Mind the Gap. Are Insurers and Vendors in Latin America on the same page about SaaS and Cloud Computing Usage and Adoption?

Almost with the end of the year around the corner we are yet immersed in some very important reports for all of us which, by the way, will be produced integrally with Latin American focus for the first time. The CIO Report and the Policy Administration System ABCD Vendor View Report are on their way.

From our past and recent discussions with Insurers and Vendors about different topics around technology, architecture, trends, features and functionality something has been driving my attention: It seems to be a gap in the perception about usage and adoption of SaaS models and Cloud Computing in Insurance, at least in Latin America. While the detailed reasons and how large is the gap between Insurers and Vendors will be part of a report next year, initial findings point in the direction that Vendors perceive more benefits from adopting these models while Insurer’s CIOs do not feel the pressure and do not have it as a priority.

A SaaS approach, applied to a Policy Administration System for example, appears as a perfect fit to the business model of many Vendors. SaaS enables Vendors to target small and medium Insurers as they can consistently manage a single scalable version of the solution and offer support very cost effectively with prices that fit smaller Insurers wallets.

On the other side, CIOs seem to feel more comfortable with on-site, self-controlled environments. Hardware and communications prices are more accessible to them providing more processing power and bandwidth for their dollars that a few years ago. In some countries even regulation presents a challenge to these type of offering as regulators still question where the system and the data needs to reside.

Something to consider is that Insurers in this region have yet not been exposed to much SaaS and Cloud offering so the perceived associated benefits and the price difference between traditional on-site and the new alternatives is still a discussion to mature.

Another aspect that might help to build the bridge and cross the gap is that core system replacement is starting to show increased trends and it will expose Latin American Insurers to new architected solutions with technology and functionality much more flexible and robust but at the same time more complex to administrate. Specially smaller Insurers will need to consider how to remain competitive, improve processes and deliver better quality products and services through diverse and new distribution channels at a cost they can bare.

Interesting times to come as we unveil what to expect in the region. In the meanwhile if you are interested in participating in the Latin America CIO Report or the Policy Administration System Report please let me know. Also feel free to reach me at jmazzini@celent.com with your comments and thoughts around SaaS and Cloud Computing usage and adoption.

Happy Holidays!

Time is passing, uncertainty remains

The insurance industry is not immune from changes occurring at the marcroeconomic level. Based on our frequent and periodic discussions with European CIOs we have noticed that the level of uncertainty prevailing in the economy right now has contributed to reduce IT budgets (for more about this, read the following reports from Celent: Insurance in France 2011: The CIO Perspective and Insurance in the United Kingdom 2011: The CIO Perspective).

Much has been said and much has been proposed to solve the current Euro zone crisis initially triggered by the Greek sovereign debt issue during the first quarter of last year. But nothing and even the decisions made in the frame of multiple political meetings (G7, G20, etc.) prevented the issue to spread over to Ireland and Portugal later that same year. Nowadays, the Euro-zone is still in danger of disappearing – at least under its existing form – despite its member state political leaders’ latest decisions last week in the G20 in Cannes. Italy is the new country in the line of fire and it seems that as time passes, the problem is getting worse. I personally think there are three interesting lessons we can learn from this crisis:

  • Nations are here to stay: it is impossible to create a successful monetary union if the participating countries do not tend to form a single nation. On the first hand, the single Euro-currency decision makers have neglected this political aspect and on the other hand they have based the single currency construction almost solely on economic principles.
  • Democracy always wins: solidarity among countries part of the same currency zone works as long as there is the outlook of stable prices and sound future economic conditions. Manifestly this is not the case in these turbulent times. Directly or indirectly populations of France and Germany will let their politicians know that they do not agree to sacrifice their already decreasing well-being for other populations especially when some of them have been cheating to get funding from other members of the single currency area. According to me we might expect French citizens to express their anger before the next presidential elections through demonstrations against new public spending reduction plans to be announced in the coming weeks.
  • It is not recommended to solve a credit problem with more credit: it is Euro-zone member states who contribute to the European Financial Stability Facility (EFSF). In other words, Greece, Portugal and Ireland contribute to this fund at respectively 2.82%, 2.51% and 1.59% . Italy and Spain represent together almost 30% of the EFSF contribution. In other words, some countries are wrecked and rescuers in the same time!

In conclusion I think that we have reached a point where the magnitude of the Euro-zone problem is too big for policy makers ability to find a successful plan. To me the time has come to plan the end of the Euro-currency under its current form and the more we wait the more difficult it will be. For insurers, there is more uncertainty ahead. We are currently reaching out to UK and French CIOs to update our CIO survey reports. These two reports will be published in Q1 next year and I invite our subscribers to stay tuned.

Battening down the British hatches : 2011 will be the year of uncertainty

At this time of year, along with Guy Fawkes celebrations and eating turkey, Celent analysts in UK, US and France start the process of interviewing CIOs at insurers to understand their plans and priorities for 2011.

Even at this early stage of the research process, there are some interesting differences in the regions. Insurers in Britain appear not to share the US view that we are in a new normal (See celent report ) – a new world of flat growth, weak consumer consumption, high unemployment and low interest rates. In fact, several are planning for growth for 2011 in what is a highly saturated, brutally competitive market. The French insurers we’ve spoken to are more pessimistic and more closely aligned to their US colleagues.

Whilst the business strives for growth, the internal driver is cost containment. The UK CIO face either flat or small decreases to IT budgets going into 2011. A handful are required to cut their budgets by up to 30% over the next three years. IT is being asked to become more affordable, and to reduce their contribution to expenses. As one frustrated CIO said “They [the business] are back to cutting the legs off IT”.

What does this all mean for the UK insurance technology industry? The impact in 2011 is probably small. Several insurers have large scale investment projects already underway and these are not under threat. I would expect to see more tactical solutions crafted for the new world of affordability. Multi-million claims replacement projects will be a hard sell, but FNOL or fraud point solutions provide value at a price that fits the new world.

In the medium term, we will see the discretionary budget under threat once more. Since Celent has been covering the UK market, we’ve seen small and steady increases in IT budgets and a resulting downward trend of the maintenance chunk of the budget. So with the increased discretionary IT investment, some insurers have managed to turn the ratio on it’s head – having 60-70% of IT budget available for new investment. These IT departments are undoubtedly more agile and more flexible in responding the business requirements, mirroring for most their organisation strategic goals of responding to the markets. But with year on year cuts to IT budgets, expect this ratio to slip once more.

For vendors, it will become harder to sell new products and services with the reduction in addressable IT budget. If the new normal does arrive in the UK, as you may intuit is Celent’s view, there is no light on the economic horizon. Rates will not rise, competition will increase, premiums will remain flat, and against this backdrop, IT will be pressured into more cost reduction.

Trend this out over three to five years (smarter people than me are not able to pinpoint any economic turnaround in the coming years for the UK) and IT starts to become an expense line again, unable to deliver in the manner that business has come to expect. This will be frustrating time for IT folk who have built up significant credibility with the business in recent years.

For now, to protect against this scenario, Celent would suggest that it has never been more important to have the dialogue with the business about how and where IT can contribute to cost containment and profitability. Automation, analytics are just two areas that can help. Before the market gets too dire, maybe it’s time to invest ahead of the curve.

The interviews mentioned in this post will form the basis for our syndicated reports “CIO 2011: plans and priorities” to be published in January 2011.

Is the death of the Insurance CIO possibly around the corner?

It was during a conversation over a year ago someone raised the possibility of the “best-before-date” of a CIO. He made the point that in 10 years time, IT would be a commoditised service consumed as and when it suited the business. He was really pushing the envelope – he meant all of IT from infrastructure services through to core insurance applications. I nodded sagely, as analysts do, and agreed with him in the principle but not on the time frame. 10 years… surely not.

The conversation was with a UK CIO of a mid-sized P&C operation and it’s been replaying on my mind recently. Against the backdrop of increasingly meaningful conversations about cloud, the idea of an IT organisation being commoditised to the point of removing the necessity of a IT management structure suddenly seems real.

There are two interesting case studies. Firstly, the UK Royal Mail moved from an internally managed mail system for 37,000 users, to an external public cloud by moving all the users to the Microsoft cloud. That’s a significant and meaningful change in strategy for a large organisation such as Royal Mail. The CIO said it was driven mostly by a need for agility rather than cost-savings. The Royal Mail had decided to focus on delivering parcels and letters, and let an external supplier deliver internal email via the cloud.

The second is an insurance specific test case. A UK insurer is testing a policy administration system in the cloud. This in itself is significant – this is a large insurer testing out the idea of a core system in the public cloud. It’s still under test but the insurer is excited about what this can mean for their agility in IT delivery.

With the growth of traditional sourcing models, it’s easy to accept that infrastructure could be moved from a private cloud with a traditional hosting company into a public cloud. What’s much harder to get agreement on is a vision of the world where core systems live in a public cloud. And there is good reason for this. Regulators, customers and insurers alike will have concerns over security and data privacy. There will be concerns about being tied to a large cloud provider with little interest in commercial issues. There will be (and have been in the cases above) some hand wringing over the gap in SLA’s delivered in the cloud versus what traditional sourcing models might offer.

The examples suggest an inexorable move towards the commoditisation of IT. It may well be too early to talk of the death of the CIO, but there is little doubt that the responsibilities of a CIO could shift towards supplier management as cloud offerings mature and become a viable solution to new outsourcing models.

2010 Celent Insurance CIO Surveys

It is at this time of the year that Celent conducts its famous surveys providing useful insights about insurers preoccupations, priorities and plans for the coming year. This year we have decided to apply the same usual method for the United States market. In other words, our readers will be able to access our famous US insurance CIO survey report in late January. On the European front, we have decided to get a more focused look at two countries. Indeed, Celent is currently conducting interviews with CIOs in United Kingdom and in France and we will publish a specific report for each country. I am personally dealing with France and so far, the main concerns of French CIOs are the following:
  • Distribution: French CIOs understand that the distribution landscape is changing fast. They have all listed distribution as one of their priorities for 2010 and most of them intend to launch IT initiatives to take advantage of the growing importance of online insurance notably.
  • Regulation: the Solvency II regulation framework affects directly insurers IT investment priorities. As the results of the quantitative impact study 4 launched by the CEIOPS in 2008 tend to demonstrate, there is a growing interest by French insurers in understanding what are the impacts of the new set of prudential regulation not only on their solvency ratios but also on their ability to comply with the other elements of the regulation. Some insurers have already invested in new IT systems for instance capital modeling tools but some others still need to understand what they have to start with and what they need to focus on to be ready in 2012.
  • Improvement of core processes and cost reduction. Even though most of the CIOs interviewed so far clearly mentioned they had not really implemented drastic measures (layoff program, IT investments cancellation, etc.) following the financial crisis and the economic downturn, improvement of core processes leading to cost reduction via a smarter use of IT resources represents a priority for 2010.
Celent pays full attention to insurance and IT trends and having the chance to discuss directly with key players on specific markets makes our job interesting. I hope our clients and readers feel our passion for our research and the insurance industry when they read our reports. I wish to all of you a happy Christmas and a successful new year.

Wishes for 2009 From a European Insurance CIO

Celent has the chance to be continuously in the heart of insurers’ preoccupations. Knowing how difficult it is to make optimal decisions in order to thrive–especially in today’s environment–keeps us informed about the hurdles to overcome. Today we are proud to share with you the wishes of a European insurance CIO, Guy Malherbe from Les Retraites Populaires. Thank you Guy for your contribution.
In 2008, life insurers were deeply impacted by the financial crisis, especially within their wealth management divisions. Nevertheless, some insurers were very successful in generating new premiums thanks to their financial stability and low exposure to risks (e.g., sub-prime, hedge funds, etc.). That was one of the paradoxes of this crisis. Collateral effects for these “lucky losers” have been moderate, even for the IT divisions. But Operational Expense and Capital Expense IT budgets for 2009 have been reduced due to the bad economic climate, which I believe will last at least one more year. So, technology executives in insurance will have to face the dilemma of “doing more with less.” As I am one of these, my goals for 2009 are:
  • Ensuring business continuity. IT services are part of the core business of life insurance. They have to be reliable and powerful to support day to day business, even in the worst cases like this economical crisis.
  • Focusing on short-term customer needs but maintaining a long-term perspective. Customers are anxious about their investments and need to be reassured. They are looking for stability and low-risk financial products. Life insurance could be the right answer if we invest in building trust-based and lasting relationships with our customers that help to restore confidence in financial products.
  • Keeping faith in the future and welcoming the “Internet generation” by implementing innovative life e-insurance services and advice. The Internet generation is getting older and will soon be interested in life insurance products. Insurers must be prepared to fulfil their needs by offering new ways of managing “virtual” relationships with this promising segment of “e-customers.”
I am sure that 2009 will be a challenging year for life insurance CIOs, but it will also bring with it a lot of great business opportunities.