We will soon publish our third report is a series that has been tracking insurer responses to the crisis. This report focuses on changes between responses in quarter two and quarter three of 2009. It is based on a Celent survey that examines how insurers are responding to changing market conditions and their expectations about the impact of the crisis. 

The global financial crisis continues to have a significant impact on insurers. Since the fall of 2008, insurers across the globe have been keeping a close eye on economic indicators, their investment portfolios, their sales results, and potential regulatory changes. Some insurers have made changes to their business or IT strategies, while others have essentially stood still. But serious questions loom. How long will the economic recovery take?

What is clear from the data is that insurers have broadly made the hard and difficult decisions. Businesses have been sold, staff made redundant and strategies have been changed. IT has made it’s own hard decisions with similar changes in staff, heavy re-negotiations with suppliers, and broad changes in project portfolios. With the actions from difficult decisions underway or completed, insurers are also undertaking some aggressive options such as launching new products or new channels.

As the year progresses, insurers are becoming increasingly optimistic about the next quarter, and also the view a year out. They remain bullish about their own company’s strategies, including competing effectively and job security.

IT investment projects have been impacted through 2009, but the impact seems to be lessening. Cuts and reprioritisation has been made, and now the focus in back on delivery. Since last year, areas attracting increased investment include claims, infrastructure and data mining. Much of this investment is driven by cost reduction and regulation. Strong interest in data mining is particularly related to the financial crisis, increased regulatory scrutiny as a result, and impending Solvency II. Policy administration system replacement continues, with over half of the respondents having this on their action list. Investment in new business/underwriting has shifted to the low category in the last year.

As the year draws to a close, and new budgets and plans are revised for 2010, it’s clear there is much work to be done in IT department. It’s time to re-focus and get on with the job.

The Beige Book October 2009 edition provides two important news: one good and one bad. Let’s start with the good one: the US economy seems to have reached its bottom at least it does not show signs of more degradation. However the bad news is: the US consumption is weak and when we know that consumption represents 70% of the US GDP, it means that the recovery will be slow.

Overall there are two things to learn from the last edition of the Beige Book. First of all, American people seem to change their habits and behaviour. They tend to save more and I strongly believe that this change is good for the world economic system in the long run even though it is no in favour of a strong recovery in the short term. Indeed, the US people could not continue spending so much using debt. The second interesting aspect relates to how the Federal Reserve will then adapt its monetary policy going forward knowing that US consumers are spending less money. On the one hand low interest rates facilitate speculation and contribute to making the US$ weaker. To a certain extend this situation could generate a new bubble (I wonder whether it’s not already the case). On the other hand, hiking interest rates would slow down or even stop a recovery, which is already slow. In summary there is no two best alternatives to choose from. The US and world economy depend on choices between bad scenarios and the challenge will be to choose the least bad. But when we think where the world economy was last year, this is maybe not a bad situation to be in now.

Much of the action seems to be driven by the fact that IBM has a near-mainframe monopoly and that businesses rely on mission-critical code that can only run on these mainframes. The issue here is not just IBM’s mainframe monopoly but, rather, the fact that companies are relying on code that was written twenty or thirty years ago.

I say the mainframe monopoly is not the main issue because calling it a monopoly ignores the realities of modern computing. Customers clearly have options beyond the mainframe; most (if not all) consider and purchase modern servers for production systems that either run alongside mainframes or have replaced mainframes. A mainframe monopoly is like a train monopoly… It might be a point of contention if one company owned all the trains, but this company would still be competing against all the very prevalent and modern options (trucks, boats, cars, planes) for shipping and travel.

One cited “proof point” of this monopoly is that modern server prices have fallen by over 40 percent since 2001 while mainframe prices have fallen less than 13 percent. But the server costs are only one element of the total cost of ownership. The mainframe has a reputation for reliability, scalability, and throughput. At an enterprise level, servers are typically positioned as a mainframe replacement in part because of the ability to cheaply buy enough to duplicate mainframe values in volume. The total cost of ownership (which includes hardware, software, and services) for all those servers compared to a single mainframe is a point of much debate. Some state that the total cost of ownership for the mainframe is lower while server proponents claim the opposite. But if a single mainframe can potentially offer a lower total cost of ownership than many servers, it makes sense that the hardware price would remain higher.  And regardless of whose numbers you believe, the modern server is positioned as a commodity compared to the mainframe; not because of the lack of monopoly status but simply because one of the values is its cheapness. If part of the server philosophy is the cheapness of the hardware, it makes sense that the price would decline more rapidly.

The real issue cited in the action is not the hardware monopoly but the fact that many companies have mission-critical systems running on these mainframes; systems they have invested too much money in to move. Any company that cannot ever move off of its existing base of code because it has invested “too much” in it will one day face extinction, if it does not face it already. From where I sit, the software and services industry is fueled by the multi-billion dollar business of selling companies modern solutions and consulting to migrate off of legacy solutions. In fact, IBM, as a major force in professional services, is one of the companies helping consumers move off of legacy code to modern enterprise software.

Has IBM prevented other vendors from creating options that would allow companies to retain their legacy code but run it on cheaper, modern servers? I am not going to comment on the truth or legality of such actions. My concern is and always has been about how to plan for the future IT direction of a company. Even if such legacy code alternatives have been prevented, these would only have been temporary measures anyway. If a company takes 30-year old legacy code and moves it from a mainframe to a server, that company’s problem is not solved. It may mean some lower-cost maintenance for the next few years (though, as discussed earlier, the total cost of ownership is in question), but that company still needs to consider its true next step. Otherwise this is sweeping a long-term problem under the rug with a short-term fix.

According to SNL, a MarketScout report forecast flat to slightly higher prices, while a Willis study concluded that price increases would be difficult to come by.

All of this points to the importance of keeping business that is currently on the books and looking for ways to earn business from other carriers.  As noted in other blog postings, the change in this approach in this economic environment is that growth will come from service, distribution channel management, and acquisitions.  New market and/or innovative product initiatives will not be the engines that they have been in the past.

For systems professionals, this means lowering expenses and raising quality on what is already being done and selectively investing in projects with shorter timelines that have direct revenue impact.  

We’ve just opened the third quarter survey to all insurers. Join in now, it only takes five minutes, and contribute to the view on how IT investment is fairing.

This event is free to Celent clients and the media. Non-clients can attend for a fee of USD $249. Celent will contact non-clients after they register for credit card information.

Please click here for more information.

Deal activity levels in the UK have seen a lull in the last twelve months, but Celent sees these two deals as a sign of the new times. Insurers will look to get back on track in IT investment as soon as possible, and most will have to face the challenge of replacing outdated core systems or at the very least, consolidating to a few of the best systems in house.

Both these examples highlight the investment that has been going on for sometime by policy admin vendors from outside the UK. Celent’s view is that the UK market has been underserved by PAS vendors for some time now, and an increase in competition can only mean more choices for the insurer.