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Mood Swing

Insurance technology executives aren't exactly singing 'Happy Days Are Here Again,' but they are increasingly optimistic about the business technology outlook, InformationWeek Research reveals.

Regulatory and competitive challenges notwithstanding, it appears that the insurance industry's much-heralded renewed focus on growth is more reality than hype - and this confidence is being reflected in an expansion of IT budgets. That's according to Insurance & Technology affiliate InformationWeek Research's 3Q 2004 Outlook/Priorities Study (based on 300 telephone interviews in June, roughly one-third of which were from financial institutions). Overall, business technology executives in the financial services sector continue to be positive about the possibility of an economic recovery in 2004 and what it will do to enhance their companies and business sectors. Nine out of 10 insurance executives surveyed, for example, think their companies' revenue growth will be better in 2004 than it was in 2003.

In general, financial services respondents reported a double-digit investment in technology and said they expect their IT budgets to hold firm as they head into the second half of 2004. The 3Q Outlook/Priorities Study found that IT budgets in financial services range from 11 percent to 13 percent of annual revenue. According to half of the executives polled, this represents growth from last year's budget levels.

In insurance specifically, IT budgets represent 11.5 percent of expected annual revenue, compared to 10.8 percent in banking and 12.8 percent in the securities/investment segment (see chart at right). Additionally, more than 80 percent of the insurance industry respondents reported that 2004 budgets are bigger than or at least equal to 2003 levels.

As is typically the case, salaries and benefits account for the largest slice of financial services IT budgets: An average of 30 percent of IT dollars is earmarked to staff compensation across financial services. Specifically in insurance, 32 percent of the IT budget goes to salaries and benefits, followed by 25 percent for hardware and technology purchases, 18 percent for applications, 11 percent for IT consulting services and outsourcing, 5 percent for R&D, and 9 percent for "everything else," which includes maintenance and administration.

It is not clear whether budget growth is driving optimism or the other way around, but either way you look at it, there is clearly a more positive outlook these days among insurance technology executives throughout the industry than last year. In fact, according to the Priorities Study, that optimism is getting stronger: 80 percent of insurers surveyed indicated that they are positive about the industry's economic conditions (18 percent were neutral and 2 percent negative), compared to only 68 percent of respondents in the previous quarter's survey (see chart, top right).

These trends are starting to be recognized throughout the insurance industry, it appears. For example, at Needham, Mass.-based consultancy TowerGroup, according to insurance practice leader Deborah M. Smallwood, word of the improved environment is not just coming from insurers. "We're seeing it with the vendors as well," she says. "They're hiring salespeople, responding to RFPs and closing more deals."

Smallwood suggests, however, that the upturn has been stronger in the property/casualty business than in the life and annuities segment. "The P&C market turned around faster, after bottoming out in 2001-2002," she says. "Life and annuities have a whole different business model and are more dependent on investments, and the market hasn't turned around yet."

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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