So, as the financial crisis unfolds, technology vendors and consultancies like Scyllogis who are exposed to the insurance sector are asking one question: will insurers spend more, less or the same on technology in 2009?

There are several factors dampening technology spend next year. First and foremost, investment income has and will likely continue to negatively affect insurer’s net income. Nearly every investment vehicle – stocks, bonds, real estate – has lost value this year. Additionally, today’s frigid credit market is elevating the cost of capital, further draining profitability. Lastly, an economic downturn will lower the demand for coverage, particularly for life products.

It’s not all doom and gloom, though. Given withering investment income, insurers may tighten their underwriting discipline and begin to raise rates. Such a strategy could reverse the current soft market plaguing the non-life market in general and commercial lines in particular and usher in a period of greater underwriting profitability. Of course, raising rates on already strapped consumers and businesses may prove challenging.

Additionally, IT spending in certain areas may accelerate. Tops on the list are risk management solutions. The models of old are no longer sufficient, as witnessed by AIG. Insurers will be seeking solutions capable of capturing and correlating every risk from every corner of the enterprise. Furthermore, new regulations, which are likely to materialize in the near term, could drive investments in compliance solutions.

Finally, it is important to remember that insurers are relatively strong. Aside from AIG, whose insurance lines are stable, and some mono-line insurers, the industry has not been as badly bruised as the banking sector. For this reason, technology vendors that have offerings across the entire financial services spectrum may turn their attention to insurers. If this happens, insurers will gain immense pricing power that they may exploit. This could drive technology sales in 2009, albeit at the expense of lower margins for vendors. Whether this drives down consultancy rates too remains to be seen, but consultancy is people based and therefore, if you are seeking niche consultancies that specialise in insurance, then there is a finite capacity. If technology sales actually increase then the demand for resources and help in their implementation and integration should also increase and consequently, the laws of supply and demand may actually push rates up.
The destination of AIG's subsidiaries remains one of the big questions about the near-time future of the insurance industry. The answer to that question continues to be postponed: as markets plummet worldwide, it's getting more difficult for AIG to find buyers. While the AIG question will ultimately have its resolution, its current status shows just how much of a beating the industry is taking due to insurers' exposure as institutional investors. However, as the economy worsens, insurers will increasingly feel the pinch of diminished premium revenue as well.
Insurers' exposure as investors can't help but increase consolidation in the industry as individual insurers' vulnerabilities make them attractive targets for M&A. As Celent's newly released report, "Bad News on the Street: Insurance IT Strategy and the Financial Crisis" puts it, "Companies will combine through government-forced shotgun marriages or voluntary elopements."
The Wall Street Journal reported recently that some merger sweet talk recently passed between MetLife and The Hartford, both of which companies' stock have taken a pounding in recent days. Those talks came to nothing, but The Hartford found a sugar daddy in the form of a $2.5 billion investment from Allianz.
Of course the hits insurers are taking from the investment side are only part of the picture. As the Celent report emphasizes, "in any economic contraction, the overall insurance market shrinks. If market turmoil persists, that process will accelerate”. The report also warns that “a lower revenue stream will worsen an already difficult expense situation”. Insurers have been under expense pressures for some time. Across all lines, lower sales mean less revenue to support fixed expenses. To adjust the cost base, companies will re-examine spending, including technology.

As the US magazine Insurance Technology reported recently, insurance IT organizations and technology vendors have reason for optimism. As Accenture's Michael Costonis suggested in an Insurance Technology report on IT spending trends, the drop in investment income drives a need for greater profitability; that profitability will be found through improvements such as more sophisticated technology-driven underwriting capabilities and through automation in a variety of areas. This is something that I have been maintaining for some time now should prevail in the UK too and nowhere more so than the London Market. Add to this the desire to exploit new markets at home and abroad and technology continually figures as a way to drive efficiencies (thus lowering costs) and to facilitate the move into new markets.
The financial crisis comes in time for insurers to tune their 2009 IT budgets, and that will likely result in some downward revision. Nevertheless, according to Celent, carriers know that a large portion of their IT spending is essentially fixed by maintenance requirements, and relief in this category is hard to come by. In addition, projects that span budget cycles cannot be unplugged easily without sacrificing the strategic value that is already partially paid for. The trend in subsequent years may be more open to downward revisions.

The overall picture is one of increasing austerity. Not only will insurers suffer diminished investment returns and lower premium revenue, they will be under intensified regulatory pressure, Celent asserts that “insurers' mark-to-market practices will come under much higher levels of scrutiny by securities analysts, rating agencies, and regulators”. This means that keeping unrealized gains off the balance sheet and impairments out of the income statement will become much harder.

Such strictures seem reasonable enough, as the nation suffers a hangover in reaction to financial wishful thinking and self-serving accounting practices. Indeed, as every day brings new financial calamities and the essential contingency of our prosperity is exposed, austerity may be the best we can hope for.