There is no doubt that we are living in the proverbial “interesting times.” As our Novarica Virtual Town Hall and Panel Discussions have highlighted recently, responses to the pandemic have been varied and far reaching as carriers grappled with an unexpected health and economic catastrophe. Many carriers have had to toss rigid structure and bureaucratic governance in an effort to survive.
The pandemic is but one sea-change event washing over carriers today, however. Many are concurrently facing the challenges of demographic shifts and persistently low interest rates. It is a brutal mix. For life insurance carriers, which have struggled to find products to sell to anyone born after 1975, according to LIMRA data, the challenges are particularly acute.
For these carriers, product economics are built on three levers: investment income, expense coverage, and mortality/morbidity. Profitability is based on looking to see if there are gains or losses based on these three elements. For many years, expense losses were masked by gains in the other two categories. Suddenly, this is no longer true. When the tide went out, as Warren Buffett famously said, it became obvious who has been swimming naked. In the future, carriers are going to have to get much more comfortable living within their means. Covering expense gaps with improved investment results, if it ever happens, could be many years away.
As we watched 2021 budgeting unfold, curiously, insurer IT budgets stayed in the very narrow trading range (as a percent of top-line revenue) that we have seen for many years. In effect, IT costs are appearing as a cost center rather than a strategic investment. In a world where efficiency to improve competitive positioning is paramount, you would expect a different outcome. Technology is increasingly critical to the products needed for the future, but breaking out of traditional paradigms is hard. Without the right incentives, it may never happen.
Which brings us to one of the key elements for carriers to consider as they move toward an uncertain future. While Agile as a development methodology clearly allows IT organizations to move more quickly, focused on delivering faster and more effective results, the accounting rules further define a “game” that has little to do with technology or delivery of capabilities. Organizations are structured to allow for optimal use of their dedicated resources. In many instances, this has created operational silos where the heads of business units are rewarded and recognized based in large part on their own financial results rather than contribution(s) made to the broader enterprise.
The enterprise is viewed in this construct as an assemblage of component parts. As a result, supporting entities such as IT—which may be inclined to drive for cost efficiency, technical standardization, or other goals specifically targeting optimization at the enterprise level—may find themselves in the crosshairs of business unit leaders who have a different mandate and see the enterprise focus as an impediment to getting things done. While there is no universal solution to the question of centralized versus federated IT models, for CIOs and other IT leaders it is crucial to understand the trade-offs as they execute on plans going forward. Novarica explored the pros and cons of each model in a recent Executive Brief.
A recent discussion with a Research Council member carrier highlighted this issue. The business unit leader wanted to expand investments in technology to improve their competitive positioning, even as the IT organization effectively refused to support the spending. The IT spend was capped at the enterprise level; it was not the sum of the business unit demand. Spending is trapped in an old and increasingly dated ratio-driven model.
In a more and more complex business climate, IT leaders will need to understand and actively manage the accounting, reward, and recognition rules that surround them. To paraphrase an old saying, do not bring checker pieces to a chess match.
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