Financial Crisis Still Takes a Toll on Insurers
Jamie Macgregor | November 11, 2014
In a post-global financial crisis world, continued low interest rates and lackluster investment performance continue to take their toll on the insurance industry. Heading into 2015, there is likely to be no respite.
Reduced growth prospects from the BRIC countries (albeit higher than most developed markets), flat or deflationary pressures in Europe, political instability in the Middle East, heavily indebted governments, and a period of political inactivity in the U.S. in the run up to the next presidential election are all likely to have a dampening effect on the level of ambition in investment as these global issues impact at home. More than ever, insurers are having to make a greater return from their core business of managing risk.
Despite this backdrop, we saw an increase in IT investment across the industry in most markets around the world in 2014, with 4.7 percent in the U.S. We expect IT investment growth to continue in 2015, albeit modestly, as insurers look to take advantage of technology to tackle their toughest issues in their core business and open up opportunities in distribution and proposition design to deliver a superior return.
Advances in adjacent industries around analytics, customer experience, and digital continue to raise expectations. Clients are demanding the same experiences they have on their personal devices (such as iPads) in their professional interactions with insurers. This is not just a retail phenomenon either. Commercial and corporate clients are increasingly demanding digital capabilities that differentiate the proposition for their staff and operations. The pressure is being felt in different ways by different insurers, depending on where they are in their simplification journey.
Early movers in core systems replacement will be better placed to direct future investment toward new digital platforms, analytics, and the heightened security awareness that comes with opening up processes and systems to the outside world. Those in the middle of core upgrades will be pushing to finish them quickly so they can free up resources to play catch-up.
Those still waiting “until the time is right,” or to get funding approved, will increasingly feel compelled to act to address their technical debt, a rapidly retiring workforce, and the fear of being left behind. 2015 could be a crunch year for some late adopters; we are already beginning to see a clearer divide in market agility between those that “have” and those that “have not” addressed their legacy.
With an increased focus on all things “digital” comes a renewed interest and growing appreciation for how insurers’ technical architectures will need to change to accommodate the Internet of Things, external data sources, and new offerings from fintech start-ups. Progress towards adoption, however, is likely to be slow in 2015 as many insurers reflect first on what all of these technologies mean to the core business result, while watching and learning from those brave enough to experiment. However, discussions among architects, proposition leads, and underwriters will still go ahead on both the opportunities and implications, and parallel investments will be made in internal capabilities to stay ahead.
For 2015, the proverb “Necessity is the mother of all invention” probably best sums up the outlook. Smart capital investment with a rapid payback, efficient operations, and innovative technology-led approaches to hunting down new profitable niches are likely to shape many of the IT investment portfolios next year while insurers keep watch for the good times to return.
(Jamie McGregor is global senior vice president of Celent’s insurance practice.)
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