Exclusive Research Report: Insurance IT Spending Slowdown Already Upon Us, TowerGroup Says

While past profits will soften the blow on IT spending, the current down market will result in budget constraints for North American insurers. But spending on improving ease of doing business, agency support, customer interaction and enterprise risk management likely will increase.

Since moderate underwriting profits cannot offset dismal financial market performance, carriers are renewing their emphasis on expense constraints. As in the life and annuity sector, some P&C carriers have already resorted to hiring freezes and are hinting at possible layoffs. Budgets are being reexamined and shifted to technology initiatives that can be implemented rapidly and have immediate impact on expenses.

Certain segments of the P&C market are more heavily affected by the credit crisis than others. Directors and officers liability, for example, has been drawn into the fray as a result of class action lawsuits related to the subprime problem. The increased loss frequency will take its toll on budgets.

Mortgage insurance is especially vulnerable to the subprime crisis. Mortgage insurance claims correlate directly with foreclosure rates. Also, as the proportion of subprime loans relative to total loans increased, the level of risk for mortgage insurers rose. Insurers in this segment will be tightening their budgets by at least 10 percent in 2008.

The dramatic decline in new construction in many parts of the country has significantly diminished surety sales. Large surety carriers are reporting increases in claims frequencies. Expect surety premium volume to drop while loss frequency increases, resulting in less money for IT spending.

Life & Annuity: Leveraging IT Investments

Over the past decade, large life insurance companies have worked to remake themselves as full-service financial service providers, offering a diverse line of investment vehicles and insurance to meet the needs of consumers' financial life cycles. By moving to a global, multiproduct-line business model, these organizations diversify their earnings base, which can help insulate them against some economic and earnings volatility. But this sector is not immune to turmoil: Even though the majority of companies had solid business results for 2007, the companies with large general accounts (assets backing guarantees and fixed-dollar benefits) that are invested heavily in fixed maturity or municipal debt bonds will find it difficult to sidestep credit losses in 2008. TowerGroup therefore predicts a downturn in IT spending for the life sector in general.

Many top-tier life insurers report strong capital positions as they enter 2008. With the downturn of this industry's stock prices over the past few months, publicly traded companies are aggressively repurchasing their stock to increase shareholder value. The strongest organizations are confident in their ability to ride out the storm and maintain competitive advantage, seeing a significant payoff after years of investing in risk management capabilities and increasing capital resources. These insurers will continue to invest in new business capabilities and product innovation, including expanded distribution. Carriers in this category will direct more capital toward the customer-acquisition end of the value chain, spending more on customer self-service and agency portals.

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