IT Budget Recovery More About Maintenance Than Breaking New Ground

A recent report showed that the insurance industry was leading other verticals in growing their IT budget year-over-year. However, a look inside the numbers shows that much of that increase is going to current systems.

As Anthony wrote about a week ago, analyst firm Computer Economics released a study reporting that the insurance industry is leading other sectors, including banking and finance, healthcare and energy, in increasing operational IT budgets. I caught up with John Longwell, VP of research for the firm, to get the story behind the numbers.

One thing that stuck out to me was that most of the spending is on maintaining the gigantic data centers at insurance companies. Longwell says that while the insurance industry is leading IT budget recoveries, that doesn't mean they're investing more in new technology. Capital spending for the insurance industry is middle-of-the-pack, and across the board hot emerging technologies like cloud and mobile aren't seeing the massive investment to go along with their hype.

However, he contends, as we exit the recession and the economy keeps recovering, companies will be more likely to make the sweeping changes to their IT infrastructure that so many are talking about, especially on the data center side. You can read more about why and how companies are doing so in our digital issue on the subject, and the full Q&A with Longwell follows.

Insurance & Technology: How many insurance companies did you poll, and what lines of business are they in?

John Longwell: We have a sample of 19 insurance companies. Almost half are in the life, health and annuities space; P&C maybe another quarter, the rest are specialty or multiline.

I&T: Can we draw any conclusions from within that sample as to whether certain business lines are more apt to make these investments?

JL: I'm reticent because of the sample, but I can see that the top guys are medical. Among the larger insurers, you're seeing growth in their operational spending, and certainly the healthcare insurers are growing the most.

I&T: How does this 5% increase in year-over-year operational spending compare to "normal" growth?

JL: Five percent growth in normal times would be kind of typical as opposed to outrageously large for any particular vertical. If you go back before the recession, things were growing across the board at a median of about 5%. In broad terms, the insurance sector appears to be recovering their IT operational spending gap ahead of the other sectors. We're seeing some similar growth in the discrete manufacturing and wholesale distribution.

I&T: Where is this money going?

JL: The spending we're seeing is operational spending as opposed to capital spending. It's more to support business expansion as opposed to investing in whole new systems. You have a lot of mainframe and custom development work going on, so that requires a lot of operational spending. When you look across the different sectors, the insurance industry spends a lot on IT.

I&T: But it's more about maintenance than upgrades?

JL: Yes. Capital spending — that is, spending on new systems — for the insurance industry is up only 1.4%, which is near the median for all sectors. The median for the composite sample is 1.8%.

I&T: So even with all the talk about emerging technologies like mobile and cloud, there isn't as much investment in those technologies?

JL: Looking at our data last year, there was a lot of talk about mobile and cloud computing, but it isn't at the point where it's going to have a real impact on spending. That may be different this year. We see lot of investment in data center automation and virtualization. That may be having some impact in terms of rising productivity in the data center. At the end of the day my belief is as productivity rises companies will use that money to invest in more technology.

I&T: You expect more capital spending to go on as we get farther from the recession?

JL: The recession slowed down, for example, data center outsourcing and movement toward consolidating data centers. It's hard to get rid of a data center; it requires a certain amount of capital and causes some disruption to the organization. As the economy recovers, and spending continues to grow, perhaps people will start investing.

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio