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Forrester Researcher Predicts Increased Insurance Carrier IT Spending in 2007

Insurance IT professionals expect their budgets will increase this year as legacy system replacement becomes a more-pressing need.

As insurance carriers look to innovate more and rely on problematic legacy systems less, corresponding IT budgets are increasing, according to a recently released Forrester Research (Cambridge, Mass.) report. The research, which included surveys of industry IT professionals, predicts a 7 percent increase in spending this year, compared to a 5 percent increase in 2006.

A 7 percent increase is a significant jump, says Marc Cecere, vice president and principal analyst at Forrester and author of the report. Traditionally, insurance IT budgets do not change much from year to year, he notes. "What also doesn't change a lot is the distribution of spending, [in terms of] new investments versus maintaining existing service levels," Cecere says.

In 2007, however, some movement is being seen on the innovation front. Forrester anticipates that new initiatives and projects will account for approximately 34 percent of IT spending, a 4 percent increase from 2006. However, some of those initiatives will involve replacing the old systems.

Robert Fullington, EVP and CIO of Life of the South (LOTS; Jacksonville, Fla.; $180 million in annual income) expects increased spending in his IT department this year, primarily on "new" initiatives, including e-commerce projects and updating disaster recovery capabilities. The department, however, will not have to deal with replacing any legacy systems. "We're fortunate that we don't have that problem here," Fullington says.

Why the Sad Face?

Just because IT budgets are growing, however, it doesn't mean that CIOs are jumping for joy. Usually, Forrester's Cecere says, IT professionals within the insurance space are an optimistic bunch, but less so this year. According to his research, 33 percent of respondents said 2007 would be a "challenging" year and another 12 percent said it would be "very challenging."

The statistics, which indicate more skepticism than in years past, initially confounded Cecere, he relates. Increased spending ususally does not come with decreased optimism. "If you go past the numbers and you sit down and talk with them it becomes a little more interesting," Cecere explains. "You have to look at where they are going to be spending their money. A lot of it is going into getting rid of these old legacy systems that they have."

Legacy system replacement can be an unrewarding job because, in addition to being a difficult process, it generally doesn't allow a company to generate new revenue -- at least not in the near term. "At the end of the day, it's like putting a new roof on your house. You had a roof before, but maybe it didn't work so well. So you put on a new one that keeps the rain out, but it doesn't move you forward in any way," LOTS' Fullington observes. "You're not adding any function. It's still the same old house."

A full 35 percent of respondents to the Forrester survey said their companies planned increased spending in replacing legacy systems in 2007, while only 14 percent planned less. Cecere points out that in the past companies would do everything but replace their aging systems. He explains that many decision-makers have been hesitant to embrace the new Web-based technologies that have emerged in recent years -- especially after the last big movement, client/server technology, turned out to be oversold in many instances. But now that the new technologies have developed a strong track record, more companies are beginning to take the plunge.

And that's a plunge more companies are going to have to take, both Cecere and Fullington agree. There's significant risk in the older systems, Cecere says, as the employees that maintained them retire or move on, taking their operational knowledge with them.

"Most legacy systems are written in COBOL [code], and nobody teaches in COBOL anymore. The maintenance of legacy systems is going to get tougher as this generation that knew that language moves on into retirement," LOTS' Fullington adds. "Every company that has these large systems eventually is going to have to do something with them."

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