Put your money where your growth is: strategic spending on IT in 2004 is necessary to prepare insurers for the next growth cycle. The question is: which strategy?

The insurance industry is well poised for the next growth cycle, with established distribution channels, favorable product positioning and a cache of rich customer information. This positive outlook is amid a backdrop of negative performance, but economic factors portend that the future for growth and expansion looks optimistic. In property/casualty insurance, strong 2003 underwriting results indicate the industry's recovery from the soft markets of the 1990s. In the life/annuity industry, improvement from the sluggish equity market has been slowed by a confluence of market factors, such as exposure to credit losses and low interest rates, but 2003 increases in both life insurance and annuity premiums indicate a steady recovery.

To advance their business model and remain competitive with other financial services institutions, however, insurers must use technology strategically.

Complicated financial times have diminished many insurers' financial strength and hindered their investments in operations and technology. This difficult period, however, is not all for naught. In fact, certain effects actually will strengthen insurers' balance sheets and permit them to invest readily in several areas of the operation. The mechanics and metrics to closely monitor return-on-investment measures and account for dollars spent on technology, in addition to efforts in information technology cost containment, continue to yield notable results. Consequently, insurers are confident about short- and long-term IT spending in 2004 and beyond.

TowerGroup projects a 2.5% to 10.4% increase in insurance company IT budgets for 2004. The demands of the current competitive environment to attract and retain customers and the need for improved efficiency of core operations are primary drivers behind the outlook for stronger IT spending in 2004. Spending will remain controlled, however, with project deliverables tracked in six- to 12-month intervals. TowerGroup does not anticipate aggressive spending in any one area of the insurance operation. Instead, resources will be spread thin to address maintenance, infrastructure and development in core systems, distribution, customer service, and data and information management. (See "Projected IT Spending in 2004 by Operational Focus," below.)

Decisions Driven by IT

How insurers approach IT spending and the automation of their business often directs decisions about the life cycles of their core systems and the interconnectivity between back- and front-office operations. The natural aversions to risk embedded in an insurer's culture frequently drive their pragmatic approach to technology use. On the other hand, it is common to find insurance industry leaders willing to assume more risk, so that they can respond to business needs quickly and drive modernization of their technologies for competitive advantage.

Traditional applications built to serve a single function or business unit are one of the primary problems facing IT organizations today. Consequently, there is a growing gap between the requirements of business units and the ability of IT to support them from both a technical and organizational perspective. Closing the gap requires a more complete view of the enterprise and the IT architecture to support it. Designing a service-oriented IT architecture is imperative for firms to capitalize upon their investments and align their IT resources to strategic business objectives.

Moving IT from a cost of doing business to an integral component of the business strategy is necessary if firms are to improve operational efficiency, lower operational risk, and align IT with operational objectives. Insurers can rationalize a strategic investment in the enterprise journey because the long-term benefits gained from leveraging existing IT investments in internal skills, applications and the infrastructure before investing in new ones outweigh the short-term costs. Insurers want an integrated array of applications and processes to drive ROI, so they must be able to decisively deploy technology solutions to improve that equation. Managing IT with a strategic focus to re-engineer operations in relation to enterprise architecture in data, business, and presentation offers a number of benefits, such as flexibility to extend IT capabilities, reductions in maintenance and development costs, and improvements in speed to market.

It sounds daunting, yet significant changes in technology markets are making flexible enterprise architectures plausible for insurers. Two key factors contribute to the new model. First, established vendors have incorporated or acquired new functionality and extended features to their primary applications. For insurers, this bodes well for a more stable market in which to manage their technology resources and establish strategic partnerships with leading software vendors. Second, the commodification of technology expands the IT community to business users. Deploying technology across the enterprise and to many layers of the organization is possible because the technology is easier to use and administer.

Today, the best designed applications must work in a number of different environments, such as Java 2; Java 2, Enterprise Edition (J2EE); and Microsoft.NET, without sacrificing performance or interoperability. Lightweight Directory Access Protocol integration, Single Sign-On, authentication, security, and ease of use for business users and system administrators are all important. The development framework and resulting code must be entirely open, interoperable with different applications and platforms, and with a high degree of performance and scalability. Each of these requirements is critical to integrating new information sources and offering the stability, reliability and control necessary to manage complex processes and a wider range of functionality.

Exploitation of existing applications and any future investments in them should extend business processes to employees, customers and distribution partners. Whether firms decide to reengineer core systems; invest in data and information management applications; build agent, customer and business user portals; or purchase a Customer Relationship Management system; interoperability is integral for insurers to avoid perpetuating the problems of the past. The following sections detail areas of the insurance operation where firms can gain more cost effective benefits by deploying key applications in the context of a strategic IT architecture.

Distribution: Collaborative And Flexible

The lines between financial services institutions of all stripes are blurring as firms seek to offer a wide array of products and services to customers of diverse levels of affluence. It is increasingly difficult, however, for firms to offer these services to their customers economically. Insurers will find that promoting their expanded suite of products and managing transactions that are more complex will be increasingly difficult. In order to remain competitive, insurers must be able to facilitate customer and distributor activity seamlessly from multiple distribution outlets, including the Internet, call centers and face-to-face meetings.

Insurers can gain a competitive edge by expanding distribution to more economical advice and service outlets, such as the Internet and automated response systems. At the same time, insurers realize bottom-line savings by distributing associated costs more efficiently. The premise is that a fully developed multichannel distribution network incorporates high-tech and high-touch delivery channels to increase the range of service options offered and attract and retain more customers, such as policyholders, agents and distributors.

Understanding the complexities and expectations of retail partners, establishing a clear set of customer targets and maintaining competitive product and compensation alignment can substantially improve an insurer's position. Insurance distribution, however, is inherently complicated and involves numerous demands from customers, retail partners, agents and financial advisers. Technologies such as agent and customer self-service portals and CRM applications are among a few choices available to manage this complexity. A multichannel distribution model that is flexible enables insurers to quickly adjust distribution strategies according to market demands, as the relationships between retail partners and consumers change. These are important considerations for collaborative channel management.

Customer Service: The Single View of the Customer

Insurance figures prominently on the balance sheet of most U.S. households, with products such as auto and homeowners insurance for asset protection; term and whole life, as well as long-term-care, for life protection, and annuities and mutual funds for wealth protection. In order to retain and attract more customers and distributors, insurers need to promote their business and actively engage customers. A single view of the customer is one way for insurers to enhance customer service. Doing so not only improves the client's customer service experience, but it also increases opportunities for firms to retain assets and expand share of wallet. At the same time, insurers can reduce the associated costs that result from managing disparate processes.

To take advantage of present opportunities, insurers must move to a customer-focused advice and service model. Today, firms must deliver first-rate customer service to achieve greater operational effectiveness and gain market advantage. This requires focusing technologies and processes on the customer instead of on products. To derive shareholder value from a customer-focused model, an insurer must integrate its use of key technologies. Presentation of client data to the call center, consolidated statements, and personalized documents are just a few areas where the single view of the customer applies.

Insurers report the biggest obstacle to achieving this goal is the transition from a large number of separate, product-focused legacy systems to a more flexible, unified enterprise architecture. A single view of the customer collects customer information from various systems into a comprehensive offering, which makes data available from all businesses in a single interaction. Closing the gap between business needs and the technology required to build a single view of the customer requires a significant investment in human and financial resources to integrate systems and data decisions, but the benefits quickly appear on the bottom line in asset retention and growth.

Connectivity and Integration: Information Management

Insurers have the opportunity to access a wide variety of information from their vast stores of customer data. Changes in today's business environment are driving the need for insurers to become more knowledgeable about their customers and distribution partners. A well-orchestrated network of data gathering and information analysis can steer the development and execution of highly competitive short- and long-term plans. Additionally, assessment and control of business and IT processes, and having keen understanding of their weaknesses, improve a firm's ability to manage operational risk and address regulatory requirements.

Insurers operate in a complex environment where relationships between departments often are lost in disparate processes. The problem is that the different processes lack the interconnectivity necessary to execute complex analysis of multidimensional activities. The framework for insurers to assess processes across the entire organization is predominantly dependent upon the insurers' ability to connect and integrate data for internal and external users. The proliferation of applications to address specific functions or products dilutes the ability for insurers to integrate these systems business processes enterprise wide.

Many insurers invested heavily in building analytic infrastructures, such as data warehouses or data marts, with the sole purpose of facilitating information sharing and data analysis. Recent surveys report that insurers believe these initiatives failed to achieve the stated goals for business-level analytical support. One reason may be that the connectivity and integration of data infrastructures are complex and extend beyond data repositories and simple analytical tools. This layer of technology is critical, however, to insurers' success in integrating back-office systems to front-office business operations. The technology often involves the use of an open architecture that makes stores of data from core systems accessible to other systems with the use of adaptors, for example. Making data accessible to the enterprise, for internal and external users, is imperative for insurers to advance operations and services.

Core Systems: Decisions On Re-engineering

Legacy systems present a dilemma for insurance carriers. On one hand, these systems often work well and have a high level of reliability. They represent known quantities, are predictable in their performance and maintenance demands, and support substantial numbers of transactions and processes. Legacy systems often are the operational engines that drive the revenue-generating processes for insurers. The reality that insurers face today is that their core systems have to do more than ever before. Due to extensive modifications, core systems often must perform functions beyond their original designs. They must interface with new internal and external systems and be able to accommodate new industry standards and technological advances.

The challenge in dealing with core systems is how to avoid the creation of new generations of inflexible legacy systems. How insurers deal with their maintenance, upgrades or replacement decisions is the differentiator that actually may provide the competitive advantage that carriers traditionally have sought from internal development. Creation of information processing systems that meet or exceed the strategic and tactical needs of insurers' business requires a commitment to the essentials of good planning and open systems standards. It is essential that insurers avoid the creation of new legacy systems and adopt an overall design principle and architecture to avoid exacerbating past problems.

Costs shape the current state of legacy system re-engineering, and many firms are reluctant to write checks for it. Core system re-engineering is not sexy, and it requires substantial investment for a successful outcome. For insurers to advance operations and remain competitive with other financial services institutions, they must address the truth about their legacy systems and the associated costs and make tough decisions about re-engineering their systems and infrastructure. The traditional "leverage, buy, build" methodology holds true. Leverage the use of core systems that do not carry substantial costs. Consider buying applications and systems whenever possible to reduce the size and investment of development resources. Lastly, build and customize, where appropriate, to maximize your investments and fully extend your IT capabilities.

Top performers in the insurance industry will embrace technology as a strategic part of doing business and invest accordingly. Insurers who focus more on short-term ROI from IT investments and less on long-term strategic value will find themselves behind early entrants and risk valuable market share. Insurers reluctant to invest in technologies to advance their IT and business operations will find that short-term savings are likely to result in long-term pain.

Projected IT Spending in 2004 by Operational Focus

TowerGroup projects a 2.5% to 10.4% increase in insurance company
information-technology budgets for 2004, but it does not anticipate
aggressive spending in any one area.

Maintenance      38%
Development      32%
Infrastructure   30%

2004 Development Projects

Core Systems              37%
Distribution              25%
Customer Service          25%
Data & Information Mgt.   13%

Note: Table made from pie chart.

Source: TowerGroup

Cynthia Saccocia is a senior analyst in the Insurance practice at TowerGroup, a research and consulting firm focused exclusively on the global financial-services industry.