At a time of historic economic troubles it may be strange to say, but 2009 promises to be a prosperous time for insurance IT vendors. At the end of last year, those of us who observe the industry could only speculate about whether insurers would hold to their declared budgets, which did not differ substantially from those of the previous year. As we head into the third month of 2009, it is clear that insurers are in fact going to be spending within a few percentage points of their 2008 budgets.It is true that insurers have taken a hit in their investment portfolios, some badly. Furthermore, the economic downturn will affect premium income on an ongoing basis, a circumstance that will be mitigated only partially by a hardening P&C market. Consequently, we have already begun to see insurers renew the emphasis on cost control that we saw earlier in the decade. However, insurers remain well-capitalized and focused on technology improvements potentially on a larger time scale than the current economic troubles.
Those longer-term plans are exemplified by current heavy activity in core systems investments. According to a current Novarica report, more than half of P&C executives say policy administration systems (PAS) will be among their top projects for 2009. About 30 percent of life/health insurers responded the same way. The author of the report, Chad Hersh said, "We've never seen numbers like these, and we actually think our numbers are actually very conservative."
Hersh believes that 2009 will establish a plateau of spending on policy admin systems that will run at least through 2012. In some respects, this represents the obverse of insurers' reputation for sluggishness: lack of agility is a liability in good times, but during the bad times, insurers keep steaming on their long-term course.
Some carriers have done a better job keeping up with the accelerating pace of business but even those have work to do. The others are now investing to catch up with the leaders. Insurers know that these projects take time to complete. By the time a system goes live, the economy may have recovered. Implementation horizons (minimum) for P&C PAS are 12 to 18 months. For Life/Health, they can be up to 24 months, according to Hersh.
It's worth also bearing in mind that carriers continue to improve their ratio of maintenance to new-development spending, year after year. That means that every year, they have a little more room in their budget for spending on new systems or upgrades.
I have already heard vendors complain about lengthening sales cycles, but that worry is likely to be exaggerated. There are limits to how much worse they can be, since they are so long already. But a more positive way to look at it is that insurers institutionalized a great deal of financial and project governance during the last downturn. That is still in place, so the change now will be more of tone than procedure.
Carriers will enjoy a buyer's market, and while most recognize the need for mutually beneficial relationships with their providers, they may seek to work with fewer strategic providers and look for ways of limiting relationships or finding more cost-effective solutions within their partnerships.
As noted above, carriers will spend millions on core systems, but they will likely alter their selection criteria. They will make trade-offs to emphasize overall value, including long-term total cost of ownership (TCO), against overall capability or functionality of a system.
They will also take a closer look at vendor performance. Vendors associated with clean, on-time, on-budget implementations will have a greater edge, even over vendors perceived to have one the most advanced systems on the market. That said, carriers are still pursuing new-technology, "rules and tools" systems. Upfront cost of systems doesn't matter as much as cost/benefit, ROI and TCO.
In the life insurance industry in particular, where things are tougher now, more carriers are seeking solutions that enable them to bring to bear more of their internal resources. That doesn't mean they aren't spending, but they are seeking partners to help them maximize return on their own capabilities.
According to a former CIO who now consults for many of the big life companies, many life insurance CIOs are being more selective when it comes to discretionary initiatives and doing smaller projects where they can still deliver value. Those observations need to be taken along with Novarica's findings that life insurers are still investing in PAS. Sometimes, these things just need to be done.
To conclude, the notion that carriers will be spending liberally in 2009 is borne out by carriers' late 2008 budget projections, and susequent research on their current activity. My own conversations with industry contacts have provided abundant corroboration. To give one example among many, a senior technology officer at a large P&C carrier recently said to me that whatever his company's troubles, with regard to technology spending, "our appetite is no less than it was last year."The notion that carriers will be spending liberally in 2009 is borne out by carriers' late 2008 budget projections, and subsequent research on their current activity. My own conversations with industry contacts have provided abundant corroboration. To give one example among many, a senior technology officer at a large P&C carrier recently said to me that whatever his company's troubles, with regard to technology spending, "our appetite is no less than it was last year."