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DATAMONITOR: Insurers IT spending priorities shift to risk management
and compliance
(M2 PressWIRE Via Acquire Media NewsEdge)
RDATE:15102008
The insurance industry is facing difficult times but the sector is not
undergoing a systemic crisis, due to regulations and sound portfolio
management by the majority of players. According to independent market
analyst Datamonitor, IT budgets should be more stable than those in the
banking sector, with neither robust spending or dramatic budget cuts
likely to materialize, and spending priorities shifting toward risk
management and compliance.
The financial services sector still faces uncertainties, with the
ongoing crisis now spilling over into the wider economy. Commercial
paper has all but frozen up, which is raising the cost of capital for
every company in every sector and governments are intervening on an
unprecedented scale. As these events unfold, technology vendors exposed
to the insurance sector are left with uncertainties of their own
regarding the state of the industry and the expected IT spend of
insurers in 2009.
Datamonitor believes that although the insurance industry has been
hobbled, it is not facing a systemic crisis, thanks to regulations and
sound portfolio management by the majority of players. AIG, which has
been the only major casualty in the insurance sector to date, was
felled by a small group writing credit default swaps, not its insurance
business. Therefore, its situation is exceptional, rather than a sign
of things to come.
While the robust spending that was previously anticipated will not
materialize, neither will dramatic budget cuts. Spending priorities
will shift away from discretionary projects, as greater emphasis is
placed on risk management and compliance.
In Datamonitor's Business Trends: Global Insurance Technology Trends'*
survey of 200 global insurers in the first half of 2008, 61% and 47% of
non-life and life insurers, respectively, said they were planning to
increase investment in risk management and compliance systems in 2009.
Moving into 2008, US insurers were displaying a proclivity to invest in
the online channel for sales and service, with 60% and 50% of non-life
and life insurers, respectively, stating they were looking to increase
investments in this area in 2009. While improving the customer
relationship is imperative, such projects may be scaled back to
accommodate the increased need for risk and compliance.
Along with this shift in priorities, spending will be marginally
downgraded. Datamonitor's survey found that a large proportion (50%) of
US non-life insurers anticipated flat budgets, while 27% and 18%
anticipated budget increases of 1-5% and over 6%, respectively. US life
insurers were more tepid, with the majority noting a flat budget
environment. European insurers nearly mirrored their US counterparts.
Credit has become much more expensive and difficult to access since the
survey was conducted, and those insurers that anticipated major
spending plans will likely witness only a slight increase in their
spend, while those companies with moderate planned increases will go
flat.
Despite the fact that most industry players have avoided 'toxic'
assets, the impact of the credit crisis on the sector should not be
underestimated. The non-life market is being challenged by a soft
pricing environment and poor investment income, while life insurers
could be confronted by a cyclical downturn. In the US, increased
competition has pushed rates down on non-life insurance in general and
commercial lines in particular. According to the Insurance Information
Institute, there has been an increase in the combined ratio, or the
proportion of premiums spent on claims and operating expenses, for the
non-life sector, excluding mortgage and financial guarantee insurers,
for the first half of 2008. Lower premiums are responsible for much of
this increase, however, insurers have also been adversely affected by
an active catastrophe season, with roughly $22 billion of catastrophe
damage already recorded in 2008. In terms of an economic slowdown or
recession, the non-life market is relatively non-cyclical because many
products, such as auto insurance, are compulsory, although insurers can
be adversely affected because consumers often opt for base coverage in
difficult times. Additionally, when businesses contract, demand for
coverage wanes, particularly workers' compensation.
Life insurers are facing challenges as well, as the life insurance and
retirement market is highly correlated with the economy. In good times,
people buy coverage and stash money away for retirement, while coverage
and retirement planning are scaled back in bad times. Life premiums
grew at a rate far greater than GDP between 1997 and 2000, a period
marked by high productivity and above average stock market returns.
When the economy and market turned downward following the technology
bubble burst and the attacks of September 11, life premiums fell from
near double-digit growth rates into negative territory. It should also
be noted that the premiums lagged the equity market by one year,
meaning that premiums may experience the heaviest downturn later in
2009 and 2010.
In addition to lower demand, both life and non-life insurers are
struggling with weak investment income. Stocks, bonds and real estate
have all lost value since last year, and a number of major insurers had
large positions in battered institutions, such as AIG, Washington
Mutual, Lehman Brothers and Wachovia. MetLife, for example, announced
that it had $800 million of investments between AIG and Lehman, the
recoverability of which it is continuing to assess. The Hartford also
has exposure, particularly $127 million in subordinated Lehman debt.
Compounding this, insurers are large consumers of mortgage-backed
securities; Allstate, for example, held $6.1 billion of mortgage-backed
securities in the second quarter, nearly $200 million of which it wrote
off.
In addition to the cyclicality of life premiums and poor investment
opportunities, a number of insurers have engaged in higher risk
strategies over the past decade. These strategies, most notably credit
default swaps and securities lending, provided outsized returns during
the good times, but are now responsible for billions of dollars worth
of write-downs. As well as AIG, which was forced to seek aid from the
US government following an increase in bond defaults, a few other
insurers have been active in the credit default swaps market, including
MassMutual, although not to the same extent as AIG. However, while a
small proportion of insurers write credit default swaps, the vast
majority are consumers of these products, which have increased
dramatically in price because of the elevated risk of corporate
default. The increased cost of coverage is directly affecting the
industry's margins.
Despite the dour news related to a few large and key players, the
industry overall is marked by highly regulated companies that possess
conservative portfolios. Insurers are feeling the effects of the
'toxic' debt storm but, unlike the banking industry which is in the eye
of the storm, the insurance industry has a sound business model.
Insurers with aggressive and risky portfolios are rare, and are the
firms most likely to suffer from the current situation. Yamato Life,
for example, made up for a weak operation by allocating 30% of its
portfolio to alternative investments, such as hedge funds and private
equity. Conversely, Northwest Mutual has less than 1% of its portfolio
exposed to sub-prime mortgages.
The US insurance industry has been controlled by a cumbersome
state-based regulatory regime, hindering innovations, but it is those
same regulations that have sheltered the sector from the fallout of the
banking crisis. When lawmakers embark upon reforming the industry it is
essential that they strive to maintain the right balance so that
innovation can be achieved and exuberance tamed. In keeping with the
expected regulatory changes, vendors should concentrate their efforts
on risk management and compliance systems. Business process outsourcing
may also receive a boost as a result of the market turmoil, as insurers
will be seeking to mitigate costs and focus on core competencies during
the lean times.
Furthermore, and perhaps more importantly, insurers will be looking to
outsourcing partners with compliance expertise. As the regulatory
landscape changes, players in the sector will be left with a choice:
update rigid systems, implement a new system or outsource. The third
option, outsourcing, is attractive, but only if vendors can deliver a
smooth transition and elevated service levels.
Notes to Editor:
*Datamonitor's report "Business Trends: Global Insurance Technology
Trends, 2008 (Customer Focus)". This report is the result of
Datamonitor's annual global survey of 200 IT decision makers within
insurance companies. Recent trends in insurance business operations,
including claims, policy administration, distribution and outsourcing
are covered. IT budgets, technology drivers and strategies are
explored. Life, non-life and multi-line carriers are represented.
Geographic scope covers Asia Pacific, Europe and North America.
Jonathan Steiman, author of the report, is an analyst on the Financial
Services Technology team at Datamonitor and is responsible for covering
the IT needs and challenges of Property & Casualty, Life & Pension and
commercial insurers. As an IT analyst in the insurance vertical, he
focuses on technologies specific to insurers, such as policy
administration and claims applications, as well as industry agnostic
applications, such as Customer Relationship Management (CRM).
Jonathan has authored an expansive report on CRM in the global
insurance market, specifically looking at how the strategy and
accompanying technology can be used to defend against a product that is
quickly becoming a commodity. He also wrote Trends and Strategies in
Policy Administration BPO in the second quarter of 2008. In addition
Jonathan actively consults for Datamonitor and recently completed a
benchmarking project for a Fortune Global 25 client.
Prior to joining Datamonitor, Jonathan worked as a financial journalist
and covered economics, M&A and general business for such publications
as Corporate Finance Week, Inc.com and Business 2.0. Jonathan holds a
BS in Business Administration with a concentration in Finance and
Insurance from Northeastern University and a MA in Business and
Economics Reporting from New York University.
Datamonitor is the world's leading provider of online data, analytic
and forecasting platforms for key vertical sectors. We help our
clients, 5,000 of the world's leading companies profit from better,
more timely decisions. Through our proprietary databases and wealth of
expertise, we provide clients with unbiased expert analysis and
in-depth forecasts for seven industry sectors: Automotive & Logistics,
Consumer Markets, Energy, Financial Services, Healthcare, Retail and
Technology. Datamonitor maintains its headquarters in London and has
regional offices in Frankfurt, New York, San Francisco and Sydney.
CONTACT: Suzanna Eygabroat, Datamonitor
Tel: +1 585 374 6326 ext: 17 (US)
e-mail: seygabroat@datamonitor.com
Denis Mason, Datamonitor
Tel: +61 2 8705 6903 (Asia-Pacific)
e-mail: dmason@datamonitor.com
KrishnaRao, Press Officer, Datamonitor
Tel: +44 (0)20 7675 7271
e-mail: krao@datamonitor.com
WWW: http://www.datamonitor.com
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Copyright ? 2008 M2 Communications Ltd.
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