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Take a bearing: in 2005, insurers will allocate IT spending to projects that support development and growth to meet one of six business objectives.

Key Points

* Information technology spending in the U.S. insurance industry is projected to remain relatively flat from 2004 to 2005.

* TowerGroup estimates that insurers will allocate less than 10% of the total operating budget to IT spending in 2005.

* One way insurers can achieve their 2005 objectives is by formalizing the process to interlink business and IT strategies.

Riding the 2004 wave of positive momentum into the new year, the insurance industry has an optimistic outlook for 2005. Although the second half of 2004 seems a torment of squalls, such as catastrophe losses and allegations, the property/casualty industry expects to report record operating results and the life/health industry is charting its way through the perfect storm. Each industry is reporting strong investment returns with the tail wind of the financial markets. In 2005, insurers must focus on the present opportunities to gain competitive advantage and drive shareholder value in business strategy and technology investments. Those insurers who locus on growth, cost containment and customer service will weather prospective storms.

Regulatory crosswinds could push the insurance industry off its heading because the long-term implications of recent state investigations are unknown. Like its securities and investment brethren who faced similar challenges in 2003, the insurance industry will be in the spotlight and is apt to face changes in its general business practices. Therefore, the following perspectives do not yet reflect any impacts to business policies from the current investigation that the industry may need to address and overcome. TowerGroup strongly recommends that insurers minimize distractions, both internally and externally, and focus on opportunities to capitalize on the momentum from the past two years.

IT Spending

Information technology spending in the U.S. insurance industry is projected to remain relatively flat from 2004 to 2005. There will be certain differences, however, in the way each business line directs its resources. TowerGroup forecasts a slight increase in total IT spending for property/casualty insurance from its 2004 estimates to reflect the pent up demand for new technology. IT spending in life and annuity insurance will be flat as insurers work hard to capitalize on existing investments and explore alternative sourcing strategies. Each industry, however, is likely to face challenges in considering bigger IT budgets and will need to concentrate on the effective use of finite resources.

TowerGroup estimates that insurers will allocate less than 25% of the total operating budget to IT spending in 2005 and spread budgeted dollars to various operations in infrastructure, maintenance and development. The biggest challenge facing insurers today is the effective use of budgetary dollars in these three areas. Insurers have yet to find the keen balance between them, so that they can allocate more money to development and less on maintenance and infrastructure. Insurers should employ the same discipline for return on investment and priority setting they use in the development budget to the maintenance budget.

Allocations in 2005 will remain consistent with approximately 30% of the IT budget going to infrastructure costs such as software, hardware and networking. Insurers then usually split the remaining 70% of the budget between maintenance, such as regulatory changes, production support and minor enhancements to existing applications, and new development, such as major enhancements to existing applications and new projects. The greatest amount of scrutiny will take place in the maintenance and development budget as insurers spread these resources thin to address a multitude of business demands.

Six Strategic Bearings

In 2005, insurers will allocate resources to projects that support development and growth to meet one of the following business objectives: profitability, operations, governance, distribution, customer service and outsourcing. These imperatives taken in concert are a powerful combination, especially when companies closely align business and IT strategy. The following is a brief description for the six 2005 strategic business and IT initiatives.

1. Profitability

It continues to be difficult for insurance companies to generate higher returns, but there have been investment return improvements. Those insurers able to effectively compete because of their scale or those that have taken steps to streamline operations will demonstrate better results. Strong underwriting results are another predominant factor to improve performance. For insurers to maintain profitable operations, they must employ strict underwriting discipline and lower operational expenses to sustain earnings over time as opposed to riding the investment cycle. For example, risk segmentation, predictive modeling, and product management are essential elements to conduct competitive underwriting. In addition, insurers must identify opportunities for automating and streamlining underwriting and rating to reduce costs. Other ways to improve profitability include fraud protection to detect leakage and performance analytics to align financial objectives with individual business units. These in concert with the next initiative in operational efficiency are primary ways for insurers to achieve profitable and sustainable growth.

2. Operations

Operational efficiency is an integral component of profitability, and many insurers report it as the best route to strong profitability. There are two ways to achieve this state, either to reduce the amount of capital needed to sustain the business or to raise the profitability of the insurance operation. Insurers must be able to make money on the business of insurance as opposed to its dependency on investment returns to sustain operations. For example, enterprise content management is a strategic imperative that insurers must regard as a core infrastructure component to adequately resource and administer. Insurance companies are drowning in content because they lack the enterprise view for how to integrate content and business processes. With the right architecture in content, document and records management, insurance companies can control content and turn it into an asset. Insurers should evaluate other initiatives in straight-through processing to reduce manual intervention that often results in costly errors. In addition, ongoing work in legacy system transformation toward flexible enterprise architecture is imperative for insurers to further reduce system maintenance costs and meet new objectives in operational efficiency.

3. Governance

Insurers are in the business of managing risk, but few incorporate that discipline into their everyday management activities. Their current state tends to be apathetic; however, they desire a robust future state where risk management is embedded in their day-to-day operations so that they can proactively address material changes in the operation. It is imperative that insurers strive to align the top office with individual business units. For example, performance metrics provide enterprise access to daily internal controls for overseeing and managing operational risks relative to capital objectives. Insurance companies recognize that they must enhance their reporting environment for executives and managers to help them make better fiscal decisions.

To achieve this state and change how they deal with risk and capital management to sustain long-term profitability, organizations look to technology for the foundation. In addition, insurers must closely align compliance with business operations and IT to try to stay ahead of new requirements. Further, we expect insurers to closely examine their security environment to support opportunities in communications such as the Internet, e-mail, wireless and voice-over Internet protocol.

4. Distribution

Gathering assets through partnerships and affiliations is critical for insurers to attract and retain more profitable distributors than their competitors. As a result, insurers must shift their view of distribution from a cost of doing business to a core part of their business. Insurers must work collaboratively with their distribution partners by using tools to facilitate communication, disseminate information and supply analytics. For example, customer and partner relationship management tools help insurers bridge the gap between strategic retail objectives and tactical territory activity. These software applications give companies the tools to make certain that activities drive the revenue objectives of both the insurer and its retail partner. Insurers should continue to capitalize on their experience with Web services and portals and explore further their options to control incentive compensation in light of recent investigations into the practice of insurance commissions.

5. Customer Service

In order to retain their customers, insurers need to promote their business and actively engage their customers for retention and an increase in share of wallet. To achieve this objective, insurers are shifting from a model focused on products to a model that focuses on the customer. To derive profit from a customer-focused model, an insurer must change the way it does business by integrating its use of key technology. For example. single customer view is dependent on collecting data from various systems to make information available to all lines of businesses in a single interaction. Insurers must expand their services to lower operations costs by delivering services from high-tech to high-touch based on a customer's economic value. The biggest obstacle to achieving this state is the ability to move from a number of separate product-focused legacy systems to a more flexible, unified architecture.

In concert with this objective, insurers must better understand their customer base. Segmentation helps insurers become more knowledgeable about their customers and distribution partners, which further enables them to target the right mix of scalable services. The three principal objectives for an insurance company to implement scalable solutions include lowering associated operating costs, improving business processes and increasing revenues. Insurers can achieve this goal with the right set of business intelligence and enterprise-reporting tools as a means to strategically align its products and services with customer value. Lastly, insurers must explore alternative communication methods to align delivery channels such as the Internet, call center and face-to-face customer communications.

6. Outsourcing

Insurers struggle to support their strategic initiatives because not enough resources are available to support development while they try to deal with their legacy operations. Principles such as a project management office, enterprise blueprint and standards help lay the foundation for strategic resource management. Numerous options available to insurers today give them flexibility to extend their finite resources and manage all business in different states of maturity. Insurers can direct an array of activities with a combination of internal and external resources in business and technology services such as domestic or foreign investment in captive sites, flexible alignment of internal resources, information technology outsourcing, and business process outsourcing. Insurers must find alternatives to expand support across the enterprise for development and growth business and diminish the resource drain from mature business lines and the supporting technology.

The Year Ahead

In 2005, insurance companies will face a number of challenges to grow the business, contain costs and mitigate risks. The new year will probably bring more regulatory requirements and change new business practices. It is certain that each insurance company will address these challenges individually and respond to the unique needs of its organization.

One way that insurers can lessen distractions and achieve their 2005 objectives is by formalizing the process to interlink business and IT strategies in areas such as priority setting, executive oversight, monitoring and reporting and project management. Most insurance companies understand the significance of both a vision and a strategy for IT, but the level of detail and formality varies. Insurers with strong, detailed plans that employees throughout the company understand are ones with tight IT and business alignment. When insurers closely align business objectives with IT, projects tend to be strategic with strong, tactical executions that have a positive impact on both the expense line and bottom line.

Deborah Smallwood is vice president of the insurance practice at TowerGroup, an advisory research and consulting firm focused on the global financial-services industry.
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Title Annotation:Technology
Comment:Take a bearing: in 2005, insurers will allocate IT spending to projects that support development and growth to meet one of six business objectives.(Technology)
Author:Smallwood, Deborah
Publication:Best's Review
Geographic Code:1USA
Date:Jan 1, 2005
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