Insurers May Fall into Budget Trap

Service and maintenance costs are guzzling more than half of funds allocated to insurance companies' IT departments. Worse, these costs run the risk of outpacing the growth of IT budgets, resulting in fewer resources tofund strategic IT initiatives, according to "IT Expenses of Insurance Companies: High and Sometimes Wasted," a recently released Accenture (New York) study. Although the findings were based upon a survey of German, Austrian and Swiss IT officials, Vic Guyan, partner, Accenture, warns that the participants' US counterparts also run the risk of falling into what the study calls a trap. If the maintenance and service costs of insurers' IT systems continue to rise at a faster pace than budgets, the amount for strategic IT investments used to survive strong competition will diminish, Accenture warns.

"I think it's legitimate to be concerned that if you don't reinvent your infrastructure, one day you will wake up to find a competitor is taking business from you," says Guyan. "The US is certainly not in a better position than the study's European participants in terms of needing to replace core systems or having an easier job of maintenance and support."

Naturally, as systems become older, the costs of service and maintenance increase. Also, knowledge of the functions and fixes embedded into the system become concentrated in a smaller group of people who know the code well, Guyan says. Unfortunately, the cycle goes as follows: As prices increase, reinvention becomes more urgent and the budget allocated for strategic initiatives is lowered.

Another obstacle is proving the business case for this kind of initiative, especially during times when CIOs are strapped for cash. "The hardest case to make is when to replace an old system that costs too much," says Guyan. The reason, he explains, is that "individually each system patch or fix that has to be made doesn't warrant the replacement of that entire system. But collectively they are what creates and perpetuates the high maintenance loads for the organization." Also, the decision about when a system needs to be replaced is difficult and requires a great deal of communication within the organization.

When replacement is not an option, Guyan suggests other cost-saving techniques, such as outsourcing maintenance to a lower-cost labor pool.

And while the costs of IT systems' service and maintenance rise, overall IT expenditures continue to grow. Survey results show that information technology expenditures have increased from 2.7 percent of premium revenues in 1998 to 3.6 percent in 2001—a 33 percent rise.

As with European CIOs, US tech execs are facing the growing cost of maintenance and service. Also, both Europeans and North American CIOs had to deal with Y2K compliance. However, some different factors also have driven expenditures within the two groups. For example, circumstances such as the introduction of the Euro contributed to greater IT costs for European carriers in 2001. Spending in the US is high, theorizes Guyan, because "carriers have an extremely high regulatory cost of business."