Increased technology spend helps with competitive edge.

Insurers now see information technology investment as being driven by the need for efficiency gains rather than simply for reduction of operational costs, according to a recent survey by independent market analyst Datamonitor.

"North American Insurance Technology Spending Strategies," in which 100 IT decision makers in the industry were asked to identify strategy drivers and key investment areas for 2005, found that the North American insurance industry is reconsidering the use of technology to maintain a competitive edge. Forty-three percent of respondents cited "cost control" as a primary driver of their IT strategy, compared to 50% in the 2003 survey.

According to the report, recent investment in insurance technology has been focused on such areas as rationalization of outdated legacy systems and the elimination of staff-intensive manual processes and redundant applications. Along with the hardening property/ casualty market and a rebound in equity markets in 2003, cost reduction initiatives have contributed to a period of profitability for U.S. insurers, particularly P/C carriers.

IT spending is set to rise. Overall, nearly two-thirds of respondents are looking to increase their IT spend from 2004 to 2005, up from half who said they would increase budgets from 2003 to 2004. Datamonitor estimates North American insurers will increase their overall IT spending about 4% to about $30.7 billion in technology in 2005, which is a $1.18 billion increase over 2004. The P/C sector spend is expected to total $16.7 billion in this year, which is more than $750 million from 2004.

The shift in efficiency as a leading driver of insurers' IT investment could result in more long-term, strategic projects, such as architecture standardization, Web services and implementation of service-oriented architectures and any improvements that facilitate straight-through-processing, said Ed Blomquist, Datamonitor insurance technology analyst.

For companies driven by efficiency, technology is generally seen is a way of improving operations, particularly back-office and core systems re-engineering and streamlining operations. For those that see it as a cost-cutting measure, technology is a means of lowering operational costs, though not necessarily changing the underlying architecture or processes that position the organization for future expansion.

Looking across the various lines of business, Blomquist said insurers will focus on core operations. For P/C insurers, this means IT investment around claims systems, particularly around the areas of claims handling, or the notification and initial processing stages. Life and pension carriers said they plan to invest more on policy administration systems, driven by the need to rapidly develop and bring new products to market.

"Generally speaking, insurers will also look at improving the efficiency of their workflow and automating business processes as an overarching strategy," said Blomquist.

"With insurers seeing a more competitive market in 2005, they will refocus energies on making their existing systems more efficient, rather than engaging in total system replacement," Blomquist said. "The implementation of business process management improvements will streamline their workflow and provide greater levels of flexibility and scalability," he added.