Posted on 05 Jan 2009
Given the ravages the financial crisis has wrought in the insurance industry, greater cost consciousness will return to insurance IT organizations. But unlike during the downturn following the dot-com bust, carriers are likely to sustain levels of pre-crisis spending.
Until recently the biggest question about 2009 with regard to insurance technology priorities was whether an economic downturn, fueled significantly by what has been known as the subprime crisis, would continue and perhaps intensify. With the events of this fall, the industry had a definitive and most unwelcome answer delivered ahead of schedule. The global financial crisis has overshadowed the striking effects of the national election — which put a Democrat in the White House and reinforced existing Democratic majorities in Congress — and it will both shape ongoing technology projects and reshape CIOs' investment priorities for the foreseeable future.
From a business point of view, the industry starts the new year with an altered landscape that is likely to change even more in the form of increased mergers and acquisitions. The more stable insurers — particularly the mutuals — will increasingly look to acquire beleaguered carriers, which are in plentiful supply, according to Jonathan Steiman, an analyst with New York-based Datamonitor. "Furthermore, if insurers are able to gain access to TARP [Troubled Asset Relief Program] money, then the amount of capital will increase, which will further drive acquisitions," he comments.
However, acquiring companies will apply greater caution and enhanced due diligence in their shopping, Steiman predicts. "Every inch of a target company will be dissected in order to gain a full understanding of its risk exposure," he says. "This will increase the amount of time it takes to close deals and may also lead to an increased number of canceled deals."
It may also drive increased CIO participation at the strategic level, suggests Larry Danielson, a principal with Deloitte Consulting (New York). "CIOs need to do significant due diligence on the state of technology architectures, applications and data structures as carriers consider targets," he says. "A strong platform can offer a reason to merge as acquirers consider the opportunity to significantly upgrade their technology platforms."
Pursuing More Than Survival
Whether carriers are involved in M&As or not, the impact of the financial crisis will reshape their basic strategic outlook, observes Michael Costonis, director of Accenture's (Chicago) insurance practice in North America.
"Prior to this unprecedented set of events, the typical insurers' strategies were largely characterized by targeted growth, focused underwriting and similar approaches, all against the backdrop of seeking a reasonable rate of return on a somewhat longer time frame," Costonis comments. "The current financial situation is forcing a rethinking of the investment/return time frame, which is becoming dramatically shorter in the process."
Costonis sees three distinct approaches beginning to be taken by carriers in response to the current financial environment. The first is what he calls the "survival" mode, characterized by an urgent effort to transform the company, refocus the business and restore profitability. "This is characterized by deep cost cutting and 'must deliver' investments," Costonis explains.
Other companies are taking what Costonis terms a "protecting the franchise" approach, in which companies make smaller-scale, tactical investments within a shrinking IT budget. The investments are aimed at either cost savings or the pursuit of modest growth opportunities, he says.
The third approach is what Costonis calls "step change," a course that is being chosen by well-capitalized companies whose strength makes the crisis an occasion of opportunity. Such companies, Costonis asserts, will invest in one or more of several areas, such as acquisition, launching a new distribution channel, improving the use of analytics, or replacing core systems to enable lower unit costs per policy or process.
Cost control will be a priority for all companies, but most industry observers anticipate an approach that is different from the one that carriers took during the last major economic downturn.
Following the dot-com bust, insurers' focus was more likely to be on simple cost cutting, IT governance and project management. This time will be different in part because of the enduring improvements from that period and also because insurers face pressure to catch up with both consumer and distributor service demands and the advances in those areas made by their competitors. Thus even the fundamental need for greater efficiency implies a different strategic approach.
"Last year operational efficiency was all about competitive advantage," relates Karen Pauli, research director, TowerGroup (Needham, Mass.). "This year it is one of the primary ways that carriers can gain control of their bottom-line results."
But that by no means implies simple addition and subtraction of cost, in Pauli's view. "Operational efficiency is also served by getting information to staff so that they can make better decisions," she explains.
Nevertheless, financial pressures will force CIOs to reconsider their priorities and more carefully justify their technology investments. For many companies, higher-risk or "nice to have" initiatives will give way to those more strictly focused on profitable revenue growth, according to Kimberly Harris-Ferrante, vice president and distinguished analyst for Stamford, Conn.-based Gartner. "For example, focus on product innovation was a high priority in 2008 but is not taking the lead for many companies in the coming year as they reduce IT budget and focus on driving operational efficiencies through improved operations," she says.
That improvement largely will take the form of reduced transaction costs through better process management and straight-through processing, reduction of paper-based transactions, and declines in IT maintenance costs, according to Harris-Ferrante. Likely key initiatives for many carriers, she says, will be systems consolidation and portfolio rationalization, and improved application and integration using services, as well as more-strategic use of software and hosting options, such as software as a service (SaaS) and outsourcing.
"P&C insurers will need to focus on reducing transaction costs in areas such as claims handling, billing and agent/carrier communications," Harris-Ferrante adds. "They should also look to reduce fraud losses, which has been an under-invested area in the past."
Life insurers will seek to reduce transactional costs in areas such as new-policy issuance, billing and customer communications. However, since life insurers are affected by the loss of consumer trust resulting from the financial crisis, they must also pay special attention to how they interact with customers, Harris-Ferrante points out. "Life insurers must invest in customer experience management to maintain customer trust, therefore making internal changes less visible to their policyholders and investing in customer service quality through new agent, call center and Internet technologies," she counsels.
There is perhaps no better indicator of insurance carriers' differing approaches to efficiency during this economic downturn than their projected IT spending. Despite initial expectations of an economic downturn, carriers had projected technology spending levels that departed little from the previous year.
Before the crisis struck, a Datamonitor survey of 200 global insurers found that nearly 40 percent would increase IT budgets by 1 percent to 5 percent. The firm has since modeled a prediction of 2 percent growth in IT spending, taking into account some of the insurance industry's recent difficulties.
Boston-based Celent had predicted earlier in the year that IT spending growth would be flat or decline by 2 to 3 percent in 2009, and the firm did not revise those predictions based on a survey undertaken after the financial crisis was well under way. "Celent has been talking to a lot of [insurance] CIOs, and so far we see little change in 2009 plans and budgets," says Donald Light, a Palo Alto, Calif.-based analyst with the firm. "However, many say, 'Stay tuned.'"
Uptick in Policy Admin Projects
Whatever changes might yet come, recent activity in the insurance technology market has been robust with regard to large systems initiatives. "We have seen an uptick in both policy administration implementation and billing, as well as a continued focus on claims implementations," reports Dirk George, managing director, BearingPoint (McLean, Va.). "We also see a somewhat greater focus on customer-facing solutions."
George emphasizes that carriers' focus on cost takeout is partly aimed at freeing even more dollars for development. "They are trying to free up dollars spent on maintenance so that those funds are available for the strategic aspect of budgets," he asserts.
Cost consciousness is also driving some CIOs to develop better metrics into their internal economies, George adds. "While CIOs know what their budget is, few have the tools necessary to see how that budget is consumed," he suggests. George predicts that the financial crisis will also intensify concerns related to regulatory compliance and risk management. "You'll see many carriers reevaluate their risk-modeling capabilities," he notes.
The 'Frostbite' Effect
By and large, carriers' spending will be affected by a "frostbite" effect, in which resources are directed toward core capabilities, predicts Matthew Josefowicz, director, Novarica (New York). "However, rich Internet applications, such as Ajax and [Redmond, Wash.-based Microsoft's] Silverlight, will grow in importance as customer and agent expectations increase," he qualifies. "Predictive analytics will also grow in importance."
Whatever CIOs choose to invest in, they are likely to enjoy an improved position as they seek new solutions and renegotiate contracts. One important factor in their favor is the fact that many vendors sell to both banks and insurers and have seen some of their big customers either collapse or be acquired at fire-sale prices, argues Datamonitor's Steiman. "The insurance market has been more stable, so vendors are moving resources to the insurance space to make up for the loss of sales to banks," he says. "Insurers should enjoy a classic buyer's market."
"Enjoy" might be a strong word, however, as carriers will be under increased pressure to demonstrate return on investment from their business colleagues. Even at carriers where budgets are cut and resources are restrained, CIOs shouldn't expect much sympathy from the business side, cautions Jamie Yoder, managing partner, Diamond Management & Technology Consultants (Chicago). "CIOs can't take their eyes off delivery of ongoing initiatives that management is counting on to transform the businesses, and they need to be careful in building the IT skills and providing the productivity tools necessary to deliver on time and, when possible, under budget," Yoder says.
CIOs should not take for granted that IT professionals are less likely to switch jobs during an economic downturn. "Resources will evaluate the soundness of their company and their role and could be quicker to seek a safer environment, so they might find it better to be proactive than reactive about their careers," observes Scott Mampre, VP, insurance, Capgemini Financial Services (New York).
Mampre also cautions CIOs on the importance of organizational change management (OCM) discipline to ensure the success of initiatives. In the absence of OCM, failed implementations can doom great ideas, while average ideas can result in ringing success when OCM discipline accompanies their implementation, according to Mampre. "When poor organizational change management exists, organizations end up in a constant state of change, constantly looking for an idea that will work or stick, as opposed to a process of implementation that will work," he says. "The result is a disbelieving organization that gets burned out on 'the flavor of the month.'"