Until recently the biggest question about 2009 with regard to insurance technology priorities was whether an economic downturn, fueled significantly by what has been known as the subprime crisis, would continue and perhaps intensify. With the events of this fall, the industry had a definitive and most unwelcome answer delivered ahead of schedule. The global financial crisis has overshadowed the striking effects of the national election — which put a Democrat in the White House and reinforced existing Democratic majorities in Congress — and it will both shape ongoing technology projects and reshape CIOs' investment priorities for the foreseeable future.
From a business point of view, the industry starts the new year with an altered landscape that is likely to change even more in the form of increased mergers and acquisitions. The more stable insurers — particularly the mutuals — will increasingly look to acquire beleaguered carriers, which are in plentiful supply, according to Jonathan Steiman, an analyst with New York-based Datamonitor. "Furthermore, if insurers are able to gain access to TARP [Troubled Asset Relief Program] money, then the amount of capital will increase, which will further drive acquisitions," he comments.
However, acquiring companies will apply greater caution and enhanced due diligence in their shopping, Steiman predicts. "Every inch of a target company will be dissected in order to gain a full understanding of its risk exposure," he says. "This will increase the amount of time it takes to close deals and may also lead to an increased number of canceled deals."
It may also drive increased CIO participation at the strategic level, suggests Larry Danielson, a principal with Deloitte Consulting (New York). "CIOs need to do significant due diligence on the state of technology architectures, applications and data structures as carriers consider targets," he says. "A strong platform can offer a reason to merge as acquirers consider the opportunity to significantly upgrade their technology platforms."
Pursuing More Than Survival
Whether carriers are involved in M&As or not, the impact of the financial crisis will reshape their basic strategic outlook, observes Michael Costonis, director of Accenture's (Chicago) insurance practice in North America.
"Prior to this unprecedented set of events, the typical insurers' strategies were largely characterized by targeted growth, focused underwriting and similar approaches, all against the backdrop of seeking a reasonable rate of return on a somewhat longer time frame," Costonis comments. "The current financial situation is forcing a rethinking of the investment/return time frame, which is becoming dramatically shorter in the process."
Costonis sees three distinct approaches beginning to be taken by carriers in response to the current financial environment. The first is what he calls the "survival" mode, characterized by an urgent effort to transform the company, refocus the business and restore profitability. "This is characterized by deep cost cutting and 'must deliver' investments," Costonis explains.
Other companies are taking what Costonis terms a "protecting the franchise" approach, in which companies make smaller-scale, tactical investments within a shrinking IT budget. The investments are aimed at either cost savings or the pursuit of modest growth opportunities, he says.
The third approach is what Costonis calls "step change," a course that is being chosen by well-capitalized companies whose strength makes the crisis an occasion of opportunity. Such companies, Costonis asserts, will invest in one or more of several areas, such as acquisition, launching a new distribution channel, improving the use of analytics, or replacing core systems to enable lower unit costs per policy or process.
Cost control will be a priority for all companies, but most industry observers anticipate an approach that is different from the one that carriers took during the last major economic downturn.
Following the dot-com bust, insurers' focus was more likely to be on simple cost cutting, IT governance and project management. This time will be different in part because of the enduring improvements from that period and also because insurers face pressure to catch up with both consumer and distributor service demands and the advances in those areas made by their competitors. Thus even the fundamental need for greater efficiency implies a different strategic approach.
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