Insurer IT Budgets Rising for 2020, Projects Focusing on Digital and Data

Novarica’s recent study shows overall IT spending ratios inching upward as insurers invest in greater speed-to-market, ease of doing business, and improved digital and data/analytics capabilities.

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Novarica recently completed its 12th annual Insurer IT Budgets and Projects study, with input from more than 100 carriers. It shows that average IT spending is inching upward for 2020 as insurers seek to improve speed to market, distributor service, and analytics capabilities. Novarica also observes a continuing shift toward digital and data/analytics coupled with a continuing embrace of cloud and Agile development. Security spending is also growing as a share of the budget and is a key challenge for CIOs.

Spending ratios and budget breakdowns

The average IT spending ratio is expected to tick up slightly next year to 3.9 percent. Though this average varies by company size and sector, the upward trend was visible across the board—most insurers are planning for increasing or stable budgets in 2020.

However, there is only a limited correlation between spending ratios and current capabilities and plans. High ratios can stem from large strategic projects, active remediation of subpar functionality, inflated cost structures, or active investments in market-leading capabilities. Similarly, low ratios could signal efficiency or a dangerous level of underinvestment.

The way IT budgets break down remains fairly consistent with prior years. Staff is still the largest expense area, while new hardware and software command only about 10 percent of IT spending. The OpEx/CapEx split is still about 80/20 for larger insurers and 70/30 for midsize insurers.

Insurers continue to spend about 55 percent of their IT budgets on running the business, 25 percent on growing it, and 20 percent on transformation. Of that “grow” and “transform” spending, investments in digital and data/analytics account for more than half. More than 50 percent of insurers are planning for new systems or major enhancements in portals, business intelligence, and predictive analytics.

Investments in core, digital, data, and security

A clear majority of insurers put improving speed-to-market in their top three business objectives for IT in 2020. Distributor ease of doing business and improving business intelligence and analytics are also common business drivers. These objectives require investments in digital and data and analytics capabilities, which themselves may require or work better with a modern core. Core systems replacement projects remain common in the property/casualty sector. The majority of volume is in current projects, but 20 percent of P/C carriers are planning to start new replacements in 2020.

Life insurers have significantly less current volume, and few midsize life insurers are planning core replacements in the coming year. The majority of transformation investment among life insurers is flowing into expanding digital and data functionality to provide business leaders with new capabilities and cost savings.

Among both P/C and L/A carriers, security spending continues to grow. From an average of 10 percent of IT spending in 2018, security now averages 12 percent, and more than a third of CIOs see security as one of their top challenges.

Along with security,  the other main areas CIOs find challenging are improving IT operations, attracting and retaining talent, and dealing with limited budgets. CIOs are wrestling with maturing Agile delivery, attracting scarce skills, balancing cost pressure with transformation agendas, and evolving security and regulatory issues.

Planning investments in future capabilities

Benchmarks and indications of industry activities are an important component of the IT budgeting and planning process. But equally important is a careful assessment of current capabilities and strategic objectives.

As noted above, a high IT expense ratio can result from active strategic investments or from a bloated cost structure, and a low IT expense ratio can result from efficient operations or from a risky level of underinvestment.

Insurers can look at their current capabilities and planned investments using Novarica’s Three Levers of Value framework. These levers are:

  • Sell More includes expanding the market; technology can enable insurers to serve new segments that were previously unreachable, unprofitable, or unknown. It also includes introducing better products and improving speed to market, as well as offering better service.
  • Manage Risk Better is primarily focused on improving pricing and risk selection. Novarica is seeing growth in the use of third-party data, predictive scoring, and analytics in underwriting and claims. This also includes reducing operating risk through initiatives like business continuity planning.
  • Cost Less to Operate is a challenging lever, although it seems like the easiest one. Although technology often creates operating efficiencies and productivity gains, it can be difficult for IT leaders to get credit for cost savings unless there are actual hard dollar savings through staff cuts. Additionally, most technology investments are not about cost takeout by automating existing processes or practices—they are about deploying new capabilities, which usually means new expenses.

Overall, insurance IT spending is expanding in 2020 as insurers increase their digital and data/analytics capabilities to push these levers to drive business value.

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Matthew Josefowicz // Matthew Josefowicz is the President and CEO of Novarica. He is an expert on insurance and financial services technology, with two decades of experience advising CIOs on IT strategy and solutions. He has written more than 100 reports on insurance technology issues and is the lead moderator of the Novarica Insurance Technology Research Council. Prior to launching Novarica in 2007, he founded and led the global insurance group at analyst firm Celent and worked at D. E. Shaw & Co., LP. He holds a BA magna cum laude in Classics from Brown University. He can be reached directly at mj@novarica.com.

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