Hersh says his firm characterizes the current state of insurance IT purchasers as reflecting the "frostbite effect," explaining, "when a person ventures out into extremely cold temperatures, the body's reaction is to restrict blood flow to areas farthest from the body's core, especially the heart. This is done to direct blood–and warmth–in order to protect the body's core.

"Similarly, when spending must be curtailed at an insurance carrier, there is a strong tendency to jettison noncore projects (such as back-office accounting systems, infrastructure upgrades, enterprise architecture projects, etc.), focusing instead on projects that address core insurer solutions, which typically offer the operational efficiencies and value carriers are looking to improve in a tough economic climate."

Hersh notes for life/health and annuities providers, the frostbite effect may not play as key a role as on the property/casualty side.

"Core systems projects for these carriers tend to take considerably longer and cost considerably more due to both the pricing of the solutions and the conversion costs," he says. "As a result, cost-justifying these projects is especially difficult heading into what could be a protracted downturn.

"We're actually seeing what I would call high levels of activity in policy administration in particular, primarily on the P&C side, but that's pretty much normal," Hersh indicates, adding such activity on the life/health side is "still moderate, because it clearly is more affected" by the economic downturn.

"P&C is at worst seeing a plateau vs. last year; there may even be more activity," he says. "P&C carriers have long since recognized to stay competitive they have to do things on a par with their competitors." This includes better speed to market, pricing accurately and competitively, the need to have a great producer portal, and upload/download capability, he continues. "We're past the ability to do that with legacy modernization; you have to start replacing systems to do that."

Would the weakened economy make now a bad time to start replacing systems? "Carriers are notoriously slow at making shifts that are caused by the macro-economy and macro-trends," Hersh points out. "Most experts say this recession is slated to end toward the end of 2009 in theory. So, it's bad business practice to curtail major projects. Those that are well positioned may have a tremendous opportunity coming out of this recession.

"What is expected to be a recovery in conjunction with a hardening market–that's something carriers need to take advantage of," he asserts. "That being said, carriers also have learned they can be creative about how much money they spend and how they spend it."

As examples of such creativity, he cites software as a service, software leasing, and "creative stuff to keep capital outlays down and still move projects forward." Such projects can be done for one line of business at a time, he notes.

"If I'm a carrier and I'm going to look at adding new lines as the recession ends and the market hardens," says Hersh, "it makes tremendous sense to get a new line of business onto a new platform so I have it available to me as the market shifts and budgets can handle it. I'm prepared for the next big thing."

According to Hersh, in a survey completed by insurance IT executives during the "height" of the crisis (the week of Oct. 6, 2008), "carriers once again proved they are no more likely to be rash in the face of negative events than in the face of positive ones (e.g., the dot-com boom)." The key finding of the survey showed a large majority of P&C CIOs still expect their budgets either to remain flat or grow, while some L&H CIOs expect minor cuts to theirs.

"One of the worst mistakes a carrier can make during a downturn–whether that downturn is a soft market or a global financial crisis–is to make wholesale cuts in its IT budget," he contends. "As IT has begun to play a critical role in helping carriers achieve operational efficiencies, speed to market, analytics, compliance, and nearly every other critical area, those carriers have come to realize cutting indiscriminately is not the answer.

"Focusing on core systems replacements, predictive analytics, or other projects that can reduce operational costs, improve underwriting results and/or expense ratios, improve speed to market, or otherwise provide strong cost/benefit ratios now is an excellent strategy," he adds. "This advice is doubly important with the sudden likelihood that any given carrier may acquire either blocks of business or entire divisions from distressed competitors or that any given carrier will compete against one that does just that."

"Companies have been squeezing efficiency out of their processes/systems for the last several years," according to Bill Jenkins, CIO and vice president, information technology, at Penn National Insurance. "Policy administration systems are viewed as mission-critical applications, so efforts to enhance the efficiencies and overall capabilities of these systems continue–either in the replacement initiative or an extend-evolve-and-enhance mode.

"The economy, although it has many insurers reexamining a number of initiatives, has not deterred insurers in their investments to upgrade their suite of mission-critical systems, e.g., policy administration systems," Jenkins notes. "The IT function is no longer in the crosshairs of the organization for wringing out organizational expenses. It now is viewed as a tool/method for reducing overall organizational expenses as well as the needed component for the company to achieve revenue growth or, in today's environment, defense of its book.

"The economy no doubt has impacted IT's spending momentum (some projects even with clear-cut ROI will be passed by); however, IT initiatives deemed mission-critical will be continued given senior management now views IT as necessary to compete and even just to survive," says Jenkins.

"IT spending at most carriers is projected to be flat this year, not reduced, in order to continue and complete these major initiatives," he observes. "[Such efforts] are needed to achieve STP (operational efficiency); [to increase] ease of doing business (increase revenue); to allow the company's IT infrastructure, systems, and operations to be agile and flexible (quicker time to market); and to provide the needed information to make the business decisions needed to compete (open systems).

"Finally," concludes Jenkins, "there is no doubt the recent financial meltdown will result in further regulation and regulatory scrutiny that will require our core systems to have the capabilities of transparency, reporting access to 'all' data, and better audit trails–thus, the need for newer, open systems.

"Many companies, such as Penn National, are looking to use a replacement strategy that provides a cheaper, faster, and better solution for legacy replacement," he says.

"Through its discussions with CIOs since the financial crisis has hit the insurance industry, Celent has found very, very few IT initiatives planned for 2009 have been halted or even phased back," states Donald Light, senior analyst for the Boston-based research firm. "This includes major initiatives such as the replacement of a policy administration system, which by its nature takes several years to plan, implement, and deploy across all lines in all states.

"The observation also applies to point solutions within policy administration, such as agent/broker portals, rating engines, and underwriting desktops," he adds.

"For all insurers, especially those with more modern policy administration systems, there certainly will be increased emphasis on getting the most gains in productivity and expense control out of the broad range of features and functions already present but not fully utilized in their current policy administration system," he suggests.

According to Rod Travers, senior vice president of technology at Robert E. Nolan Company, the effect of the recession "depends on where each company is in the development/implementation cycle of technology. Companies in the midst of implementation should review their plans with an eye toward gaining efficiencies as soon as possible–ideally within the current budget cycle," he advises.

This strategy could include narrowing scope to implement sooner discrete functionality, focusing on the largest lines of business or on processes currently underserved by automation, and emphasizing the highest cost/benefit opportunities, says Travers. "When implementations already are under way, there are front-end sunk costs, so there is both a desire and a business justification to continue the project so that benefits can be realized," he points out.

On the other hand, companies that have not yet embarked on implementing new technology may delay plans because of the significant front-end investment required, Travers contends. "They may instead focus on improving efficiencies of current processes, wringing more functionality/value out of existing technology, and pursuing less comprehensive technology upgrades. Business process management (BPM) systems likely will see increased attention as a practical and less expensive alternative to wholesale system replacements," he says.

"The primary issue with implementing new policy administration systems is the length of time required," Travers explains. "Experience has shown, and many vendors concur, implementing a comprehensive new policy administration system (several lines of business, several states, etc.) can take two to four years. In most cases, another year must be added to these estimates to accomplish a renewal-based rollout to the new systems.

"Due to the uncertainty in the financial markets and economy, some carriers may be reluctant to embark on such major implementations due to the long implementation time frame and the fact that costs are front loaded and benefits will be derived much later," he says.

"In previous downturns, many carriers focused instead on gaining maximum efficiency from current systems and reducing costs through process redesign while delaying major systems expenditures until the business cycle turned. Others have revisited the possibility of outsourcing, though this alternative has its own costs, risks, and unique management requirements," continues Travers.

Updates and modular add-ons for policy administration systems is an area that likely will see much more activity, he predicts. "Carriers will be much more inclined to invest in incremental technology (e.g., BPM, imaging and workflow, Web-enablement, etc.) that has lower initial cost, shorter implementation time, and a quicker return on investment," he says.

"Most companies with older policy admin systems have some kind of plan in place to upgrade/replace their system," Travers notes. "These companies have faced the cyclical nature of P&C in the past. We expect to see an overall slowdown in full policy administration systems.

"That said, those carriers with a track record for successfully implementing technologies will have every reason to proceed with a planned replacement because of the eventual cost savings, operational benefits, and competitive differentiation that modern systems can bring when properly implemented," Travers asserts.

Kimberly Harris-Ferrante, research director, financial services industry, for Gartner, based in Raleigh, N.C., believes many policy administration efforts will be put on hold, however.

"What we're seeing is companies are doing two things: responding to reduction in capital and saving money and anticipating the next wave of change in regulatory processes or markets. Companies are fearful," she claims.

For 2009, Harris-Ferrante states IT budgets in insurance will stay the same or be reduced. "Hard decisions must be made. Companies must maintain current systems and decide what will stay and what will go; also, what new projects will be done and what put on hold?"

Big multiyear core replacement projects may be put on the back burner, she points out. "You can't cut customer service, so what will go will be back-office projects with long terms and big costs."

If a carrier has a current policy administration project, "you are putting it on hold for most companies," she comments. "If it's a publicly traded company, shareholders want more value. Big replacement is going to be hard to justify from a funding point of view. It's not that companies shouldn't be doing it, but financial market conditions say otherwise."

When it comes to reacting to the economy, Harris-Ferrante describes four types of insurance company reactions. The first type says, "Let's stop where we are and wait to see what happens." There are no major changes or drastic cuts. "They'll be positioned OK for what comes," she indicates.

The second group is the "knee-jerk, cut-costs" crowd. This group focuses on cost cutting and efficiency, she maintains, perhaps considering outsourcing, layoffs, system cuts, and budget cuts. "But will you jeopardize your competitive position?" she asks.

The third type of company says, "We know something will happen, and we don't know what, so let's focus on cost cutting and agility/flexibility." SOA, integration, and consolidation projects are the focus, explains Harris-Ferrante. These companies want to be able to jump quickly when everything settles down and new markets open up. The emphasis is on being flexible.

A fourth group of companies says, "We aren't as hurt as some others in the market, so we want to turn that into an opportunity," she continues. "How do we figure out niches, opportunities, ways to improve, and ways to steal customers away from others while our competition is up to their eyeballs in other things?"

Most insurers are in the second group–responding to short-term need without thinking of long-term implications, says Harris-Ferrante. The second-most popular is number one. "If you are in either one and your competitor is in the latter two, in 12 months you could be behind the eight ball, and [those] companies will be in a position to capitalize on your weakness," she asserts.

"We see the insurance software market taking a big hit in 2009. Sales of policy admin systems will take a hit in 2009," she predicts. "So, it will be a buyers' market. They will have more leverage. This would be a great time to do a policy admin upgrade, because you will get better deals," contends Harris-Ferrante.

"I don't think we will see a lot of rebuilds. There will be a lot of modularized improvements. Not a lot of companies will be migrating off the mainframe to a different platform," she adds.

Jim Knight, executive vice president, global CIO for Warren, N.J.-based Chubb, confirms some IT projects are being curtailed due to the economic slowdown.

"Many IT departments [in the industry] are operating with very severe constraints," he remarks. "Recently, I was in Orlando attending the Society for Information Management SIMposium 2008. I heard many fellow CIOs, session speakers, and panel discussions (both CIO panels and media panels) around the problems. Many reported IT activities are curtailed, some even saying new development is at a standstill.

"In times like these, it is absolutely critical IT is aligned as closely as possible with the business side of the corporation," he states. "The key to forging a strong alliance between IT and the business is mutual respect and having a seat at the decision-making table."

This situation has improved in recent years, according to Knight, "but for those IT groups that are not currently at the table, one way to get there is to become more agile and look at things from a business perspective first and a technology perspective second. To stay at the table, IT has to continue to deliver and to help drive strategic direction. We have the expertise to make recommendations about technology, but they must be in concert with the business and its priorities, within economic constraints, and based on very sound business cases with clear ROIs."