Top Trends in Insurance IT in 2005: Celent

By Matthew Josefowicz, manager of the insurance group, Celent Communications.

Going into 2005, insurers are continuing to come out of their shell a bit, a trend that began in the middle of last year. While insurance IT groups spent the early part of the decade hunkered down and focused nearly exclusively on cost reduction, they are now turning their attention back towards supporting growth initiatives. Budgets are generally holding steady at 2-3 percent of premium, and 2005 budget increases are in the low single digits, but we’re seeing more focus on new projects rather than maintenance, and even some increased patience with slightly longer projected ROI periods. Overall, Celent estimates that IT spending in US insurance is expected to reach approximately US$29 billion, a roughly 4-5% increase over last year.

The top IT trends that Celent sees this year are:

Policy administration systems take center stage. RFI activity for policy administration systems is way up. Insurers are increasingly realizing that they key to solving many of their agility and data accessibility issues is in replacing their core systems. Business drivers for all this activity include the need to easily support new products and channels, make frequent rate and product changes without an IT bottleneck, and be able provide rich data for strategic business analysts and for compliance purposes. While the majority of this activity will be in gradual phase-outs of legacy policy admin systems, there will be a few wholesale rip-and-replace projects as well. Celent expects significant activity in policy administration systems in 2005.

Continued focus on e-business and distribution. Maintaining an excellent transactional agent portal is becoming a baseline necessity for attracting high-producing independent agents. Insurers are typically investing 5-15% of their IT budgets in maintaining and upgrading these systems in order to provide the high-level service that is necessary to retain key agents.

Continued focus on data mastery, with an emphasis on data quality and models. Data mastery has been a top area of focus for the last couple of years as insurers turned introspective to try to serve agents and customers better while extracting useful strategic information from the mass of disaggregated data in their enterprises. Celent expects this trend to continue, with an increased emphasis on the development and deployment of enterprise data models, which allow insurers to share data between various systems and analytic tools more easily.

Dramatic expansion of Web services. Web services, a “bleeding edge” technology only a few years ago, are embedding themselves firmly into insurers architectural plans, and starting to displace less flexible EAI and EDI methods in many cases. Compliance, compliance, compliance. Between Sarbanes-Oxley, HIPAA, state privacy regulations, and now “Hurricane Eliot” (as in Spitzer), Chief Compliance Officers are commanding more and more attention from insurance IT groups. While most CIOs perceive this as a hardship, Celent believes that there is an opportunity here to use compliance pressure to get key infrastructure improvements (especially data mastery improvements) bumped to the top of the priority list.

Buy v. build pendulum swinging back? Perhaps because CIOs are dealing with slightly less cost-reduction pressure, there is an increasing movement of the buy v. build pendulum away from ?uy.?In Celent’s recent CIO survey, most preferred custom-builds including vendor components rather than end-to-end solutions from single vendors. And, more importantly, the level of faith in vendor solutions dramatically declined from last year. Celent believes insurance IT vendors must focus more on clear messaging of their capabilities in order to win back a skeptical market.

Matthew Josefowicz is the manager of the insurance group at Celent Communications, a global research and advisory firm focused on the application of information technology in the financial services industry. He can be reached at mjosefowicz@celent.com

Visit Celent