Anecdotal Brights Spots for Insurance and IT in Buffett and IBM

Given the comments to my recent post Recent Signs of IT Spending for Insurance Remain Encouraging, I know that many of us are watching developments week by week, if not day by day, looking for indications of economic direction for our industry.

In the midst of all the darkening economic reportage we’ve seen two bright stars in recent days: one was in Insurance and the other was in Information Technology.  For people in insurance technology, that’s the best daily double you can get.

Insurance was highlighted in Warren Buffett’s annual letter to Berkshire Hathaway shareholders (click here for the complete text).  After a beginning in which he acknowledged the worst year in Berkshire Hathaway’s history and that he foresaw continuing economic woes for the U.S. and the world in the short term, he then emphasized that the future was on our side.  And he went to to describe how pleased he was that the insurance business was foundational to BH:

[W]e are fortunate that Berkshire’s two most important businesses – our insurance and utility groups – produce earnings that are not correlated to those of the general economy. Both businesses delivered outstanding results in 2008 and have excellent prospects. 

 

That the industry our technology serves is so prized by the most famously successful investor of our generation should be strong comfort to us.  And that his conviction is undaunted by the current negative circumstances is all the more encouraging.

As for technology itself, this week IBM reaffirmed its profit guidance for 2009 resisting the negative direction of the S&P 500 and the Dow Jones Industrial Average, both of which slid into new negative territory (see Bloomberg story here).  A lot of bad news has come forth since IBM first announced their expected 2009 earnings on January 20th.  That they would now reaffirm that guidance is therefore particularly encouraging.  We know that IBM is not only a giant as information technology companies go, but it is also especially strong in the insurance industry.  Information technology provides the greatest source for productivity improvement in any industry.  Economic downturns don’t lessen the need for improvements in productivity; if anything, they increase it.  It’s no surprise then that a technology supplier would have better prospects than other suppliers at a time like this.

Thus we have in recent days seen specific examples of leaders in both insurance and technology expressing strength and optimism – albeit a cautious optimism.  Therefore, to be in insurance technology at a time like this is one of the better places to be.  I know that these “anecdotal bright spots” are indeed only anecdotal.  But they are also bright!

Recent Signs of IT Spending for Insurance Remain Encouraging

Sungard, one of the leading technology providers for financial services, recently reported 11% organic growth for Q4.  Meanwhile, the four major bank technology providers (Fiserv, Fidelity National, Metavante, and Jack Henry) all reported good quarters.  They struggled to varying degrees with licensed software sales, but other components of revenue are holding up well.  Moreover, the shortfall in license revenues may be deferrals rather than revenue that will never show up.  These vendors largely serve the community bank market in the United States and so the woes of the largest banks do not impact them severely.

Gartner is reporting that global IT spending for financial services will be off 70 basis points in 2009 from last year’s spend.  However, this may simply reflect that things in the U.S., bad as they are, are better than they are elsewhere in the world.  Returning again to bank vendors, Temenos, one of the leading bank technology vendors outside the U.S., reported year-over-year decline in Q4 revenues and declined to give any guidance for 2009 earnings, citing market uncertainty.  When contrasted with the U.S. bank technology vendors mentioned above, it points again to greater weakness outside the U.S. markets. 

The assumption in my thinking, of course, is that as goes financial services, so goes its components (banking, insurance, capital markets).  Health, which to some extent is a component of insurance, is projected by Gartner to show a 2.2% increase in IT spending for 2009. 

All this published evidence is consistent with all the anecdotal evidence I’ve encountered.  That anecdotal evidence is that while everyone speaks cautiously, they all report a continued interest IT investments for financial services including insurance.  I’ve heard of no major shutdowns of IT spending.  More thoughtful spending, yes; but no mindless moratoriums.  Therefore, in spite of the doom and gloom pouring forth there’s ample reason for cautious optimism.  The insurance industry needs technology – perhaps even more than ever in difficult economic times.

IT Spending for Insurance Holding Up…So Far

As economic shock waves continue to reverberate throughout the economy, we all keep wondering what might happen to IT spending in the insurance industry.  The latest indications from analyst firms like Celent, TowerGroup, Gartner and others are all – believe it or not – encouraging. 

These reports are encouraging because while they certainly indicate some softening in growth rates in spending for 2009 compared to 2008, they generally don’t indicate an actual decline in spending.  For many people, that’s very good news.  The broad consensus seems to be that spending will be relatively steady, albeit with altered priorities.

Altered priorities is indeed the second common theme of these reports.  Insurers are not expected to spend money exactly the same way they did last year.  Emphases vary by analyst firm.  Here’s a scan of what they’ve been saying recently:

Priorities Will Shift, But Insurers 2009 IT Spending Remains Healthy According to Insurance & Technology Review of Analysts 

Insurers Face “Unprecedented Financial Pressure” But Will Still Spend on IT According to TowerGroup

Insurance IT Spending Will Slow in the Short Term But a General Contraction Will be Avoided According to Research and Markets

IT Spending for Insurer Data-Oriented Projects Looks to be Holding Up According to Celent

P&C Soft Market Begins To Harden

Technology and outsourcing vendors to the P&C industry know well its undulating cycle of soft and hard markets.  In soft markets, carriers are interested in writing more business and are willing to lower prices to get it; hard markets are the reverse.  (For a more textbook definition, see the Insurance Information Institute’s (III’s) Insurance Glossary.)  (Life insurance markets are not so cyclical, and Health – hey, don’t those prices only go up?)

Claire Wilkinson, who writes the Terms and Conditions Blog for the III, has now written Soft Market Winding Down in her Nov 7 post.  In it, she quotes Richard Kerr, founder and CEO of MarketScout, as saying that this “winding down” has occurred “as a result of several factors including the meltdown in the financial markets, slipping underwriting results, and anemic investment income.”  So, they are not quite saying the hard market has arrived.  Moreover, the turn in cycles is never unanimously agreed upon as there is always a little art in the science.  Nonetheless, it does appear that there are the beginnings of hardening as Kerr’s research shows. 

Others concur.  The National Underwriter (NU) weighed in on this same report with its own story, MarketScout: Soft Market Reaching End, published the afternoon of Nov 7.  Even a week earlier, NU had reported that Evan Greenberg, CEO of ACE, had declared based on his company’s experience (earnings for the recent quarter were down 92%), that ”The end of the soft market in insurance has arrived.”  And the day before that, AXIS CEO John Charman said during his company’s earnings call, “We believe a hard market in 2009 is a near certainty.”

Technology and outsourcing vendors who are conversant in the terms carriers and agents use and who are sensitive to the issues carriers face, are in a better position to serve those carriers and agents.  While each carrier and agency are unique, there are some common consequences for technology and outsourcing strategy when a market cycle changes.  Priorities for IT projects can shift when a market moves from soft to hard.  For example, in a soft market finding ways to get new business are paramount.  In hard markets, getting profitable business is paramount.  Of course, it’s always important to grow and it’s always important to be profitable, but the emphasis undulates along with the market cycles. 

Know your customers and know what’s important to them in this next market phase.  You may find that some of them don’t yet think the market is hardening.  Whatever they think, however, you’ll be better off for being on speaking terms with them about their issues…and how your products and services address those issues.

 

P.S. Here are a couple of other sources on the subject.  First, Lynch Ryan’s weblog Workers’ Comp Insider posting Insurance in the storm: Buyers Can Expect the Onset of a Hard Market with additional sources.  Then there’s a contrary view in the article, Broker Executives See No end In Sight To The Current Soft Market. 

Since America Is Sneezing, Will The IT-Enabled Services Industry in India Catch a Cold?

Gaurav Oberoi, an insurance-focused Project Leader at Larsen & Toubro Infotech in India, writes and asks about what the Indian vendors (IT service providers to insurers) are facing and what should they do to cope up with these challenges.

About 60% of India’s IT and related services business comes from the U.S., and almost half of that work is financial services in nature, which, of course, includes insurance.  This IT and related services business (including call centers, and all sorts of back office operations in addition to common IT processes like programming and quality control) are often called IT-enabled services (ITES). 

In a posting from its Indian bureau, The Washington Post reports that while new hiring has slowed, there have been no major layoffs.  In fact, it’s possible that the crisis could help employee retention issues at Indian firms that have caused wages to escalate.  If employees are concerned about the economic environment and don’t seek to move around as much, training costs could go down and the pace of salary growth might slow – helping the margins of those companies.

The Hindu Business Line publishes a vendor scorecard in tomorrow morning’s edition that shows growth slowing until the end of the second half of 2009.  Of course, you have to remember that slow Indian ITES growth rates are still torrid by U.S. standards.

Technology sourcing advisory firm TPI is predicting a similar slowness for the next few quarters, primarily based on the third quarter results just posted by the five leading Indan ITES vendors: Tata, Wipro, Infosys, Satyam, and HCL. 

Of course, vendors do not perform uniformly – whether in growing markets or retracting ones.  Some always do better than others.  It will be interesting to see which vendors distinguish themselves in this challenging environment.

Is the Insurance Industry Risk Averse?

It’s often said (and I’ve said it myself) that you can plot the major sectors of financial services – insurance, banking, and securities – on a continuum of risk attraction/aversion with respect to technology adoption.  Insurance would be on, say, the leftmost side as the most risk averse, securities would be on the right as risk attracted, and banking would be in the middle of the two.  Thus, it explains, capital markets have the most sophisticated information technology, insurance has the least sophisticated, and banking is somewhere in the middle.  You also see this reflected in the technology provider arena of each of those three sectors with insurance technology providers being many and fragmented, banking providers being more consolidated and mature, and securities with advanced outsourcing solutions (instead of each firm licensing and deploying software or, even less, building its own software applications).

That the insurance technology provider community is fragmented is obvious from the size of the vendor directory at www.InnovationInInsurance.com.  But is this because the insurance industry is risk averse…or are they just averse to technology risk?  And if it’s just the latter, can something be done about that? 

An insurance company CEO marveled to me recently that his board of directors would heavily scrutinize every million dollar IT decision he proposed while his underwriters and claims examiners were making million dollar decisions every day without such scrutiny.  He knew, of course, that his directors were distinguishing risks which it was the company’s core competency to manage (e.g. the limits on an insurance policy) and those risks (e.g. the licensing of enterprise-wide software) that were outside of its core competencies.

When it comes to insurable risks, insurance companies are not only not risk averse, they actually embrace risk.  In fact, risk is their business model.  They accept risks that others don’t want, and then manage those risks by amassing enough of them to make them manageable.  After all, when it comes to whether a house will burn down next year, it’s impossible to know.  But if you are considering a thousand of them or more, while it’s not possible to know which ones will burn, you can be pretty sure of the number of them that will.

If technology vendors just assume that insurance people don’t like risk, they will deny themselves opportunities.  Nathan Conz makes that point well in his Oct. 21 blog at Insurance & Technology in which he points out that “The Curse of the Bambino” which was supposed to explain why the Boston Red Sox couldn’t win the World Series was not only debunked by their winning of the 2004 and 2007 series, it was an urban myth which gained currency only in the 1980’s when Boston sportswriters wanted a clever way to express their frustration.  “The Curse of the Bambino” was a canard, and Conz’ point is that assuming insurers have always lagged, or will always lag, in technology adoption is similarly distracting and counterproductive.  (At least credit him with productively channeling his own frustration with the Sox bowing to the erstwhile last-place Tampa Bay Rays.)

Insurers will adopt technology that will increase their profits sufficiently as long as the risks associated with implementation and usage can be properly managed.  If we want them to buy more, therefore, we simply need to give them more compelling value propositions – value propositions that address the management of risk as well as the return on investment.

Who Wants to Help the CIO?

In their most recent blog, Deb Smallwood and Cindy Maike quote from their IBM-sponsored white paper, Insurance: Realizing the Full Potential of Change.  (E-mail dsmallwood@smallwoodmaike.com for a copy.)  In their writing, Smallwood and Maike state that’s it’s important for insurers to change…and that the business side of the carrier must lead that change while the technology side supports that leadership.  They then promote the use of Business Process Management (BPM) and Service Oriented Architecture (SOA) as enablers rather than technology, and as disciplines of effective change management.

This white paper makes me think about what an overwhelming challenge it is to be an insurance company CIO today.  Unless the carrier CEO is already proactively formulating clear strategy for the CIO to follow, the CIO must induce the CEO to do so (ever tried to convince your boss to do something he or she is not already doing?).  Then, the CIO must make sure his or her organization is educated on the proper use of BPM and SOA to execute that strategy (how many people in the organization thoroughly understand these concepts – in the same way?)…AND…integrate the myriad applications and systems that comprise today’s insurance company (is hodgepodge too strong a word?).  Consider that at least half the energy required by any new system is often the energy to integrate it into the spaghetti of home-grown and vendor-provided systems that is currently operating.  It’s exhausting just thinking about being an insurance company CIO.

This overwhelmed CIO provides a great opportunity for insurance technology vendors to be a part of the answer instead of part of the problem.  Think about your product or service not merely in terms of its features, functions, and benefits – but equally as much in terms of what it does for “the integration problem” (if we can call it that).  Maybe BPM/SOA provides a standard paradigm for addressing the integration issue that arises, to whatever degree, with the consideration of each new piece of software or component of outsourcing. 

I think when a carrier CIO sometimes resists what seems to be a no-brainer innovation of installing a vendor product, it may be because behind the scenes there’s an integration complication, or the CEO has not provided an overarching strategic context, or some other broader, background issue.  Maybe Smallwood and Maike are providing a better roadmap for vendors to support the CIO’s.

IT Spending for 2009 – Five Precincts Reporting

This is budgeting season for insurance technology vendors and the big question is, “What will be the IT spend for carriers in 2009?”  More specifically, “What will be rate of growth in that spending over 2008?”  Here are five data points that have turned up recently. 

1) According to Gartner and the Property Casualty Insurers Association of America (PCI), the growth in IT spend for P&C carriers in the US next year is likely to be about 2%.  This compares to 8% last year, and 11% the year before that.  This multi-year decline is deemed to be a function of the decline in revenue growth of insurers, and does not incorporate the stock market’s latest gyrations.

2) Deb Smallwood of Smallwood Maike has recently predicted that 2009 IT spending for insurance carriers will be flat when compared with 2008.  She likens this period to that following 9/11 when  “IT decisions were stalled,” and “spending shrunk.”   

3) Writing in Insurance & Technology magazine, Jonathan Steiman, analyst of Financial Services Technology for Datamonitor, asks “Will Insurers Spend More or Less in 2009?“  The answer he gives is hopeful, based on insurers strength relative to the more-battered banking industry and the assumption that the underwriting cycle will now harden, braking the decline in revenues and margins.  He does not, however, quantify his hope in the article.

4) Anthony O’Donnell, Executive Editor of Insurance & Technology wrote last Thursday “Insurance IT Spending Unlikely to Shrink.”  Drawing on his interactions with industry analysts and researchers, he concludes that because of achieved…and expected…productivity gains, and competitive pressures, that insurers will continue spending on IT.  In his article, O’Donnell gives some helpful data points from specific research analysts that are worth studying if you’re responsible for budgeting revenues for your product or service.

5) Twenty-four hours later, the same Anthony O’Donnell was writing “Austerity Looms for Insurance Industry” for his magazine.  He wasn’t hedging his comments from the previous day so much as reflecting the volatility of the financial environment in which we find ourselves (the Dow had lost almost 700 points by the end of the day Thursday and another 700 in the first hour of trading on Friday…so you could almost see his hands shaking as he typed).  In such an environment, confident predictions are hard to come by.

So, there are some current reference points.  There is reason for hope.  Insurers need technology more than ever, and if the environment is challenging, then all the more so..  They have to be more efficient, they have to understand and manage the risks they are taking, and they have to be able to respond quickly to a business environment that could change quickly.  This means technology: software, outsourcing, services.  These are not niceties that insurers buy in halcyon times, they are the necessities for survival and growth.  Make sure that what you provide carriers is what they need to survive and thrive in whatever 2009 brings and you should do well.

Paving Something Besides the Cowpath

Insurance technology vendors (and by that I mean software vendors, outsourcing providers, and service companies focused on insurance) will have to sharpen their focus in order to grow in this challenging economic environment.  Buyers always care about return on investment (ROI) but it has now become hyper-critical.  Vendors must show that what they do will produce a measurable return in a reasonable time.

Insurance technology buyers are going to be under severe pressure to justify purchases.  First of all, their budgets are likely to be more limited.  Deb Smallwood of Smallwood Maike has recently predicted that 2009 IT spending for insurance carriers will be flat when compared with 2008.  More than ever, vendors will need to assist buyers in building the internal case for procurement.  This means understanding more than ever just how the customer benefits from purchasing the product or service.

There are seasons of business where buyers have budgets and vendors just have to describe their products with the right buzzwords to qualify as a recipient of the RFP, if not the contract itself.  This is a season, however, when vendors need to help carriers think through their problems and come up with creative solutions that make bottom line sense for the carrier (or health plan or agent or…).

When you think about it, it’s not so much in the product or service that causes a customer to derive benefit and gain a return on investment.  Rather, it’s in the way the product or service is used.  Many customers do not alter their head count or position descriptions in ways that a new product or service allows them and thus they miss out on savings that they should have.  To help customers get the most value, vendors have to heighten their interest in customer success.  It’s more important than ever that your customer not just buy your product or service – you need to make sure they succeed with it.

This current economic season is the best time to ignore the cowpaths of traditional insurance business processes.  By innovating in this climate, you give buyers and reason to buy when they otherwise wouldn’t.  Strip out the waste and inefficiency of antiquated business processes.  Offer improvements that help carriers cut cost and deliver better product and service to their customers.  There are much straighter paths to get to where the insurance industry needs to go than the well-worn cowpaths we see now.  For some fresh inspiration, check out author John Hagel’s current blog, “Exploring New Forms of Economic Leverage.” 

Innovation is the key.  And while not all change is innovation, there is no innovation without doing something differently.