Insurers spending more on technology in 2002. (Technology: Technology News).

U.S. insurers are expected to increase technology spending by more than $1 billion this year and focus on replacing outdated systems to reduce costs and improve service.

The insurance industry is poised to spend $18 billion on technology in 2002, a 7% increase over 2001, according to a report by Celent, a research and advisory firm. Celent estimates that insurers will maintain this average growth rate for the next two years. The study found that information-technology spending, on average, accounts for about 12% of an insurance carrier's noncommission operating expenses, and that 35% of a carrier's IT budget is devoted to new projects.

"Insurers aren't just maintaining what they already have, they are looking at new projects," said Matthew Josefowicz, a senior analyst with Celent and author of the study. He said insurers are starting to replace legacy systems and billing systems to reduce costs and improve service. The survey found that the three biggest focuses for insurers' IT projects are improving customer service, increasing delivery speeds and cutting costs.

Also, insurers are trying to measure their investments in technology by looking at short-term return on investment, Josefowicz said. While it makes sense for insurers to monitor how their technology spending is paying off, he cautioned that the ultimate payoff might not be measurable in just six months.

The survey also found that insurers spend 44% of their IT budgets on internal staff, with another 11% spent on consultants. Software, licensing and support represented about 20% of their budgets, and an average 15% of the budget was spent on hardware.