Shifts in consumer demographics and corresponding insurance and financial needs. An aging population in geographies such as the United States and the issues associated with aging (such as long-term care, increased medical costs, and high claims costs) increasingly will pressure insurers to seek alternatives to manage claims and risks as well as provide supplemental products to meet these needs. Other geographies, which are facing evolving needs of the middle class, will be driven to meet those needs through product development and risk management.

Federal and state regulations. The insurance regulatory environment has been undergoing radical change during the past few years as state and federal regulators introduced new legislation focused on consumer privacy (such as the USA PATRIOT Act, HIPAA, and the European Union Directive), corporate compliance (for example, New Basel Capital Accord and the U.S. Public Company Accounting Reform and Investor Protection Act of 2003), and savings/taxation restrictions.
Regulatory change will continue to affect the industry in terms of internal operations (such as security and the passing of health information) and external relationships (for example, issues concerning the use of external services providers or offshore outsourcers). On the regulatory landscape, one of the most threatening issues for personal lines insurers may be the pending regulations regarding the possible elimination of the use of credit scoring as a risk determinant in underwriting practices. The debate between state and federal regulation of the industry also looms, placing more uncertainty in an insurers future.

Environmental conditions that pressure the P&C industry, such as global warming, catastrophes (including terrorism), and other environmental conditions (such as asbestos abatement and mold). Continued environmental despair is costing the industry billions of dollars in losses and claims payouts. Although solutions are available (such as geographic information systems, geographic modeling, and predictive technology) to help manage risks associated with environmental conditions, their adoption rate is relatively low. Increased levels of reserves in the billions of dollars have been posted for asbestos and mold litigation alone.
Coupled with this, organizational pressures will continue. Insurers are faced with daily challenges associated with systems, resources, and budgets. Gartner expects investment in organizational transformation will increase during the next two years.
Technical evolution and pressures of legacy system maintenance. Although new solutions are being implemented in the front office and mid-office to support customer relationship management, sales requirements, and claims, for example, the systems that run policy operations are outdated and founded on platforms and languages that are difficult to support and maintain. These systems, however, are the foundations of the enterprises and house the source policy data. Investment has not yet happened to renovate and revise these systems and will become a major priority for large insurers by 2006. This, combined with IT consolidation (much a result of past mergers and acquisitions), will further assist insurers to reduce IT costs.
New channels and channel strategies. Although the Internet did not take off as a sales channel as originally anticipated, it will continue to emerge as a mechanism for customer service. Insurers have been forced to strengthen heavy-volume consumer touchpoints (such as agents and brokers) and find new channels for nontraditional products (for example, work-site marketing for long-term-care insurance). Expanded consumer access points will continue to encourage insurers to invest in sales and service devices and solutions. New devices (such as wireless) and applications (for example, those to support illustration and wealth management) will continue to become key methods enabling field sales forces to promote distribution optimization.

Evaluate Lessons Learned
The insurance industry is learning from the tough economic conditions and concentrating on achieving a sustained underwriting profit like never before. Insurers are reunderwriting, reducing in size, in-creasing in profitability, and embracing technology. They are finding the courage to implement major shifts in their organizational philosophies, bringing in management talent from outside of the industry and focusing on the customer.

If they stay on this course, absent major catastrophe, underwriting profitability will return to the industry by 2005.

Business Improvements
Market pressures will continue to drive insurers to focus more on supporting traditional insurance processes (such as claims or rating), reinvent and streamline these processes, and manage cross-enterprise and extra-enterprise processes.

A key aspect of this business model is technological innovation, especially in Type A (IT-aggressive and early-adopter) organizations. Gartner anticipates innovation will occur to assist with risk management, business process management, and claims servicing. Gartner projects technological innovation will promote:

A stronger and more strategic focus on enterprise risk management, especially correlated with continued regulatory and economic strife. Insurers, especially those in property/casualty insurance, must eliminate all errors associated with risks and underwriting. As a result, continued development of technologies to manage risk, including fraud management, is expected. Fraud detection will play a bigger role in the future as insurers seek mathematical- and analytical-based modeling solutions that will enable them to flag potentially fraudulent cases at data entry and through batch data comparisons in back-end processes.

Increased business process reengineering practices, especially in the claims department. Business process management (BPM) tools and process modification will become major strategies for innovative insurers during this period. New technologies, such as business rule enginesthat are stand-alone or that are embedded into a process-based technology (such as a claims management solution)will be used to assist in legacy system maintenance, and strategies will be amended to promote greater business return. These investments sometimes will be joined with large-scale claims and policy administration projects to obtain greater systems integration or functionality. Gartner expects BPM to continue to affect the underwriting department as well as insurers seeking to streamline workflow from point of sale to policy issuance, including the gathering of third-party data to assist in underwriting decisioning. P&C insurers also will increase their reliance on claims management solutions to support workflow and business process flows.

Growth in devices to monitor auto insurance. P&C insurers may begin to use usage-based pricing for personal auto insurance, in which customer driving conditionsincluding speed, distance, and safetycan be closely monitored. Vehicle devices may play a stronger role in commercial fleet implementations as tools to record and monitor fleet activity. By using solutions, fleet providers may use recorded driving information to obtain reduced insurance rates and as a litigation tool when accidents occur. Vehicle devices are not anticipated to flood the consumer market during the next few years, however, due to the price of hardware (which could be purchased independently or installed in new car purchases) and consumer privacy concerns.

The use of new data sources to support insurance processes. New data sources will be used to help narrow underwriting risks (such as using prescription drug history as a means to determine an applicants honesty in application submission). New sources of information will be imperative, especially if credit scoring is eliminated as a tool to determine underwriting risks. As new data comes into the organization, however, there will be an increased need for data transformation. Using traditional and new data sources, insurers can create more robust and stronger predictive models to assist in both risk management (including fraud) as well as underwriting.

Data transformation services adoption. Incoming and outbound data from third-party data providers, the service network, and distributors must be managed appropriately. Many of the solutions that pass information to the insurer from these partners, however, do not support industry data standards. To combat this problem, insurers will be encouraged to implement data transformation services and tools. These solutions will take incoming data and then transform it to a user-defined standardmost preferably one from ACORD.

Technological innovation will be promoted or challenged by the economic condition of the geography. As long as the market faces instability, insurers will be hard pressed to invest in these types of solutions. Gartner has found IT spending rates for insurers in most geographies are staying stable or increasing slightly. We anticipate IT operating budgets as a percentage of revenue will not exceed three percent until 2005.

Gartner expects technology adoption in the insurance industry will accelerate as global economic conditions improve. During this period, investments will center on supporting business process management and core practices, such as claims and underwriting.

Kimberly Harris is a research director in Gartner Research, where she is responsible for monitoring the business and technology trends within the property/casualty and life insurance industries.

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