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Carriers Take More Disciplined Approach to Vendor Relationships

As carriers apply more discipline to the process of justifying the business value of technology investments, the vendor community is adjusting accordingly.

Though the current financial turmoil is shared by all insurance technology organizations, each seems to be attacking the problem in its own way. For some, IT budgets are down; for others, technology investment is up. While many carriers simply are looking to weather the storm, others view the crisis as an opportunity to gain competitive advantage.

What nearly all insurance CIOs share, however, is a reaffirmed sense of value. For those who have seen their budgets cut for 2009, it is more critical than ever that every dollar is well spent. Meanwhile, for those looking to continue ambitious projects in the tough economic climate, it will be imperative to justify IT spending in terms of hard-dollar savings or bottom-line contributions to the business.

"The economic climate is requiring us to work with our business partners much more aggressively on prioritization," says Rick Roy, SVP and CIO at Madison, Wis.-based CUNA Mutual ($15.2 billion in assets). "Simply said, there are fewer discretionary project dollars to spend across our various product areas so there's a big need to make sure we're really prioritizing carefully what we're going to spend money on."

Mark Gorman, principal of Minneapolis-based consulting firm Mark B. Gorman & Associates, says recent events such as the struggles of industry giant AIG have led insurers on "a flight toward safety" and to "return to higher-value propositions." Carriers, he explains, are reevaluating how technology delivers value to the business with an eye toward business performance.

"We're seeing a movement toward a business view of value," Gorman comments. "The current commercial environment is focusing organizations on ... core operations and an increased drive toward business value in their investments."

Clearly insurance technology vendors are feeling the transitive effects of the crisis. Tough economic times have forged more-disciplined, more-value-conscious CIOs, and vendors have had to adjust their value propositions accordingly.

"This is an opportunity for the vendor community to look at the current financial situation and say, 'Can we make a business case for whatever type of technology solution that we're proposing, to not only generate efficiencies and cost savings but also to help strategically on the growth side?'" says Scott Morrison, VP of marketing for Okemos, Mich.-based compliance solutions vendor Sircon.

Of course the implications of the crisis on vendors will become more apparent as 2009 unfolds and insurers tighten their belts further. "We at first didn't see [spending cuts] in September," Morrison recalls. "Then in October and into November we started to see it a little bit in sales cycles that we were actively involved in."

Most carriers already were finalizing IT budgets as the crisis came to a head at the end of the third quarter. As a result, Morrison adds, many insurers already are reevaluating those plans. "The outcome of some of that activity is going to start to show up," he says. "The belt-tightening [will lead to] a greater focus on evaluation and greater demand for accountability in technology decision making."

Show Me the Value

In the past few months carriers have been demonstrating more caution in the technology buying process, according to Morrison, who notes that while companies still place value on business drivers such as ease of doing business, they are pressing vendors to demonstrate that value in more-concrete ways. "Over the next six to 12 months there will be further requests to try and quantify that so that [insurers] can build [ease of doing business] into whatever ROI models they have when they make these types of technology investments," Morrison comments.

Ray August, president of Falls Church, Va.-based CSC's P&C insurance division, expects changes regarding insurers' requests for proposals (RFPs). "Traditionally RFPs have addressed IT needs for a current state of the business. In these economically challenging times, we expect and have started to see RFPs address the future state of where the company wants to go," he explains. "They are streamlining resources and systems out of necessity, and they are looking for collaborative partnerships that can help them keep afloat and even become more competitive during difficult times."

At Vertafore -- the parent company of insurance vendors Sircon, AMS, ImageRight and SilverPlume -- changes in the RFP process are already apparent, reports the Bothell, Wash.-based company's VP of business development, Peter Zale, who says carriers have established more-rigorous screening processes from a business and technical perspective. "People are being a little more careful, and we are starting to see a little bit more emphasis on proofs of concept," Zale says. "[Insurers] expect real hands-on experience to test software and functionality over a real period of time."

Zale also suggests that while insurers haven't necessarily shied away from enterprisewide projects, many are now choosing a more phased implementation process. The strategy, Zale explains, is to create a series of measurable "proof points" where each phase helps justify further rollout. "Carriers still see the value of an enterprisewide deployment of certain types of technology, but maybe they're consuming it in more bite-sized or manageable pieces that they can justify either from a cost standpoint or a risk standpoint ... as opposed to taking it on as a huge project all at once," he says.

"That phased approach does two things," adds Mark B. Gorman & Associates' Gorman, who notes that enterprise risk management (ERM) technology has become a top priority among insurers as a result of the financial crisis. "It delivers value earlier, and it reduces risk."

Over the past four months, Gorman relates, he has received more inquiries about running Monte Carlo simulations across multiple risk factors than for any other technology. "People are no longer looking at their enterprise risk management in contained silos or as self-reported risks," he reports. "Now they're looking for the ability to measure the interrelationship of risks across the organization and ... to simulate that risk on a broader basis than they can with, for example, their CAT modeling."

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