Insurers Seek Fewer, Deeper Partnerships With Technology Vendors

Whether carriers are being more cautious or more aggressive in their technology investment, they are likely to renegotiate with vendors and seek fewer, deeper partnerships.

Insurance carrier IT organizations' reactions to the financial crisis continue to be curiously muted compared to the rigors that followed the dot-com bust, but some discernible signals have begun to emerge. For example, it is clear that the economic downturn is affecting spending patterns -- even if budgets still haven't been cut substantially -- and that vendor relations are evolving in response to changing economic realities. Even on the P&C side, where the effects of the crisis have been less dire, carriers are reexamining their project prioritization and revisiting their supplier relationships.

Some companies are postponing strategic projects while others are aggressively moving forward, but all are responding to the changed market conditions, believes Matt Josefowicz, director of Novarica's insurance practice. "Whether that means pressuring vendors on pricing or insisting on different deal structures, there's definitely a great deal of activity going on with regard to restructuring existing relationships and even entering into new ones," Josefowicz says. "Carriers are approaching these negotiations with a little more discipline and realism than they had been recently."

Columbus, Ohio-based Nationwide ($119 billion in 2007 total assets) began a vendor consolidation exercise last December, resulting in about 90 percent of its IT services being delivered by only three suppliers, according to CIO Srinivas Koushik. As part of the initiative, the carrier secured a 10 percent reduction in hourly rates.

"We had already done some pretty good negotiation to get us to standard rates, but in this economic climate our partners came back with what they could in order to help us," Koushik relates. "What's in it for them is that as part of the consolidation we gave them a bigger chunk of the business."

Nationwide has enjoyed similar results on the software side, Koushik adds. "You have one or two outliers, such as the Oracles and Microsofts who don't do too much of that, but pretty much everybody else -- HP, IBM, Cisco -- has come to the table," he contends. "They recognize not only what's happening with the economy but also what carriers are going through, and they're trying to reach the right win/win proposition with us."

IT as Part of the Solution

Despite the tough negotiating tactics taken by carriers such as Nationwide, vendor/carrier relations actually may be less one-sided than they were during the dot-com bust downturn because IT itself is under less pressure, suggests Novarica's Josefowicz. Carrier leadership today, he says, is more focused on operational than IT cost, and if IT can cut operational costs, senior management is more willing to make that investment.

"If total operating expense is 20 to 30 percent of revenue and IT is only 2 or 3 percent, there's a good argument for gaining operational efficiency through technology," Josefowicz explains. "Even six months into this crisis, there's still a feeling that IT is part of the solution, not the problem."

Particularly in the P&C industry, carriers see technology as playing a role in achieving greater profitability through core business operations, observes Steve Forte, research director, Gartner (Stamford, Conn.). That can mean underwriting to a profit, processing at the right unit cost per transaction, or pursuing smart tactical growth opportunities, both organic and through M&A, according to Forte. "The market will separate the winners from the losers, and having the right cost structure will be critical in determining on which side of the line individual insurers will end up," he comments.

The vendors face their own sustainability challenges, of course, and those primarily funded by venture capital are more vulnerable, according to Forte. However, Gartner doesn't predict systemic consolidation in the insurance technology market. "Vendors that continue to offer innovative products and services and deliver on them will be able to navigate through this economic climate," Forte predicts.

Innovation Road Map

That may be true, but innovation for innovation's sake won't be enough, in the view of Marcus Ryu, VP, strategy and new products, Guidewire (San Mateo, Calif.). Vendors need a forward-looking, long-term road map of innovation, Ryu asserts. Vendors also have to play a more collaborative role.

Traditionally carriers in search of technology innovation had to pay an incumbent vendor the costs of development or undertake proprietary development themselves, Ryu continues. "Today insurance carriers want to focus their organizations on competitive advantage rather then core application development," he says. "Technology firms that want to serve the P&C industry should understand its requirements and bring demonstrable innovation as the price of entry to the conversation."

Nationwide's Koushik applies Ryu's observation to the requirements of the specific buyer. That being the case, what Nationwide wants from vendors, Koushik stresses, is not merely a demonstrated long-term road map but the willingness to establish a long-term relationship.

"It doesn't really help us for the vendor to come in with its own stack of hardware and software -- that just puts us back into the job of integration," Koushik comments. "We have to figure out how the technology applies to our environment; and while we're willing and able to do that, the partners who can come in with solutions that enable our strategy are going to get a lot more air time internally."

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