In my conversations with insurers, I am frequently asked about IT investments. People want to know what the trends are around IT budgets and how their spending on information technology compares with others. To help explore these topics, we analyzed insights from our portfolio of research and did some additional analysis.
Working on this research project was illuminating. The findings validated and quantified some key assumptions about how and where technology investments are being funded. Some of the major conclusions show that:
- While there is wide variance in the percentage of premium that insurers are allocating to the IT budget, the industry average continues to run between 3% and 3.5%.
- A significant portion of the IT budget is allocated for discretionary spending. Nearly 40% of insurers indicate that 10% or more of their budget is discretionary, and more than 20% of insurers allocate more than 20% of their budget to discretionary use.
- There is major investment in technology-based solutions occurring outside the IT budget. 59% of insurers report significant spending outside the IT budget, with 5% of insurers stating that spending outside the IT budget exceeds 50% of the budgeted IT spending.
There are no hard and fast rules dictating an appropriate or normal or acceptable percentage of premium that should be spent on the IT budget. Spending levels are and should be influenced by the business climate, strategic initiatives and the competitive landscape.
It is great news that more insurers report better alignment of IT investments with business objectives and strategic initiatives. This alignment is critical to driving new collaborative approaches for addressing both challenges and opportunities. The industry is serious about investing in the modernization of systems and architectures. That investment is laying a foundation for the optimization of business processes and operations in every aspect of the environment. The result is transformation that delivers real value and the ability to drive innovation for the future.
This is a pivotal time for the industry, and technology is an essential enabler for the capabilities that will deliver needed growth and efficiencies in the coming years.
During the planning process, it is important to look beyond how the budget compares with that of peers, and to assess what funding is required to support the business capabilities that are needed to compete. Understand what the gap is. It may be necessary to exceed the traditional percentage of DWP allocation that your company has grown comfortable with. Realize that in today’s environment, the reality is that IT spending is high, and many companies are able to find additional funding in business units to help meet company goals and position for competitive advantage.
For more information from our recent report, IT Budget and Spending Realities and Trends in the North American P&C Insurance Industry, please visit our website: https://strategymeetsaction.com/.