Tag Archives: deb smallwood

Shifts in Strategy: Making Sense of 2015

The insurance industry is in the midst of a historic shift. That might sound like an overstatement, but Strategy Meets Action’s research and observations from working with insurers back up this claim. For the past six years, SMA has been tracking and supporting the industry’s evolving maturity – by doing research and providing services – for insurers and the entire insurance ecosystem. For the first time, SMA’s research is revealing significant shifts in company modes; strategic investments; and project priorities that reflect success, maturity and a positive momentum across the industry. These shifts are resulting in a bifurcation of the industry, with a gap emerging and expected to widen between the leaders and the laggards.

Leaders and Laggards

The general state of insurers, what SMA calls the “company mode,” has changed dramatically. For many years, SMA research revealed that 3% to 5% of North American insurers were just surviving ” struggling to be profitable. Today, 11% of insurers define their company mode as struggling, up from 4% in 2014. When combined with insurers in “sustaining mode,” the result is that one-third of the industry is not doing well. On the other hand, two-thirds of industry participants are growing or transforming. In fact, the percent that are transforming has grown from 13% back in 2010 to 34% in 2015. This supports what SMA and others have been saying – that the companies investing in technology and innovation are separating from the pack and positioning for higher growth.

Customers and Agents

Business drivers for strategic technology investments have typically been related to growth, cost management and business optimization. Now, for the first time since SMA surveys have tracked the drivers, customer demands and expectations and agent expectations are both in the top five on the list of business drivers. This is leading to a shift in technology investments. The way this manifests in individual IT projects is that they are grouped and integrated to support the major strategic initiatives. Customer experience, enterprise analytics and new product initiatives are examples of major initiatives that often require multiple supporting IT projects.

Investments will continue in core system modernization, but, as insurers complete their modernization, the shift in type and amount of spending will accelerate to these new strategic initiatives that address customer and agent needs and enable insurers to respond to new marketplace realities and opportunities. As a result, in 2015, customer engagement and experience is the number one strategic initiative for insurers. These types of investments beyond core systems are aimed at winning in the areas where traditional industry boundaries are fading, and in the digital world at large. Many insurers have arrived at the inevitable conclusion that becoming a digital insurer is mandatory.

Innovation and Transformation

The technology investments taking place by leaders today are not just step-changes aimed at improving operational efficiencies. They are positioning the company for major business strategy changes – launching new business models, partnering with companies outside the industry and venturing into new product and service areas. To accomplish this, insurers must create agile technology platforms and harness the power of emerging technologies, tasks that require innovation. And, as it turns out, innovation is sweeping the industry. One-third of insurers now have active, formal innovation initiatives, and the number is growing daily.

2015 promises to be an exciting and eventful year for the insurance industry. Every insurer has a choice to make. Embrace innovation and aggressively transform to capture new opportunities – or just continue with business as usual and run the risk of becoming a casualty in the new competitive battle.

For more, read SMA’s new research report, 2015 Strategic Initiatives: Making Sense of the Shifts.

How Does Your IT Budget Compare?

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/.