P&C Industry To Spend More on IT

Despite the fact that the US property and casualty insurance industry suffered industry-wide losses for the first time in history (mainly because of the impact of the September 11 terrorist attacks), the industry actually will be increasing its technology spending, according to the findings of a new TowerGroup study, "US Property & Casualty Insurance IT Spending: 2002 and Beyond."

That's not to say that the 2001 financials are having no effect on IT spending. The study reveals that P&C companies will direct their tech investments toward technologies that help cut costs and/or improve efficiencies.

Initial concerns notwithstanding, the P&C industry handled the 9/11 attacks as it was designed to do, says Jamie Bisker, director, insurance practice, TowerGroup (Needham, MA), the study's author. Insurers were able to meet their obligations, and unless any company was exceptionally hard hit, "there was no reason to change IT plans, except where there might actually be increased spending for such things as better disaster recovery and contingency planning."

In fact, spending within the insurance industry has been more profoundly affected by other factors, according to Bisker. Spurred by regulatory compliance pressures, the competitive challenges of converged financial services and the continued evolution of the Internet, P&C insurers have continued to pursue a measured, pragmatic course. "The industry finally got the message that technology is something that they need to be investing in," he says.

The TowerGroup study was based on interviews with a sample selection of top-10 and second-tier insurance companies. The broad consensus of the study's respondents was that there would be spending increases in 2002 over 2001 figures, in the range of three to five percent. Projections for the future extend into the six to eight percent range, Bisker reports. One of the most striking findings of the research was "that there are some companies that are very bullish on technology who say they are going to be increasing spending eight to 12 percent" over the same period, Bisker says.

The economic downturn has manifested itself within the P&C industry in the form of hardened rates, especially after 9/11, though in the short term carriers will use improved revenue streams to replenish reserves and build surpluses to compensate for the 2001 losses, Bisker says.

P&C insurers are focusing their spending on technologies that either directly reduce costs or improve control over costly processes, especially in the areas of claims handling and underwriting, according to the study.

Many companies are grappling with core systems issues, balancing the temptation of sticking with existing systems against the need for the greater flexibility demanded by today's changing market. The study endorses a course of leveraging message-oriented middleware to give existing systems greater flexibility, even as companies work to replace them.

Such transitions will cause intermittent periods of slow growth, as strategic goals are achieved and spending shifts from infrastructure projects to development and outsourcing, the study says. The growth profile will thus shift heavily in favor of external over internal IT spending, in the categories of hardware, software and services.

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