Insurance & Technology asks a panel of distinguished industry observers what the new year will bring for senior technology executives of insurance companies. Further consultant commentary will appear in I&T's 2004 Business Technology Forecast print and online issue, along with interviews of I&T's Reader Advisory Board members, analysis by TowerGroup, reporting on the regulatory compliance outlook for the year, and notes on industry association activity.
I&T: Where are the smart IT dollars headed in 2004?
Bill Pieroni, IBM: We will see a drive towards multi-channel and multi-product strategies along with increased interest in business transformation outsourcing. Insurers increasingly have to juggle multiple distribution partners under a multitude of different distribution agreements. Insurers must look to replace or outsource inflexible, legacy platforms with single, standardized systems. In addition, vendors must provide insurers with an effective means to manage their channels and touch points while preserving key product differentiation messages. Enabling insurers to establish a customer-focused strategy using technology will ensure increased profits through improved penetration and relationship development.
Tim Plunkett, PeopleSoft: Thanks to many of the top executives at insurance carriers now coming from the banking and capital markets area, the need for detailed analytics and reporting will only intensify, and the need to know detailed P&L's at anytime becomes a norm. Having been an underwriter, I also marvel at the technological tools available today to underwriters and claims people. Where my tools were mud boots, a folding ladder and a Polaroid camera, today's insurance professionals have cell phones, digital cameras, Web access, laptops, tablet PC's, Blackberries, XML ACORD standards and access to knowledge databases.
I&T: What are some of the key business trends that will drive insurance company investment in technology?
Bill Ruh, Software AG: Compliance, compliance, compliance. I can't say it any stronger. The federal laws are huge, but there are a large number of state-based rules, and compliance at the state level is a huge thing. Managing the compliance process is very important. With Sarbanes-Oxley, there is a trend towards fiscal and financial processes that are solid. Everyone looks at the stock market, and the shareholders do not play games. Executives are looking for real-time reporting and executive dashboards.
Paul Himes, Keane Worldzen: Business process and application outsourcing are being viewed as tools that provide an effective means to improve business operations and IT efficiencies. Business process outsourcing will help insurance companies to reduce spending on back office operations, enabling a greater focus on product development and marketing.
Tim Plunkett, PeopleSoft: The biggest driver we see today is new regulation, especially Sarbanes-Oxley. Everyone wants to keep their executives out of jail by having best-of-breed financial, analytical and reporting applications. The insurance industry is risk-adverse by nature, and best-of-breed is one of the things they will insist upon.
I&T: The M&A market is heating up. Will this continue? What are some of the drivers behind the M&A activity?
Bill Ruh, Software AG: We are going to see large multi-line players provide soup-to nuts product offerings and then there are the players that will try to become leaders in niche markets because it is hard for a to compete with the multi-line players. The M&A market is driven by players that do not want to be a niche and want to be a large player because there is very little organic growth nowadays. I don't think we have seen the end of the activity. In fact, we haven't begun to see the large deals yet.
Bill Pieroni, IBM: M&A has been occurring for life insurance carriers (and with limited activity in property & casualty) seeking to gain scale and scope economies in their core business. This is happening through both purchase of books of business and entire companies. To optimize overall expenses, financial services firms have been refocusing on their core business, occasionally divesting books of business that are considered non-core. AIG's recent purchase of GE's insurance business is an indication that GE's financial services arm is willing to divest non-core activities to focus on its major activities such as commercial lending. On the other hand, fearing that only a small number of life insurance carriers will dominate the North American insurance market, large carriers are more willing to acquire sizable companies to compete effectively for product and channel dominance. The flurry of Canadian life insurers acquiring carriers, such as Manulife's acquisition of John Hancock, is an indication.
I&T: Many buyers are consolidating their IT expenditures with a few IT "partners." What are the advantages for the carriers? Disadvantages?
Bill Pieroni, IBM: We are seeing increased focus by insurers on successful solution packages. Insurers are still generally focusing on shortest path to the operational solution, rather than enterprise architecture redesign, and if they can find a vendor combination package that will get them there, that they're certainly preferring to do this. When insurers do worry about IT standardization, a frequent response is to standardize on an end-to-end ERP. As much as product, insurers are looking for the correct, new end-to-end technical paradigm. Much of the talk about components and services oriented design and solution packages is confusing, but insurers are receptive to the end-to-end component based vision.
Tim Plunkett, PeopleSoft: Insurance carriers are definitely looking to reduce the number of applications or systems they have to work with. In fact, we see that as a stated objective in many RFPs. Insurance carriers realize there is a limit to the number of applications they can expect their people to be certified/expert on. A few years ago, insurance carriers were examining their core competencies as to what lines of business to stay in and what their strategies would be, and at the same time, the IT departments also had to examine what was core and what was non core. Many carriers decided to purchase pre-packaged software or outsource through a partner who had the core expertise for the non-core applications/systems. The immediate advantage was cost savings, and the CIO had more control over the budget knowing that systems outsourced in this way were now a fixed monthly expense. With the experts now delivering the services, insurance carriers realized another advantage with the ease they could upgrade and stay current with technology.
I&T: Which emerging/maturing technologies and trends will make an impact on the insurance industry in 2004?
Bill Pieroni, IBM: Limited discretionary investment spending will continue to force insurers to look for opportunities in a sourcing model across the organization to optimize expense and revenue. Insurers will need to variabilize costs and closely align expenses with cash flow. As the hard market tapers off, the soft market will require further focus on claims and underwriting to continue to gain cost efficiencies. We will see industry leaders continue to reduce operating expenses as many wrestle with declining investment income and reduced reserves and surplus. The recent increase in merger and acquisition activity will drive investment as insurers try to achieve synergies from the consolidation.
Tim Plunkett, PeopleSoft: Another driver in technology investment is that the CIOs of today are not coming from the traditional insurance company paths. Newer CIOs have seen first-hand how technology has transformed the industries they worked in before. You can see the excitement in their eyes as they roll out their vision and know they can make bottom line contributions and be viewed just as much of a strategic partner as is underwriting or claims.
General Manager, Global Insurance Industry
IBM (Armonk, N.Y.)
Global Industry Consultant, Insurance
PeopleSoft (Pleasanton, Calif.)
Bill Ruh, SVP of Professional Services
Software AG (Reston, Va.)
Executive Vice President
Keane Worldzen (Boston)
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio