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Insurance companies aren't realizing the full value of their IT investments.

Although IT is a major driver of business costs and value, insurers can align IT strategy more closely with business strategy and position IT as a competitive advantage, according to a report released by The Boston Consulting Group, a Boston-based global management consulting firm. The study reports that global insurers currently spend up to 30 percent of their total operating expenses on IT. But, on average, insurers spend 75 percent of their IT budget on ongoing operation and maintenance of the IT landscape and only 25 percent on innovation and developing new functionalities. Additionally, the report notes, a majority of insurers find it difficult to determine their total IT costs.

"Insurance companies today are no longer able to count on high investment returns and are focusing value creation on more effectively exploiting marketing strategy and achieving cost leadership," relates Boyd Pederson, vice president and director, BCG, and coauthor of the study. "IT is an increasingly important lever in supporting both of these strategies," he continues.

A primary reason behind many insurers' inability to improve the value generated by their IT functions, according to the report - "Creating IT Advantage in the Insurance Industry," which is based on a BCG survey of more than 80 insurance companies between 1998 and 2004 - is a general lack of transparency. In order to gain meaningful and transparent performance indicators to manage IT costs effectively, the report asserts that the IT cost ratio (total IT costs as a percentage of gross premiums) and IT unit cost (the IT cost per policy or per insured risk in the portfolio) should be leveraged as key performance indicators.

BCG urges insurers to acknowledge that both business and IT organizational characteristics act as IT cost drivers. Of those characteristics, the CIO can influence the IT project portfolio, the nature and complexity of IT architecture, the efficiency of IT processes and the approach to IT sourcing. "CIOs must view a cost driver like project portfolio management in the context of the larger IT system," notes Pederson. "Because of its critical role in business planning, CIOs can use project portfolio management as a lever to align scarce IT resources more closely with business strategy."

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