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Insurers Strategy Concerns: the big shift?

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2008/11/25
Nicolas Michellod

American and European insurers are currently facing hard times. While everybody can explain now how we got into this situation, it is still unclear how precisely financial companies and notably insurers will change their strategy in the near future and particularly how they will align their IT resources in order to respond in this fast changing environment.

In a recent report ("Bad News on the Street: Insurance IT Strategy and the Financial Crisis"), Celent reviews the different aspects that might have an impact on insurers strategists in the near future and evaluates which IT projects might be the preferred choices in this period of financial uncertainty. Not long ago, CIOs were working on initiatives aiming at capturing growth in mature markets, trying to ease the way they were doing business and emphasizing agility in priority. Nowadays it seems that insurers get more concerned about their expense ratio. Indeed, when assets are shrinking and trigger above-average depreciations, it is important to have profitable insured risks and clients in its books. What has caused troubles to the insurance sector in 2008 is not directly the recession coming but more the rapid decrease of values in the financial markets worldwide. Of course many will say that both are related and they are right but what is making the problem more complicated for insurance companies is the sudden and strong drop of the financial markets (30% for the Dow Jones and the DJ Euro Stoxx 50 from September to October 2008). There are past examples that help us better understand what is currently happening. For instance, in mid-June 2002 CREDIT SUISSE was forced to bail out its insurance company Winterthur, whose financial strength had suffered from the general malaise in stock markets and from the low level of confidence in insurers shown by consumers.

As we all know, financial markets are generally good indicators to anticipate economic cycles and based on their recent performance, it seems that investors are seeing a hard and potentially long recession ahead. In this situation, Celent believes that insurers will have to focus on basics. In other words, we expect insurers to perform a big strategic shift, which will lead them to get back to more prudence in terms of asset investments and to launch initiatives aiming at improving return on their insurance portfolio in order to improve their overall loss and expense ratios. To win the battle for the good risks, business intelligence will be an important IT resource. In order to improve their expense ratio, Business Process Management (BPM) and alternatively Business Process Outsourcing (BPO) might emerge as key IT initiatives in the near future. For instance, Zurich Financial Services has announced last October their plan to outsource their data-centers currently based in the US and in Switzerland in the frame of a more general cost saving plan.

Celent will publish its traditional annual insurance CIO survey in the first quarter of 2009 (for the US, Europe and Asia). We are going to know much more about insurers' intentions soon.

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