Economy Portends Insurance IT Budget Cuts

We are yet to see a declaration of recession by its formal definition (i.e., two straight quarters of decline in GDP) but many economists have said on less formal grounds that a recession has begun. Given the power of self-fulfilling prophecy in financial matters, the news justifies some degree of fear that the insurance technology world could return to the dark days between 2001 and 2004 when IT budgets were cut back and cost-cutting was many CIOs' highest priority.

The subprime mess and the credit crisis it has precipitated is not the event for the insurance industry that it is for banking, but a general economic recession will put some pressure on insurance IT spending, acknowledges Matthew Josefowicz, insurance practice director, Novarica (New York).

"The biggest challenge for insurers will be the pressure on their bond portfolios and other investment, but it doesn't change the fundamentals of their business the way the credit crisis does for banking and securities," he comments. "People can always choose not to borrow money; they can't choose not to buy car insurance. So the [the economic situation] will affect more discretionary areas for the industry, such as life insurance."

However, as the economic downturn coincides this time with a soft P&C market, senior insurance executives reading the same financial reports as everybody else are likely to begin reordering priorities, according to Donald Light, a Palo Alto, Calif.-based analyst with Celent. "If the seas are getting stormy and you're the captain, will you slow down and look for alternatives? Yes. Will you return to port? Not many will," says Light. "I think we'll see greater caution, greater reluctance in making expenditures but it seems to be a relatively minor dampening so far."

Some carriers have already renewed their emphasis on expense management within IT, some contemplating hiring freezes or even layoffs as a possible response, claims David West, research area director, insurance, TowerGroup. "Premium volume is down significantly, but you're also seeing less demand on the life and annuity side and less ability to deliver appropriate investment results," West opines.

The coincidence the macroeconomic cycle with the soft market this time around has led carriers to introduce more rigor into the technology procurement process, asserts Marcus Ryu, vice president, strategy and new products, Guidewire Software (San Mateo, Calif.). Among the measures Ryu has observed are the imposition of additional levels of financial review and approval for all projects; lengthier review of business cases and projected ROI; stretching project duration to control costs in the near term; and, in some cases, freezing all IT decisions.

However, though such measures may be widespread, leading insurance carriers continue to invest aggressively "in the sure expectation that the cycle will again inevitably favor growth," Ryu says. "While all companies must manage expenses carefully, higher performers do not whipsaw their strategic, multi-year investments according to short-term market conditions."

Speaking anonymously, one CIO of a mid-sized Northeastern P&C carrier reports thinking similar to that described by Guidewire's Ryu. "I'm sure many insurers will be decreasing budgets but we're going ahead with our plans and may continue significant investment into 2009," the CIO reports. "We see tremendous value in the future for what we're investing now."

The insurer is currently focused on a major policy administration replacement initiative that he believes will likely be the case for many other insurers by necessity if not choice over the next one to three years, whatever the state of the P&C market or the economy generally. "I've been a proponent of leveraging legacy systems but I think we are now getting to the point where many companies will finally need to look toward replacing themand that will involve significant investment," the CIO argues. "Companies at a status quo will probably not pursue transformation efforts until the economic climate is more favorable, but companies that have already launched transformation efforts will continue them."

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