs just had a bottomless checkbook and they
could do whatever kind of projects they wanted without really even justifying it
specifically to the business side. Then after the tech crash there was what I
call the “CIO Doghouse Period” where the CIO was on a very short leash and
couldn’t do anything without 100 signoffs from the business side. So, I think
that is swinging back and it is equalizing. I don’t expect it to swing all the
way back to the other side; nor do I think is it good for business for it to
swing all the way back to the other side. So hopefully what we are moving
towards, and I see this a little bit already in the marketplace, is much more of
a tight partnership between business and IT at the top and also throughout the
organization.
Resource:
Are life insurers starting to spend on the right IT investments, hardware
or software, etc.?
Josefowicz:
I think what is the right
IT investment is different for every single company, whether it is improving the
quality of the staff, whether it is improving the physical infrastructure of the
hardware or whether it is upgrading the software.
In most cases things come down to software, data structures, data models,
connectivity and things like that but I think what is the right place to spend
IT dollars is very dependant on the individual business, what their current
situation is and what their business goals are.
Resource:
What technologies should be the highest priority for life insurers?
Josefowicz:
Again, it depends entirely on what the individual situation is. I think that
life insurers need to think about what we call the “four A’s of IT
strategy” which are business/IT alignment,
agility, accessibility, and affordability. Agility means having the
flexibility to adopt improved business practices without having there be a
significant IT hurdle for that. Accessibility means having systems and data that
are accessible to each other and accessible to important stakeholders and
ancillary systems both inside and outside the enterprise. And of course
affordability speaks for itself.
Resource:
Do you think there will be an increase in outsourcing in the next five
years among life insurers?
Josefowicz:
Yes, I think there will be. I don’t think it is going to be dramatic, but I
think there are definitely advantages to be gained from strategic IT and
business process outsourcing.
Resource:
What types of services or processes do you think life insurance companies
will be outsourcing?
Josefowicz:
It will be a combination of discrete business processes whether it is around
claims or new business or requirements, etc. On the IT side it could be
maintaining systems that aren’t core to have in house, it could be staff
augmentation in order to a improve a flexibility for big projects or, having a
core IT staff that is always available, but being able to supplement it when big
projects come into play and then not having such capacity when there aren’t
big projects in house. I think those are the main areas.
Resource:
Do you think mostly large or mid-sized insurers will be outsourcing?
Josefowicz:
I think insurers at every level are doing some kind of outsourcing; it is
just a question of how much. One thing we have seen is that the larger companies
tend to have more use of offshore resources typically because that is who the
offshore companies are targeting. Also, larger insurers are just more
comfortable with offshoring while the smaller companies still do not have the
comfort level to work with offshore providers.
Resource:
Do you think regulatory issues will affect IT spending this year?
Josefowicz:
Absolutely. I think there is a lot of attention on regulatory issues right now.
Again a lot of that comes down to data quality
and data transparency issues as well as security issues. What is interesting is people
talk about compliance driven IT spending but most of the things that are being
mandated from a compliance point of view are really things that insurers need to
do to improve their business anyway.
Resource:
Your report found that over time new project spending will shift away
from policy administration, underwriting and IT infrastructure toward product
design, distribution, claims and billing. What is causing this shift and how
soon will it happen?
Josefowicz:
I think it will just be that earlier investments will be made in those other
areas. So those other areas product development, distribution, underwriting and
policy administration those are the super high priorities areas now and probably
for the next two years. So, in terms of new projects the money will have already
been spent in those areas and will shift into what are essentially secondary
areas.
The
shift will happen in the next two to three years. I think what is interesting
about billing is that it is starting to be viewed, rightly, as less of a
financial issue and more of a service issue. The number one complaint that comes
in to the call centers is billing inconsistencies or billing issues. So by
improving the data quality, billing process and also the communications in the
billing process they can create a better service experience and reduce their
service burden at the same time.
|
