Insurers Looking to Cut Costs: Is Tech on the Block?

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A report from Keefe, Bruyette and Woods, a New York-based investment bank that studies financial services companies, has a dose of reality for P&C insurers: With the U.S. economy struggling, the time is nearing to discuss opportunities to cut costs.

Ad spending, total headcount and salaries have been increasing at P&C insurers, the report says, without a corresponding rise in company profit margins or growth in the industry as a whole. With projections indicating that the market will continue to be soft for some time, insurers aren't going to be able to count on growth to balance out their increased spending, KBW asserts.

"P&C insurance management teams are limited in terms of how they can improve weakening ROEs," the company says. "We expect that as managements lower their expectations for growth, expense reductions will become a more common industry topic."

The question, of course, is how much of the cuts will be directed at companies' tech departments. I attempted to reach a KBW analyst to find out if they had any insight on this point, but one was not available by publication. However, Novarica recently released its 2012 IT budget projections — not only for P&C carriers, but life and annuities as well — and it doesn't seem like IT will be on the chopping block.

"IT certainly isn't recession-proof — when the company is under enough pressure IT feels that like anything else — but most companies see that in an information business, you're dependent on information capabilities to grow," Novarica partner and managing director Matt Josefowicz told me. "Competitive advantage in the insurance industry comes from managing information better than your peers. If you stop investing, you're coming off a competitive track."

KBW seems to concur. In a myopic twist, however, this is viewed as a negative: From the firm's perspective as an investment bank, investing in innovation for growth that is unlikely to come under current market conditions could negatively impact insurers' bottom lines.

"Unfortunately, we view that most will continue to invest for growth, which will be slow to materialize," the company says.

So, which is the better strategy: Using technological innovation to attempt to grab whatever growth opportunities exist? Or, should insurance companies back off their innovation plans in the name of preserving the bottom line?

We want to know what your company is planning to do: Take our insurance IT budget survey and let us know where your IT budget fits into the tough insurance market. We'll be discussing the research at next month's I&T Executive Summit at The Boulders Resort & Spa in Carefree, Ariz. (Nov. 6-9), and report the topic after the event as well. As always, feel free to comment here or shoot me an e-mail or a Tweet if you have other insight to share outside our brief survey.

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