Insurers Will Increase IT Spending In 2002, Celent Study Forecasts

Despite the general pullback in IT spending since the technology boom of the late '90s, a new report from Boston-based Celent Communications indicates that overall IT spending in the insurance industry will grow by seven percent in 2002 to $18 billion, and will continue to grow at the same rate for the next two years.

According to Celent's Matthew Josefowicz, author of the report and senior analyst, insurance IT and e-commerce strategy, "The report is based on interviews with many insurance companies and many insurance CIOs. We then came up with averages based on the interviews."

Overall, the largest portion (35 percent) of carriers' IT budgets is being spent on new projects and initiatives. "The specific types of new project technology are exactly what you would expect," Josefowicz says. "Insurance companies are looking at Web portals for both policyholders and agents, new policy administration initiatives and electronic billing technologies." All of the new project initiatives are focusing on improving customer service, increasing delivery speeds and cutting costs, in that order.

"Overall, I think insurance companies are being a lot smarter about spending technology than they were a few years ago," Josefowicz says. "There is a renewed focus on short-term and demonstrable ROI. But carriers should not confuse the two." For instance, it is important to calculate, plan for and show ROI, but not all worthwhile projects can show an ROI within 60 days, Josefowicz explains. "There are some projects that may not give a return for six quarters, but that does not mean that they are not worthwhile. An exclusive focus on short-term ROI may stop carriers from undertaking worthwhile long-term initiatives.

"Don't get me wrong, ROI is definitely a good thing," Josefowicz continues. "Vendors are definitely saying that they are seeing more of a focus on ROI and a more careful attitude about making IT decisions from the insurance carriers. That is part of the reason why vendors are saying the sales cycle is longer. However, an ROI focus is good for both the insurer and the vendor. If vendors are going in and delivering a clear and measured value, insurers will more likely work with the vendor again."

Within IT budgets, expenditures on internal staff consume the lion's share, roughly 44 percent on average, with another 11 percent spent on consultants, according to the Celent research. Software licensing and support forms the next largest block, with a 20 percent share, followed by hardware with 15 percent on average. Connectivity and bandwidth consume about eight percent of overall budgets, Celent found.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio