Shopping spree: U.S. insurers are expected to increase their IT spending this year, particularly for product design, distribution and customer support.Insurers will dig a little deeper into their pockets this year. The payout pay·out n. 1. The act or an instance of paying out. 2. A percentage of corporate earnings that is paid as dividends to shareholders. : technology. Carriers are increasingly recognizing the critical role information technology plays in nearly every aspect of the business. "There's no way to achieve any kind of significant growth or major change in strategy without laying the groundwork in IT," said Matthew Matthew one of the twelve disciples. [N.T.: Matthew] See : Evangelism Josefowicz, manager, insurance group, for research and consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a Celent. "People are now starting to understand IT isn't just in the basement This article is about the section of a building. For the foundation, see Basement rock. A basement is one or more floors of a building that are either completely or partially below the ground floor. Slab-on-grade buildings do not have basements. keeping things humming, but rather it's a critical piece of everything insurers do." As a result, insurers are expected to slightly increase their information technology spending this year. In fact, carriers are expected to top the national average. Boston-based market research firm Aberdeen Group Aberdeen Group is a provider of business-related research services. It has its headquarters in Boston, Massachusetts and belongs to the Harte-Hanks group. Founded in 1988, Aberdeen's research is used by over 2. said that worldwide IT spending will rise annually 5% to 6% between 2003 and 2006; Celent predicts insurers will see a 7% increase during that time frame. Celent expects U.S. insurers' overall IT spending to total about $28.8 billion this year, accounting for a little less than 3% of total net written premiums. And that spending won't cease climbing anytime soon. Insurers' IT spending is anticipated to grow to nearly $42 billion by 2010. IT spending spiraled out of control during the dot-com boom See dot-com bubble. , placing much pressure on IT to drive down costs to eliminate waste, said Rick Nolle, senior vice president of IT for RGA RGA Reinsurance Group of America RGA Return Goods Authorization RGA Republican Governors Association RGA Residual Gas Analyzer RGA Royal Garrison Artillery RGA Restricted Growth Association (UK) RGA Rate Gyro Assembly Reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. Co. "Now we've eliminated the excess and we're back to the bedrock of solid spending for solid results." Property/casualty insurers likely will have the biggest hand in IT spending, driven in part by a softening softening /sof·ten·ing/ (sof´en-ing) malacia. softening a change of consistency, with loss of firmness or hardness. market, and asset growth and lower combined ratios that shaped the industry last year. Research and advisory firm TowerGroup anticipates that property/casualty carriers will increase their IT spending 2.5% to 10% over 2004 spending estimates. U.S. life and annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. carriers' IT expenditures will remain relatively fiat [Latin, Let it be done.] In old English practice, a short order or warrant of a judge or magistrate directing some act to be done; an authority issuing from some competent source for the doing of some legal act. , as they have for the past three years. But as insurers loosen their purse strings purse strings or purse·strings pl.n. Financial support or resources, or control over them: the politicians who control federal purse strings; tightened the corporate purse strings. , where will their IT dollars go? Product design; policy, core and distribution systems, and customer support are just a few of the areas in which insurers are expected to make significant IT investments. Waves of Change It's no secret that the insurance sector lagged behind other industries when it came to leveraging technology. Now, however, industry experts see a shift from insurance IT groups' "hunker-down-and-deal" mode of spending into a recognition of technology's strategic role in supporting profitable growth. "It's been easier for executives in non-IT roles to become dangerous enough to understand how technology can influence and improve their business," said Cynthia Saccocia, research director for Tower-Group. "The question now is whether CIOs have become savvy enough to introduce how technology can drive business innovation." Many industry experts believe the answer is "yes." In addition, Saccocia said vendors have become more focused on technology as a solution and are selling more to the business objectives as opposed to selling to technology itself. Insurers have engineered numerous IT spending changes over the years. Five years ago, the bulk of insurers' IT investment was geared toward improving the claims process, said John Chu, senior vice president of ebusiness and technology for Hartford Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. Group's property/casualty operations. That was followed by their refocused goal of using IT to improve carrier-agent relationships to increase productivity and streamline operations. Chu foresees yet another change. "In order for insurers to transform their businesses, they'll have to look at how they process and manage their work across the insurance domain--not just at the front end or back end." That means managing data in a very different way. "Insurers now are more centered on going after the harder pieces of the pie, which involve generally larger, longer-term investments around policy administration systems, how we rate and how we manage rules that dictate TO DICTATE. To pronounce word for word what is destined to be at the same time written by another. Merlin Rep. mot Suggestion, p. 5 00; Toull. Dr. Civ. Fr. liv. 3, t. 2, c. 5, n. 410. our business model," he said. The good news is that while IT spending is expected to rise slightly, it's not shrinking overall operating budgets Noun 1. operating budget - a budget for current expenses as distinct from financial transactions or permanent improvements budget items, operating cost, operating expense, overhead - the expense of maintaining property (e.g. . Insurers are anticipated to allocate To reserve a resource such as memory or disk. See memory allocation. less than 25% of the total operating budget to IT spending this year, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. TowerGroup, spreading budgeted dollars to various operations in infrastructure, maintenance and development. Going Shopping Much of life/health insurers' IT dollars in five years is expected to be concentrated on product design, distribution, claims and billing. Property/casualty carriers, on the other hand, anticipate increased spending on product design and distribution, according to Celent. Celent's projection of $28.8 billion in IT spending by insurers this year will be spread across several areas. Sixty-three percent of the total spent will center on maintenance of existing systems, while 37% will focus on new projects such as policy administration and service, underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. , claims, IT infrastructure, and distribution and sales. (See "New Project Spending by Functional Area" on page 22.) Hartford expects to increase its IT spending this year, making heavy investments in maintaining current operations in addition to architectural and capital investments. "A lot of that rise is really going after how we transact An earlier e-commerce system for the Web from Open Market that included order capture and secure order fulfillment using credit cards, ecash and other payment systems. It included customer service and subscription administration capabilities as well as an integrated database for reporting business, manage our data, and launch rates and rules that drive new products in how we conduct business daily," said Chu. Seattle-based Safeco Corp. will spread its IT spending across two areas--baseline operations and discretionary spending. The company has experienced overall growth over the past several years; however, its baseline The horizontal line to which the bottoms of lowercase characters (without descenders) are aligned. See typeface. baseline - released version operation costs continue to decline. "We're now generating extra dollars that we can use toward discretionary spending, and we're creating more value for the business such as in the product and distribution sides," said Yom Senegor, executive vice president, corporate strategy, and chief information officer. "It's proof that we're building efficiencies into our operations." R. Allen Al·len , Edgar 1892-1943. American anatomist who is noted for his studies of hormones and for the discovery (1923) of estrogen. Bowen, senior vice president of information services See Information Systems. for Ohio National Financial Services, emphasized the importance of product development. "We're in a competitive market and products are becoming more complicated by definition. The squeeze is on and we constantly have to figure out ways to reduce the cost of building products while keeping profitable and providing good value to customers," he said. Another area of investment choice will be to replace aging infrastructures. In 2001-2002, capital outlays capital outlay See capital expenditure. for hardware declined for five consecutive quarters--the first time since 1945, according to a report by management consulting Noun 1. management consulting - a service industry that provides advice to those in charge of running a business service industry - an industry that provides services rather than tangible objects firm McKinsey and Co. It wasn't until 2003 when companies looked to replacing aging systems that spending on hardware started to again rise by as much as 14%. The trend continues today. Buy vs. Build When it comes to IT investments, will companies buy or build? Celent believes insurers' spending habits are returning to the build side as the buying thrust in the late 1990s and early 2000s, driven by powerful vendors and insurers' move to doing everything as inexpensively in·ex·pen·sive adj. Not high in price; cheap. in  ex·pen sive·ly adv. as possible, has now changed course. "Now that
they are thinking about strategic issues and building for growth,
there's more willingness to get their hands dirty and take on more
build projects," said Josefowicz. He said that's being
accomplished by stitching together different components, modifying them
and using them as a basis for some type of framework.
For many insurers, the answer is a hybrid of the two. Pennsylvania-based Harleysville Insurance's strategy is to buy and integrate software. "Our plan is to buy software components that perform common functions, such as policy administration and billing, but at the same time, we will build capabilities that will help differentiate our products and services from those of our competitors," said Akhil Tripathi, senior vice president and CIO CIO: see American Federation of Labor and Congress of Industrial Organizations. (Chief Information Officer) The executive officer in charge of information processing in an organization. . Some believe service-oriented architecture See SOA. may be an answer. "If you try to start adopting that architectural mindset mind·set or mind-set n. 1. A fixed mental attitude or disposition that predetermines a person's responses to and interpretations of situations. 2. An inclination or a habit. , it brings into question buy vs. build a little differently," said Chu. In the past, companies with one big black box of insurance found it difficult to buy off-the-shelf products that fit all the business requirements and needs across the spectrum of insurance. "People used to want to build all the pieces so they would fit nicely together, but now if they adopt service-oriented architecture and all the pieces fit together because of new Web services (1) Loosely, any online service delivered over the Web. Such usage appears in articles from non-technical sources, but not in IT-oriented publications, because definition #2 below describes the correct use of the term. that allows translation, it prescribes a different view," be said. Aligning a·lign v. a·ligned, a·lign·ing, a·ligns v.tr. 1. To arrange in a line or so as to be parallel: align the tops of a row of pictures; aligned the car with the curb. the Future The state of insurance IT looks promising. The industry has made significant strides with the deployment and advancement of technology over the past five years, said RGA Reinsurance Co.'s Nolle. "Companies realize IT's importance, and the real key is that they're getting a return on the dollars and are spending precisely and wisely." The alignment between technology and business is helping shape that success. "I love what I see happening in the industry--I'm in there just like my business partners are today," said Catherine Brune, senior vice president and chief technology officer for Allstate. "The business looks at me as more than just their partner. Together, we're deciding where we'll spend money, and when you do that, you end up with your share of the cuts or pluses and management clearly understands what technology can do for the business." In addition, the winners in the market will be companies with a dedicated mindset to IT, said Hartford's Chu. "They need to view technology as a strategic differentiator and understand the importance IT has and what it can do across their domain." The once-lagging-behind industry is now entering what many call the most exciting time to be in insurance IT. But there's still opportunity to do many things better, said Celent's Josefowicz. "There's a lot of different challenges and, for better or for worse, IT combined with intelligent business practice is really the key to all of them." But one doesn't work without the other. "And the flipside is that you can't dump a lot of money into IT and expect to get any business value out of it without the strong strategy behind it."
10 Technology-Driven Property/Casualty Insurance Organizations
Information technology can be linked to individual success stories.
Loss-
Pure Loss Adjustment
Company/Group AMB # Ratio Expense Ratio
1999 2003 1999 2003
Personal Progressive Agency
Lines * Pool 18637 62.7 54.1 12.5 13.5
Government Employees
Group (Geico) 02933 70.9 67.4 11.5 10.6
Safeco Insurance Cos 00078 66.4 55.5 12.0 14.9
Allstate Insurance
Group 00008 59.6 58.4 14.4 12.0
New York Central
Mutual Fire
Ins Co 00700 63.9 56.7 16.1 18.0
Commercial West Bend Mutual
Lines * Group 18447 55.9 51.8 12.3 9.4
Travelers PC Pool 18311 64.5 61.5 8.7 9.6
Selective Insurance
Group 03926 65.1 59.9 9.4 10.8
Zurich America
Insurance Co 02563 61.3 66.5 15.7 15.5
American
International
Group 05953 65.6 64.3 11.7 12.3
Noncommission Combined
Company/Group Expense Ratio Ratio
1999 2003 1999 2003
Personal Progressive Agency
Lines * Pool 16.3 12.9 99.5 87.7
Government Employees
Group (Geico) 17.6 15.3 100.3 93.6
Safeco Insurance Cos 14.2 13.2 108.6 99.6
Allstate Insurance
Group 14.5 12.6 99.2 95.2
New York Central
Mutual Fire
Ins Co 16.6 9.7 104.8 99.5
Commercial West Bend Mutual
Lines * Group 14.6 13.6 101.8 91.8
Travelers PC Pool 14.9 10.4 102.8 96.6
Selective Insurance
Group 14.6 14.9 106.0 101.6
Zurich America
Insurance Co 20.8 17.6 111.4 101.5
American
International
Group 15.5 9.9 97.6 94.9
* Indicates leading lines of business
Source: A.M. Best Special Report "Technology Today," March 28, 2005
Key Points * U.S. insurers' overall IT spending is expected to total about $28.8 billion in 2005 and will rise to nearly $42 billion by 2010, according to Celent. * Property/casualty insurers are spending more on IT than life and annuity carriers in 2005, driven by a softening market, and asset growth and better combined ratios. * Insurers are expected to invest growing IT dollars in such areas as product development; policy, core and distribution systems; and customer support.
U.S. Insurer IT Spending
2005-2010
Insurance IT spending is expected
to grow from 205% to 3% of net
written premiums today to
between 3% and 3.5% in 2010.
L/H P/C ($ Billions)
2005 $15.6 $13.2
2006 $16.7 $14.5
2007 $17.7 $15.9
2008 $18.8 $17.4
2009 $20.0 $19.0
2010 $21.2 $20.8
Note: Table made from bar graph.
Source: Celent analysis
New Project Spending by Functional Area
New project investment in 2005 will center on policy
administration and services; underwriting; claims; IT
infrastructure; distribution and sales; and billing.
($ Millions)
P/C L/H
Policy admin. and service $897 $1,393
Underwriting $763 $894
Claims $768 $503
IT infrastructure $433 $743
Distribution and sales $470 $665
Billing $511 $347
General and administrative $268 $479
Actuarial/product design $409 $286
Contact center $367 $290
Reinsurance $72 $82
Asset mgmt. $52 $57
Note: Table made from bar graph.
Source: Celent analysis
Learn More Allstate Insurance Group A.M. Best Company # 00008 Distribution: Exclusive agents Harleysville Insurance A.M. Best Company # 03916 Distribution: Independent agents Hartford Financial Services Group Inc. A.M. Best Company # 18217 (Hartford Insurance Pool) Distribution: Agents and brokers Ohio National Life The Ohio National Life Insurance Company, is headquartered in Cincinnati, Ohio. It was originally founded as a stock company in 1909 but converted to mutual company status in 1959. In 1998, Ohio National reorganized as a mutual insurance holding company. Insurance Co. A.M. Best Company # 06852 Distribution: Career agents, personal producing general agents, institutional sales system Reinsurance Group of America Inc. A.M. Best Company # 58089 Distribution: Direct with clients Safeco Insurance Cos. A.M. Best Company # 00078 Distribution: Independent agents Guardian Life Insurance Company of America The Guardian Life Insurance Company of America (GLICOA) is a Fortune 1000 company founded in 1860 in New York, New York. It is the fourth largest mutual life insurance company in the United States of America. A.M. Best Company # 06508 Distribution: Career agents, independent agents, brokers, group representatives For ratings and other financial strength information about these companies, visit www.ambest.com. RELATED ARTICLE: Filling the shopping cart. Besides investing in product design and core and distribution systems, insurers also are expected to concentrate IT dollars into several other areas: Data Management. As players in a data-intensive industry, carriers are expected to open their wallets when it comes to data and content management. "There are no silver bullets No Silver Bullet - essence and accidents of software engineering is a well-known paper on software engineering written by Fred Brooks in 1986. Brooks argues that there will be no more technologies or practices that will serve as "silver bullets" and create a twofold in this industry," said Yore Senegor, executive vice president, corporate strategy, and chief information officer for Safeco Corp. "We have to continuously refine and improve our operations, and better information allows us to do that." Ohio National has named content management as one of its major IT initiatives this year. The initiative is driven by the company's increased focus on Web delivery and a greater emphasis on governance Governance makes decisions that define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of management or leadership processes. Sometimes people set up a government to administer these processes and systems. and compliance. Staffing. Recruiting and retaining IT staffing and internal resources will continue to receive a significant part of insurers' IT dollars, although many don't foresee fore·see tr.v. fore·saw , fore·seen , fore·see·ing, fore·sees To see or know beforehand: foresaw the rapid increase in unemployment. a rise in spending this year. Guardian Life, for instance, expects the 55% of its IT budget dedicated to staffing to stay level from year to year. Some insurers, however, anticipate adding IT dollars for consulting services Noun 1. consulting service - service provided by a professional advisor (e.g., a lawyer or doctor or CPA etc.) service - work done by one person or group that benefits another; "budget separately for goods and services" and outsourcing (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management. . Lack of resources has driven up Safeco's discretionary spending on staffing this year, said Senegor, adding that the company will turn to external providers to fill the gap. Customers First. Customers will be at the heart of insurers' IT investments this year. According to a recent CIO Insight survey, profitability and boosting customer service are important strategies for most companies, and as a result, IT initiatives that support customer service, sales and marketing--such as customer relationship management, business intelligence and content management--are expected to see the greatest budget increases this year. Allstate will dedicate ded·i·cate tr.v. ded·i·cat·ed, ded·i·cat·ing, ded·i·cates 1. To set apart for a deity or for religious purposes; consecrate. 2. a significant portion of its anticipated 5% to 7% increase in IT spending to enhancing customer support. The company will make investments in billing, customer interaction via its Web site and ease of doing business, said Catherine Brune, senior vice president and chief technology officer. New Projects. Insurers will continue to feed IT dollars into the development of new projects--everything from new imaging systems to business intelligence. A portion of Guardian Life's IT spending will be devoted to several new projects and existing initiatives. For instance, the company is investing in the completion of a straight-through-processing initiative this year that gives end-to-end end-to-end a pattern of anastomosis in which severed ends are matched and united, in contrast with other patterns such as end-to-side or side-to-side. Usually applied to anastomosis of the intestine. automation to the new-business-application, underwriting and policy-generation process in a disconnected or connected e-signature mode. RELATED ARTICLE: The big spenders Noun 1. big spender - one who spends lavishly and ostentatiously on entertainment; "the last of the big spenders" high roller scattergood, spend-all, spendthrift, spender - someone who spends money prodigally . Property/casualty insurers are expected to see the most significant growth in information technology investments this year, particularly personal and small commercial lines carriers--segments that Brad Brown Brad Brown (born December 27, 1975 in Baie Verte, Newfoundland, Canada) is a defenceman currently playing for the Toronto Marlies of the AHL. Playing career Brad Brown was drafted in the first round, eighteenth overall, by the Montreal Canadiens in the 1994 NHL Entry , a senior partner in the IT practice for management consulting firm McKinsey & Co., says are most ripe for technology. The industry is in an arms race now, due in part to pricing capabilities and online real-time 1. real-time - Describes an application which requires a program to respond to stimuli within some small upper limit of response time (typically milli- or microseconds). Process control at a chemical plant is the classic example. capabilities for quoting, underwriting and issuance. "It comes down to the fact that the whole ease of doing business is critical for distribution of products as well as agency retention and improved pricing models," he said. IT also is critical for property/casualty insurers because of competitive necessity. "They're trying to at least match other players with their technology and at the same time differentiate themselves on the basis of product and relationship," Brown said. Property/casualty insurers' IT spending will focus on several areas, such as product design and distribution. In addition, independent market analyst Datamonitor predicts much of property/casualty carriers' IT dollars will be invested in claims management systems. In its recent "Claims Automation in U.S. P&C Insurance" report, Datamonitor said U.S. property/casualty insurers are anticipated to pump $4 billion into revamping these systems this year. Claims processing will account for the bulk of IT expenditure, while claims handling, driven by the uptake uptake /up·take/ (up´tak) absorption and incorporation of a substance by living tissue. up·take n. of the Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the as a factor in all phases of the claims cycle, will experience a growth rate of more than 12% through 2007, according to the study. In addition, property/casualty insurers will continue to enhance the agent experience. While direct writers appear to be making investments in call centers and Web platforms to service customers better, the big focal area soon will be agent service, said Brown. Life insurers, on the other hand, don't have an impetus Impetus is a stimulus or impulse, a moving force that sparks momentum. Impetus may also refer to:
n. The sum of a person's intellectual capabilities or endowment. , he added. "They're finding cost savings at the same time that they're making investments." Life insurers will continue focusing on distribution, making heavy investments in sales force technologies such as sales illustration tools, product portals, mobile technologies and lead generation tools, Brown said. TowerGroup predicts U.S. life and annuity companies will concentrate about 48% of their IT dollars on internal resources, with the remaining 32% spent on external allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as and 20% on hardware. Property/casualty insurers' spending is comparable, with 52% dedicated to internal resources. |
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