Economy Forces Insurers to Refocus IT Spending

As company after company misses earnings estimates and some organizations begin to cut laborexpenses, many wonder what will happen to insurance IT budgets.

When New York-based Citi-group, Inc. ($902 billion in assets) announced last month it may cut up to $2 billion in spending, the markets trembled. But Diana Beecher, senior vice president and chief information officer of Citigroup unit Travelers Insurance (Hart-ford), says cost-cutting measures have been planned for some time. "Most of the savings are related to the natural evolution of bringing together all of the businesses related to Citigroup," says Beecher.

For instance, adds Beecher, "The biggest savings are from the purchasing power. We can get the lowest possible price based on our size."

At Columbus, OH-based Nationwide Insurance ($194 billion in assets), Kelly Can-non, vice president of information technology, says the increase in IT spending will remain constant. "We have been on a double-digit growth path in IT spending for four to five years," he says. "The rate...has been constant, including for 2001."

However, David Annis, CIO at The Hartford ($172 billion in assets), says the company's IT budget for 2001 has increased, but not as much as in previous years. "This year the IT budget is up five to six percent from last year," says Annis. "But the increase for 2001 is less than other years—previously it was 10 to 15 percent per year. We go through our IT budget in detail every year. We have gone through a couple of rounds of budget reviews, but I have not made cuts based on poor economic outlooks."

Technology vendors concur that, while there is increased scrutiny, there have not yet been massive cut-backs in IT spending. John D'Alusio, senior vice president, strategic business development at HNC Insurance Solutions (Irvine, CA), has not yet seen the weak economy result in spending cuts. "We have not seen a decline in revenue tied to the economy," he says. "We would have to go beyond a recession to a depression for an insurer not to spend $200,000 for an HNC fraud system."

Nonetheless, "companies are looking to trim non-critical IT spending," says David Holtzman, partner, financial services at Chicago-based Andersen's business consulting group (formerly Arthur Andersen). "They have told IT that it should rethink spending and the use of outside consultants," he says.

However, spending "smarter" seems to be the current trend in insurance, as companies still need to develop Web-based systems but also need to control spending. "I am spending exactly the same amount, adjusted for inflation, as I was in 1998, but I am doing more with it," says Cecilia Claudio, senior vice president, CIO and chief transformation officer at Los Angeles-based Farmers Group, Inc. ($12.8 billion in assets). For instance, "We have outsourced the maintenance of the legacy systems to India and that has helped us reduce payroll. Farmers also has a different labor mix. In 1998, we had many consultants. We have replaced them with employees."

In fact, the consulting industry may be the hardest hit by the slowing economy. "Companies are cutting out consulting," says Benjamin Tomb, managing director, financial services, at KPMG (New York), an e-CRM systems integrator and consulting firm.

However, many companies are looking to increase IT staff, while other sectors of the economy are cutting back. "There have been no labor reductions," says Nationwide's Cannon. "Nationwide is looking to hire 100 IT people."

While most spending cuts seem to be trimming excess expenditures, KPMG's Tomb warns against trimming too much. "The pullback in spending is more of a knee-jerk reaction," he says. "Some companies are recognizing the slowdown as an opportunity to clean out deadwood," or outdated programs. "However, insurers are reverting to what they were doing before—waiting."

A decrease in new spending for 2001 may give the appearance of a slowdown in technology development, when the opposite is true. "In '99 and 2000 we made a lot of investments in new technology," says Farmers' Claudio. "In 2001, we are finishing a lot of those projects. We don't have a lot of new initiatives that we hadn't already put on the plate—and the budget—in 2000. Now we are putting them out on the street."

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