Battening down the British hatches : 2011 will be the year of uncertainty

At this time of year, along with Guy Fawkes celebrations and eating turkey, Celent analysts in UK, US and France start the process of interviewing CIOs at insurers to understand their plans and priorities for 2011.

Even at this early stage of the research process, there are some interesting differences in the regions. Insurers in Britain appear not to share the US view that we are in a new normal (See celent report ) – a new world of flat growth, weak consumer consumption, high unemployment and low interest rates. In fact, several are planning for growth for 2011 in what is a highly saturated, brutally competitive market. The French insurers we’ve spoken to are more pessimistic and more closely aligned to their US colleagues.

Whilst the business strives for growth, the internal driver is cost containment. The UK CIO face either flat or small decreases to IT budgets going into 2011. A handful are required to cut their budgets by up to 30% over the next three years. IT is being asked to become more affordable, and to reduce their contribution to expenses. As one frustrated CIO said “They [the business] are back to cutting the legs off IT”.

What does this all mean for the UK insurance technology industry? The impact in 2011 is probably small. Several insurers have large scale investment projects already underway and these are not under threat. I would expect to see more tactical solutions crafted for the new world of affordability. Multi-million claims replacement projects will be a hard sell, but FNOL or fraud point solutions provide value at a price that fits the new world.

In the medium term, we will see the discretionary budget under threat once more. Since Celent has been covering the UK market, we’ve seen small and steady increases in IT budgets and a resulting downward trend of the maintenance chunk of the budget. So with the increased discretionary IT investment, some insurers have managed to turn the ratio on it’s head – having 60-70% of IT budget available for new investment. These IT departments are undoubtedly more agile and more flexible in responding the business requirements, mirroring for most their organisation strategic goals of responding to the markets. But with year on year cuts to IT budgets, expect this ratio to slip once more.

For vendors, it will become harder to sell new products and services with the reduction in addressable IT budget. If the new normal does arrive in the UK, as you may intuit is Celent’s view, there is no light on the economic horizon. Rates will not rise, competition will increase, premiums will remain flat, and against this backdrop, IT will be pressured into more cost reduction.

Trend this out over three to five years (smarter people than me are not able to pinpoint any economic turnaround in the coming years for the UK) and IT starts to become an expense line again, unable to deliver in the manner that business has come to expect. This will be frustrating time for IT folk who have built up significant credibility with the business in recent years.

For now, to protect against this scenario, Celent would suggest that it has never been more important to have the dialogue with the business about how and where IT can contribute to cost containment and profitability. Automation, analytics are just two areas that can help. Before the market gets too dire, maybe it’s time to invest ahead of the curve.

The interviews mentioned in this post will form the basis for our syndicated reports “CIO 2011: plans and priorities” to be published in January 2011.