With the days of double-digit budget increases behind them, IT departments are focusing on finding ways to run leaner and meaner: cutting costs in some areas to help fund others; getting more with the same or fewer dollars; and concentrating on service and support systems. Particularly in property/casualty, were seeing spending on areas of reducing claims costs, making the claims process more efficient, and supporting underwriting. In life insurance, the emphasis is on developing easy-to-use interfaces for agents, captive or otherwise, says Jamie Bisker, research director for TowerGroup.

Less Is More
Some argue that a drop from previous spending increases actually is a good thingor at least a better reflection of actual needs. After Y2K was resolved, many carriers retained those budgets that were increased to deal with remediation efforts, says Bisker. IT departments convinced management there was a need to continue the work they had to postpone for Y2K, to do application maintenance, and then for the e-commerce model in general.

Spending less doesnt necessarily mean getting less. Budgets have gone down, but they should have gone down, says Paul McDonnell, senior vice president and insurance segment leader at BearingPoint. Core insurance technology, networking, storage, and MIPS costs have all decreased.

There is opportunity to be found in a buyers market, particularly for companies that have capital to invest, says Salzmann. Yes, in the industry as a whole there have been periods of unprecedented losses, an extreme reduction in the amount of capital available for insurance companies to write business, and a draining of insurance companies resources by the performance of the stock market. But if you were already efficient, pricing adequately, and if you did have enough capital, you benefited during this period.

Salzmann adds ACUITY, which grew its surplus by nearly 19 percent in 2003 and in double digits over the last three years, actually has increased its capital outlay for IT by 20 percent in 2003. The insurer builds most of its systems in-house and will continue to target operating expenses, such as completing the paperless, straight-through processing that is already in place for over half of its P&C business. ACUITY also aims to increase efficiencies in sales by extending the reach of its quotation and application systems via its own Internet portal and by integration with third-party agency management vendors.

The only upward pressure weve had on our expense ratio has been increased taxes and contingent commissions due to the increase in profitability, Salzmann says. Every other component of our expense ratio has gone down, and thats directly attributable to the automation weve put in place and the reason we will continue to do so.
Anticipating a flat IT budget in 2004, Travelers Property Casualty Corp., Hartford, Conn., also sees opportunity in the marketplace. Most of the trendy technologies [from past years] that people thought were chic are gone, but the good ideas that came out of that time period have settled in. Established vendors are selling more robust versions of those technologies, says Diana Beecher, senior vice president and CIO.

For instance, Internet technologies were all the rage, but they werent practical, or the vendors were demanding huge prices for them, she adds.As vendors have disappeared, companies like Microsoft or IBM have taken up those ideas and translated them into tools that address the kind of stability, availability, and security that is expected of a business enterprise like us and are doing so at a more reasonable price.
According to Beecher, that has helped Travelers initiatives to Web-enable agent-facing business applications, particularly in personal lines rating and application.

ROI, ROE, and the Death of The Nine-Figure Project
A CIO once said to me, CRM is good, but its not $10 million good, Bisker says. Insurers realize the value, but they cant stomach the idea of spending money on those projects without seeing the outcome. So they take a pragmatic approach by attacking these projects in smaller chunks with measurable ROI, with multiple sponsors of business and IT users.

There are very few instances where companies have been able to be successful with nine-figure projects, adds McDonnell.

While return on investment is a key question asked by decision-makers at insurance carriers, return on equity is a question asked by stockholders. And, as companies demutualize, responding to that question becomes more important.

Companies need to get ROE into the mid-teens to compete [with other industries], says McDonnell. Thats been driving both investments and overall spending, including in IT, and if they cant get ROE, theyre going to cut spending.

PMAs Klotz has no doubt competition has heated up in the technology industry. I have consultants from all over coming to me latelyseveral new inquiries a day, he says. Theyre also reaching farther than they used to. Some carriers are seeking to take advantage of this competitive environment by renegotiating contracts for everything from consulting to hardware.

We went through all of our major contracts with our vendors, put in a formalized process of rebidding all of those, brought in competitors, reviewed all of the software, and went through formal RFPs, says Rick Omartian, IT CFO and chief of staff at Guardian Life Insurance Company of America, New York. Weve also lowered our consulting exposure to six preferred vendors, about 10 percent of what the insurer had before.

That initiative has been in process for the last two years. The first one that was a major success was telecom, Omartian adds. Across the firm, we saved over 30 percent by renegotiating and eventually changing telecom vendors.

Rearchitecting
Replatforming proprietary systems to standardized platforms may not be a glamorous task, but it can have big bottom-line savings, according to James Scurlock, director of financial services industry at EDS. Implementing Linux- or Wintel-based platforms and rearchitecting legacy systems onto them can have payback times of less than 12 months, he says. The maintenance costs are significantly less than proprietary operating systems.

We are looking at Linux, and we believe there are some opportunities, says Omartian. Weve come up with some pilots and have it running on our mainframe boxes but havent moved any mission-critical applications to the platform yet.

Guardians approach to replatforming is a common one. When it comes to Linux, the adoption rate has been, Lets test it and see if it works, Scurlock says. In general, [rearchitecting] regardless of platform has been slower in insurance than in the banking industry because most of the large insurance systems that run on mainframes have been handcrafted, theyre large, and theyre old. There have been very few package applications that date way back, as in the banking industry.

In their budgeting and planning processes, insurers will continue to evaluate existing systems, looking to cut costs via consolidation. Companies have grown through acquisition, and they havent taken advantage of the fact that perhaps they have six data centers and need only two. Or they may find they have multiple contracts with the same vendor and are able to consolidate that into one contract and renegotiate for volume discounts, McDonnell says.

Reduction in systems is a goal at Guardian, says Omartian. In our Group Profit Center, we have five different proposal systems that were consolidating into one proposal system, which is targeted for August completion, he explains.

Data consolidation is one of the newest IT initiatives at Allstate Corporat-ion, Northbrook, Ill. We discovered there were data and database projects under way for a number of different operational constituencies in the corporation, says John Hershberger, assistant vice president of database marketing. As a result, the carrier created an enterprise project to rationalize and standardize its data strategy.

There are activities under way in finance, claims, various marketing organizations, agency support, all these different data projects designed to better manage information. We are looking for a way to eliminate redundancy and find a way to share these resources, to be able to spend less but still give all parts of the organization the information resources they need, says Hershberger.

The project, currently in the scoping and design phase, also is designed to control the proliferation of what Hershberger calls shadow IT activityinstances where non-IT employees in various parts of the business have made their own connections to administrative systems and operational databases. These things dont happen by accident, they happen because there are unmet needs in the various areas of responsibility.
Eventually, if users cant get the information they need to do their job, they will go off and figure out a way to get it. But over time, that creates a lot of unnecessary, nonconforming data sets, and there is tremendous cost to that.

Offshore
Despite international tensions and geo-political concerns, insurers will continue to look toward offshore outsourcing to cut costs in their upcoming budgets. Across all industries, in fact, offshore application management remains the highest-growth service among outsourcing vendors, according to a recent Gartner Dataquest survey.

EDSs Scurlock, who predicts an annual increase in the use of offshore development in insurance for at least the next three to five years, prefers what he calls a best shore approach. Lets go where it makes the most sense. For instance, look at Canada. Theres a 30 percent reduction just due to the currency rate, and Ottawa will give substantial subsidies to companies that set up shop there. So you can do development for 40 cents on the U.S. dollar, he says. A number of clients, who might not be comfortable with India, might look at Ottawa, but the bottom line is always, Where is the best place to do it?

Just what IT activities are suitable for outsourcing depends on an insurers own corporate preferences. Were seeing outsourcing used most heavily in some of the infrastructure activities, says McDonnell. [Insurers] may look at outsourcing e-mail services, some of the less glamorous things. They may want to look at completely outsourcing the tech support for PCs or LANs, or what they perceive to be non-value-added activities. They also may look to outsource maintenance of books of business they retain but no longer actively sell.

In late 2002, Guardian signed an outsourcing contract with Indias Patni Computer Systems Ltd. that is potentially worth $35 million over seven years. Selected from 14 potential firms, Patni will handle software maintenance and application development for Guardian. Weve left [the development details] open, explains Omartian. If Patni can show us the benefits, were perfectly willing to move it to them. Omartian reports the cost savings realized in 2002 alone amounted to a large portion of the insurers 23 percent reduction in IT expenses since 2001. Through Guardians outsourcing contracts it has achieved an annualized savings of $12 million.

Better Project Management
At times, the way insurers have done IT projects is through brute force and smart people, says McDonnell. They now realize they have to dramatically improve how they manage IT projects and their overall effectiveness as an [IT] organization.

PMA has a two-pronged approach to its effective project management. From a planning perspective, it is moving its forecasting to a rolling 18-month cycle. A rolling forecast is important because of the pace of change, says Klotz. You need to have a dialogue other than the annual budget.

The second part of its strategy is that dialogue: a close relationship between IT and business staff that has resulted in unexpected opportunities with no budget impact. We continually monitor the value of projects, Klotz explains. Im not going to spend money simply because its been budgeted, and neither are our business units. Weve had several unfunded projects completed because a business unit was going to take money out of its budget for one issue but had a different problem we could solve.

Similarly, Travelers employs an 18-month cycle and a pragmatic approach to its IT budget. We dont spend capital just because its there, and we do not differentiate between good times and bad [in our spending], says Beecher. When the economy was solid, we didnt spend as though it would never end. Now that things are tighter, we dont stop spending because of it. We focus on why were spending.

In 2002, Guardian installed project management software from Primavera to, in the words of Omartian, bring discipline to managing projects. Today, its totally process oriented, tracked, and reported to senior management. This has helped Guardian ensure IT spending is tied to business strategies. Any project over $100,000 gets a formal business case showing ROI and ROE, and is signed off on by various levels. It has definitely helped focus our outlook on where were spending our tech dollars.

Overall, carriers will approach their 2004 budgets with caution, but spending smart is a prudent approach. This is definitely a time when there is more of a vision regarding how to conduct business than ever before, says ACUITYs Salzmann. The efficient will continue to be rewarded.

Beyond Nitty gritty

the PMA Insurance Group saw an increase of between three and seven percent in its IT budget from 2002 to 2003, according to CIO Jim Klotz, who expects the same change in 2004. The growth will still be modest in the future, but it has been modest in the past, he says. We have a long-term strategic vision, and I dont ever envision getting double-digit increases. We didnt increase the IT budget by double digits in the past, and we dont expect to do so in the future.

Details on the overall IT budget of Allstate Financial could not be released. However, John Hershberger, AVP of database marketing at Allstate Financial, indicates, There is a much reduced appetite for projects that have a difficult time demonstrating positive payback.

Rick Omartian, IT CFO and chief of staff at Guardian Life Insurance Company of America, reports the companys IT budget has decreased over each of the past few years and is expected to do so again in 2004. However, he stresses this is by internal design, rather than due to outside forces. In about 2001, we began running IT as a business, with the goal of controlling costs of projects, using strategies such as outsourcing to accomplish that, he says. Overall IT costs have decreased by 23 percent since 2001, he adds, even though spending on strategic initiatives has increased.

Diana Beecher, senior vice president and CIO of Travelers Property Casualty Corp., explains the insurers IT budgetwhich has remained relatively flat over the past few yearsreflects a change in rate of speed rather than rate of spend. If the business case for a project is sound, we continue with it, although perhaps more slowly than initially projected, she says. For example, the carrier is working on a project to increase its network capacity, but as the pace of Internet-driven business growth has slowed, the timetable for completion of that project may be extended.

ACUITY increased its IT budget by 20 percent in 2003 and expects again as much in 2004. Ben Salzmann, president and CEO, reports the companys double-digit growth rates and underwriting profit over each of the past several years have made this increase both possible and necessary. Our 90.9 combined ratio was the direct result of technology, particularly in the support and automation of the entire underwriting process, he explains.