European insurers spent 2 per cent less on IT in 2003 than they did in 2002, but they are about to return to happier-go-lucky ways. Or so says a new report from market analysts Datamonitor.
The report, entitled European Insurance Technology Opportunities, suggests that short term cost-cutting measures have now come to an end, and insurers are focusing instead on rationalising their IT and standardising their architecture to save money in the longer term. At the same time, they are looking for systems that help them secure future business growth.
Datamonitor says the collapse of the equity markets left many European insurers in dire straits, forcing them into cost cutting measures, particularly on the IT-side. Today, initial concerns over the solvency of many top European insurers have largely dissipated and equity markets have stabilized, offering insurers a period of respite and allowing them to once more look ahead. In doing so, Datamonitor thinks that the short-term focus of insurers will be on rationalization and standardization of IT infrastructures and applications in order to save costs and maximize efficiency.
In particular, insurers will concentrate on opportunities in areas where significant overlap has grown out of past merger and acquisition activity. Insurers will pay specific attention to datacenter consolidation and network rationalization. Equally, insurers will seek to rationalize the vast number of overlapping applications that exist within these organizations with the long-term aim of standardizing on single group-wide applications.
While the short-term focus is undoubtedly on efficiency maximizing measures, insurers are waking up to the need for preparing to meet business growth, whether present or future. Although transformational projects may be on the back-burner in the short-term, Datamonitor believes that these projects will become necessary in the medium – to long term.The key objective will be to build a next-generation multi-tier architecture that is fully scalable whilst allowing for full channel and end-to-end integration.
Therefore, although European insurance technology spending has declined between 2002 and 2003, the long-term focus on effectiveness driven spend will contribute to a slow recovery in investment levels. This recovery is likely to apply to non-life insurers before Life and Pensions (L&P) insurers, with non-life IT spend expected to start growing as of 2004.
As the technology requirements of vendors are rapidly changing, so too are the dynamics that pervade the vendor market. Recent years have seen a proliferation of dedicated independent software vendors (ISVs) where previously there were few. Competitive pressures have therefore increased. Simultaneously, industry trends are becoming less favourable to ISVs, with many top insurers preferring larger vendors that have a best-of-breed solution and a services offering. This shift is due to the large-scale, strategic nature of the projects undertaken: insurers are concerned with vendors’ ability to execute on such projects and the credibility of their offering. Equally, vendor viability is a major issue since insurers can no longer afford to hedge their bets on a solution that may, in future, be abandoned.
Going forward, Datamonitor believes that the ability to execute on large-scale business transformation and outsourcing projects will be a critical differentiator. This will exacerbate current trends in the vendor market and play into the hands of larger players.
“Insurance technology spend has certainly suffered a blow following the collapse of the equity markets, however it is set for a slow recovery,” says Christine Skouenborg, financial services technology analyst at Datamonitor. ” Insurers are now adopting more balanced strategies. At the core of these is short-term rationalization and standardization aimed at reducing ongoing IT costs. In the long-term, they will increasingly move towards the development of next-generation architectures and business transformation. This marks the end of insurers knee-jerk cost cutting measures.”