TowerGroup Forecasts Cautious, Controlled Technology Investment From U.S. Insurers in 2005

Research Outlines IT Spending Estimates / Top Business Issues and
Drills Down Into Property & Casualty / Life & Annuity Business Lines

NEEDHAM, MA, February 7, 2005 � New challenges in the US insurance industry are creating one of its most difficult operating environments in recent memory. In the context of such divergent issues as terrorist threats, state and federal regulatory activity, competition from other financial services players and tight global economic conditions, TowerGroup forecasts a cautious approach to technology spending by US insurers in 2005.

“We expect the current climate for insurance to mitigate aggressive technology investments over the next 12 to 18 months,” said Cindy Saccocia, senior analyst in the Insurance research practice at TowerGroup and author of the research. “IT spending will remain controlled and allocations will be limited to projects of 12 months in duration or less. This conservative approach to spending is problematic because it often inhibits a company’s ability to be innovative. If this is the modus operandi, then insurers must be decisive and not let controlled IT spending compromise longer-term goals.”

Saccocia added that TowerGroup expects large enterprise initiatives to be broken into tactical projects of shorter durations to demonstrate return on investment along the way.

Highlights of the research include:

  • Overall IT spending for the US insurance industry will remain relatively flat in the year ahead, moving from an estimated $35.3 billion in 2004 to $36.4 billion in 2005.

  • Most of the IT spending action in 2005 will be found in the Property & Casualty (P&C) sector. For most P&C carriers, TowerGroup projects an IT spending increase in 2005 from 2.5% to 10% over 2004 spending estimates. Operations, profitability and distribution will take the top three IT investment spots for P&C in 2005.

  • TowerGroup has forecast flat IT spending in the Life & Annuity (L&A) sector since 2001. It expects little to change in 2005.

  • One of the biggest challenges facing L&A insurers in their IT environments is legacy systems remaining from their complex product history. Only L&A insurers willing to take on enterprise projects will increase spending in 2005 from 5% to 15% – or allocate up to 25% of their operating budget to IT-related expenses.

“The current year is a critical one for insurers to close the gap between business strategy and technology investment,” said Saccocia. “Insurers must concentrate on the present opportunities and not let their natural aversion to risk inhibit their capabilities to achieve what is possible with new technology. Recent successes demonstrate that companies can manage this complex business as a profitable operation.”

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About TowerGroup: TowerGroup is the leading advisory research and consulting firm focused on the global financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world’s leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North American, Europe, and the Asia-Pacific region, TowerGroup serves a global client base.
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