Archives for November 2008

Insurers Strategy Concerns: the big shift?

American and European insurers are currently facing hard times. While everybody can explain now how we got into this situation, it is still unclear how precisely financial companies and notably insurers will change their strategy in the near future and particularly how they will align their IT resources in order to respond in this fast changing environment.

In a recent report (“Bad News on the Street: Insurance IT Strategy and the Financial Crisis”), Celent reviews the different aspects that might have an impact on insurers strategists in the near future and evaluates which IT projects might be the preferred choices in this period of financial uncertainty. Not long ago, CIOs were working on initiatives aiming at capturing growth in mature markets, trying to ease the way they were doing business and emphasizing agility in priority. Nowadays it seems that insurers get more concerned about their expense ratio. Indeed, when assets are shrinking and trigger above-average depreciations, it is important to have profitable insured risks and clients in its books. What has caused troubles to the insurance sector in 2008 is not directly the recession coming but more the rapid decrease of values in the financial markets worldwide. Of course many will say that both are related and they are right but what is making the problem more complicated for insurance companies is the sudden and strong drop of the financial markets (30% for the Dow Jones and the DJ Euro Stoxx 50 from September to October 2008). There are past examples that help us better understand what is currently happening. For instance, in mid-June 2002 CREDIT SUISSE was forced to bail out its insurance company Winterthur, whose financial strength had suffered from the general malaise in stock markets and from the low level of confidence in insurers shown by consumers.

As we all know, financial markets are generally good indicators to anticipate economic cycles and based on their recent performance, it seems that investors are seeing a hard and potentially long recession ahead. In this situation, Celent believes that insurers will have to focus on basics. In other words, we expect insurers to perform a big strategic shift, which will lead them to get back to more prudence in terms of asset investments and to launch initiatives aiming at improving return on their insurance portfolio in order to improve their overall loss and expense ratios. To win the battle for the good risks, business intelligence will be an important IT resource. In order to improve their expense ratio, Business Process Management (BPM) and alternatively Business Process Outsourcing (BPO) might emerge as key IT initiatives in the near future. For instance, Zurich Financial Services has announced last October their plan to outsource their data-centers currently based in the US and in Switzerland in the frame of a more general cost saving plan.

Celent will publish its traditional annual insurance CIO survey in the first quarter of 2009 (for the US, Europe and Asia). We are going to know much more about insurers’ intentions soon.

Riding out the market crisis

One of the job functions of an analyst is being asked to predict the future and no more so that in this current economic climate. As the year end approaches, I am being asked this question on a daily basis. The question usually masks a certain amount of personal concern about how 2009 might turn out.

Anecdotally, from conversations and interactions that we are having, there is some belt tightening, some teeth sucking, and grimacing all around. But as yet, we have not seen massive slashing of 2009 budgets.

In a recent poll of insurers (October 2008), we asked about the impact on IT investments in the current climate. The chart below summarise the results. It’s heartening to see that for most insurers, business cases are being revised or spend re-prioritised. For a handful, there is no impact. Admittedly, as the year progresses and as economies around the world appear to slide into deeper trouble, this data may seem out dated.

So as the financial news changes daily, as new presidents are inaugurated, and current prime ministers grapple with the limits of Keynesian economics in a global downturn, Celent will continue to keep a beady eye on IT spend and budgets. As a team, we are in the process of collecting data from CIOs from the across the globe as I type. We’ll have more quantitative data at the year end in our regional CIO survey reports. Watch this space for the update.

Best Practices for a Vendor Proof-of-Concept

Insurers who have been through the arduous process of whittling a long list of policy admin system vendors down to a short list, and then whittling a short list of vendors down to an even shorter list, often ask us how they can be sure they’ve made the right choice before investing potentially millions of dollars and multiple years in their decision. Engaging in an extended proof-of-concept is one way to test out a vendor, but it needs to be done the right way if it is going to truly demonstrate the system’s value. For a proof-of-concept to be successful, you need to make sure that you’re testing enough functionality, but also to keep it limited so that the goals are realistic. While Celent regularly works with insurers to define the scope and requirements of proofs-of-concept, in this post I’d like to talk about some of the more intangible factors for success. There are two ways to approach a vendor proof-of-concept, depending on whether you have selected one vendor and are putting them through a final test, or if you are still comparing multiple vendors and therefore have two proofs-of-concept going on at the same time. You’re better off if you can work with one vendor, as you can take the tests to a deeper level and have your resources focus exclusively on making it a success. You should consider installing the vendor’s system in your own data center, even if some of the development work they do during the POC is at their own site. It’s crucial to dedicate a full resource from your staff to be involved with the entire POC, ideally doing some of the modeling or integration work. It doesn’t help you if the vendor goes away for a month and returns with a finished model and tells you that it was “easy to do.” You need to understand exactly what kind of work is involved, how difficult it will be to manage once the vendor is no longer consulting with you, and how much time it will take to train business users on the system. In terms of duration, I’ve seen proofs-of-concept take anywhere from two weeks to three months. Any longer than three months and it’s no longer a proof-of-concept, but just a normal implementation with an “escape clause.” With one vendor, you should schedule the proof-of-concept phase for at least two months, but plan the work so that whatever you do can be put towards the true implementation if and when you choose to continue. Finally–especially if you are working with a single vendor–Celent is in favor of paying a fair price for the proof-of-concept phase. Paid proofs-of-concept are more successful. Committing money as well as resources signifies to the vendor that there is true involvement from the client, and it positions you to dedicate true resources. An unpaid POC is like playing poker without having to pay the ante. You might start off interested in the game but you won’t care as much about your cards. The reality is that a proof-of-concept won’t be successful without both the carrier and vendor working together, regardless of how strong a solution the vendor offers.

Update to "Bad News on the Street, Insurance IT Strategy and the Financial Crisis"

Since we published Bad News on the Street, Insurance IT Strategy and the Financial Crisis in early October, the economic roller coaster continues to twist and gyrate. One assumption in that report, that there will be a “mild to moderate” recession, is being severely challenged. The mortgage meltdown morphed into a credit confidence crisis which precipitated a consumer confidence downturn, increasing job losses, accelerated by an auto industry meltdown. Suddenly, a question that seemed ridiculous a short time ago seems prudent: “Is $750 billion enough?”

Strange actions have been seen on the street. “Traditional” insurance companies are courting and marrying tiny banks so that they can meet at the TARP alter. Other insurers are vehemently rejecting any government assistance and the resultant “strings” attached. Foreign-owned insurers are directly petitioning the US government for assistance.

Since the report, third quarter numbers have been released and the results are not kind. The third quarter 2008 net income of the largest 25 Property/Casualty and Life/Annuity/Health insurers is 97% below that of last year. (These numbers exclude AIG.)

Discussing the situation with insurers in North America, Celent finds that most are taking a “wait and see” approach to IT budgeting. Strategic projects that are already underway are not being cancelled, but those that were planned to be launched in late 2008 are being delayed. In late October, Celent surveyed CIOs at North American insurance companies about projections for their 2009 budgets. No one reported a decline and 34% said their budgets would remain flat at 2008 levels. When asked to rate this amount against the strategic business and technology objectives they expected, most (75%) characterized this as “adequate”.

Barring economic catastrophe, the next game-changing event will be modifications in regulation. Two central questions loom. First, to what extent will the insurance industry be included in general financial reforms targeted toward banking institutions? Second, which way will the ongoing tug of war between Federal and State oversight go?

A slim ray of optimism exists in rumors that a hard market is coming for commercial Property/Casualty products. We will keep our ears to the ground and our radar on scan for additional developments.

Celent Enters the Blogosphere

Welcome to the Celent blog!

For those of you who are new to the site, or who are new to blogging in general, doesn’t it make you feel…cooler? That’s what it does for me. Entering the blogosphere is like slapping on a pair of virtual Ray-Bans and driving a virtual red Ferrari down the virtual Pacific Coast Highway. Very cool.

Of course, sharing snippets of the Celent perspective in a convenient medium is more the point. So maybe there are billboards about insurance technology and business strategy along our virtual route. Team Celent is going to fill them with content that is thought-provoking, interesting, and timely. If you’re an insurance geek (and all the cool people are!), you’ll enjoy an occasional ramble on the current state of the industry, core systems trends, IT spending, vendor relationships, or maybe simply some random observations from our travels.

Please feel free to leave your virtual calling card while you’re here, or drop a line directly to the analysts. That dialogue is an important part of what we do, and it keeps things interactive and interesting. And by all means, enjoy the ride!

Craig