The Next Generation Numbers Game

Investment and financial management software provider SS&C (Windsor, Conn.) CEO Bill Stone has seen similar growth in outsourced solutions. "There has been an increasing move to business process outsourcing, and to relying on vendors to manage back-office technology and staff for accounting functions," he says.

SunGard's senior vice president, sales and marketing, David Pitman, believes clients are attracted to ASP solutions because it allows them to rely on the considerable resources of the software vendor, or, as he says, "We're the experts, so you don't have to worry about managing systems and regulations."

According to TowerGroup's Lind, cost is another key factor. "I believe cost is the No. 1 issue in the increasing interest in ASP and outsourced solutions. That said, I also see mindsets modernizing when it comes to understanding that having data reside at a vendor site is not a risk."

The increasing comfort level associated with accessing data remotely through the Web is yet another factor in the ASP equation. "Along with wanting to maintain a smaller staff and less hardware on-site," SunGard's Pitman says, "insurers are also more accustomed to accessing applications via the Internet and perceiving that as a benefit rather than a risk."

In addition to cutting costs, insurance portfolio managers are also looking for new ways to increase returns, and some are even looking to vendors to outsource certain investment management functions. Michael Doucette, managing director, strategic solutions, Princeton Financial Systems (Princeton, N.J.), a portfolio management systems provider, sees "lots of our customers asking themselves what our core competencies are and, in addition to outsourcing technology and accounting functions, are even looking for help with asset and portfolio management."

"Insurers are now allocating a percentage of their portfolios and cash into hedge funds, which have not only had better market performance compared with other types of investments, but which require new kinds of technology to execute," comments SS&C's Stone. "Insurers' entrance into the hedge funds is having a big impact on the hedge fund industry because insurers want transparency, which, in the past, these funds have been reluctant to provide."

Rocky Gillis, investment product manager for the insurance solutions group at Brookfield, Wis.-based Fiserv, says insurers are becoming interested in "more exotic investment vehicles." Looming behind many recent IT decisions are increasingly stringent accounting, regulatory and compliance issues. "Even though the insurance industry has always been highly regulated," he says, "we are now seeing regulations snowball, and our clients are looking to us to be more proactive in terms of staying current with key legislative and regulatory decisions."

The Cost of Compliance

The Sarbanes-Oxley Act and its Section 404, which requires corporate executives to assert the effectiveness of internal controls over financial reporting, has had a particularly profound impact, since the level of personal risk to executives has been raised. Additionally, it is not only the accuracy of the reports, but the accuracy of financial reporting processes that executives must ensure.

Many experts believe the regulatory climate is only going to become more stringent as additional legislation related to SOX is passed. SunGard's senior vice president Tara Winters sees the potential for "IT spending related to SOX surpassing Y2K spending in the insurance industry."

Although SOX compliance is required of only public companies, some private firms are also tackling issues related to the legislation. But some in the insurance industry question whether the new regulations are necessary in an industry that is already highly regulated. Steve Broadie, vice president, financial legislation and regulation, Property Casualty Insurers Association of America (PCI; Des Plaines, Ill.), comments that "Our basic concern is that SOX was designed for an entirely different set of companies and a different kind of reporting, and applying it on top of existing regulations will be expensive and redundant."

While the actual IT costs associated with SOX have yet to be calculated, the cost of consulting fees, auditing fees and internal resources is significant. A 2004 survey conducted by Chicago law firm Foley and Leidner estimates that "The average cost of being a public company has increased $1.6 million from the inception of SOX." The report projects an additional $600,000 in auditing fees associated with the new compliance regulations and 12,000 hours of internal work. One unanswered question is whether these costs will be one-time or ongoing, annual charges.

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