Despite Downturn, Insurers Remain Committed to Core Systems Evolution

Despite the gloom that has consumed the financial services industry, most insurance companies remain bullish on technology investment and many are looking to build out policy admin capabilities to position themselves for growth as the economy emerges from the recession.

The financial services industry remains mired in turmoil, as every day brings new omens, recriminations and prognostications of doom. While insurance has fared better than other sectors, its largest company has become a symbol of the crisis and a focus of public outrage over perceived mismanagement and greed. Many other insurers have taken a beating in their investment income and, as the economic downturn evolves, can expect a hit to premium income as well.

Given these gloomy conditions, one might logically ask: Is this any time to be investing scarce resources in core insurance systems? According to Mike Clifton, chief technology officer for The Hanover Insurance Group, the answer is a resounding “Yes!”

Despite the financial crisis and the longer-term economic downturn, Clifton says, when it comes to technology investment at The Hanover ($2.5 billion in 2008 revenue), “We are still as aggressive as we were before the downturn.” If anything, he adds, the Worcester, Mass.-based P&C carrier is investing more aggressively in core systems.

Clifton is not alone. “We are aggressively investing in technology,” says Robert Fullington, president of Jacksonville, Fla.-based Life of the South’s LOTSolutions technology company. Fullington notes that LOTSolutions sees opportunities for both cost reduction and expansion of capabilities and services.

The outlook is similar for New York Marine and General Insurance Company, reports Craig Lowenthal, the carrier’s EVP and CIO. “The economic downturn hasn’t changed our approach to technology investment at this point; in fact I believe this is a great time to invest in key initiatives,” he comments. “Being able to successfully execute on key initiatives at this time will position your company to be that much more competitive as the country emerges from the recession.”

These technology executives’ opinions are representative of many others — from a wide variety of companies in terms of size, lines of business and geographic location — with whom Insurance & Technology has communicated since the beginning of 2009. This bullishness is in significant measure a manifestation of insurers' strong capitalization, owing to the strict solvency rules to which the industry is subject.

Staying the Course for Tech Investment

To the extent that a given insurer has not been devastated by the financial crisis, it is likely to continue its strategic technology investment, observes Donald Light, a San Francisco-based senior analyst with Celent. “Policy administration replacement is a little like sailing an ocean liner — it’s not something you start and stop,” he explains. “These initiatives will tend to have their own momentum unless things get much worse than they have so far.”

A Celent study conducted around the turn of the year found that most carriers are holding their technology budgets fairly steady, neither growing nor shrinking them by more than 2 percent. Certainly, in the wake of the crisis, there is more caution in the air at many carriers, Light acknowledges. But, he says, he hasn’t seen that result in many halted projects.

“IT groups are getting orders to start controlling expenses, but I wouldn’t predict any major downturn in spending,” Light says. “We think the strategic tailwinds are stronger than the economic headwinds.”

That may be true from the carrier perspective, but to the degree that insurers’ caution may slow their spending, vendors face more-adverse conditions. A combination of continuing vendor consolidation and economic factors will make for a buyer’s market for insurance software, according to research by Gartner (Stamford, Conn.). “The shaky economy has deterred many insurers from funding system replacements in favor of smaller, tactical software and service purchases,” wrote Kimberly Harris-Ferrante, Gartner distinguished analyst and author of a recent report.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio