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Insurance IT Spending To Increase...Slightly

TowerGroup forecasts point to emphasis on closing the gap between IT spending and strategic business operations.

TowerGroup projects IT spending in the U.S. insurance industry to increase slightly in 2004, up 2.5 percent from 2003 levels. However, there will be marked differences in each business line. TowerGroup forecasts a 10.4 percent increase in total IT spending for property and casualty insurance (P&C) from its 2003 estimates. This increase is due, in part, to a 230 percent projected increase in P&C net written premium from 2002 estimated results.

TowerGroup anticipates IT spending in life and annuity insurance (L&A) will be flat from 2003 to 2004. L&A insurers are not likely to increase IT spending due to financial market pressure, which makes it difficult for L&A insurers to raise revenue and, consequently, a challenge for them to consider bigger IT budgets.

TowerGroup estimates that insurers will budget a zero to 10 percent increase in IT spending from 2003 to 2004 and will spread budgeted dollars to various insurance operations in infrastructure, maintenance, and development. Typically, insurers allocate 30 percent of their IT budgets to infrastructure costs such as software, hardware, and networking. Insurers then usually split more than half of the remaining 70 percent of the budget to maintenance activities such as regulatory changes, production support, and minor enhancements to existing applications; and the balance to new development-such as major enhancements to existing applications and new projects (see Exhibit 1 on this page).

Shift on New Initiatives

TowerGroup projects that approximately 20 percent of the development allocation or approximately six percent of the total IT budget at insurance organizations will fund 2004 new initiatives. A closer examination of the development budget demonstrates how difficult securing new projects will be in 2004. Typically, in insurance 50 percent of the development budget is for major enhancements to existing systems and 50 percent is for actual new development projects. Of the 50 percent spent on actual new development, 60 percent funds prior-year projects, leaving just 20 percent of the development budget to fund current year new development (see Exhibit 2 on page 44).

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