The latest Ovum ICT budget forecast for the insurance industry highlights the growing importance of the Indian and Chinese markets to technology vendors: ICT spend in those countries is set to eclipse that in the established markets of the UK, France, and Germany within five years.
There is a growing disparity in ICT spending growth between mature and emerging insurance markets
The latest Ovum insurance ICT spend forecast for 2016 to 2022 shows that overall ICT expenditure by insurers picked up in 2017 compared to the modest growth seen in 2016, as global market conditions showed some improvement. However, cost pressures and continuing uncertainty over any fragile growth prospects means that overall expenditure growth will plateau around 4.2% for the rest of the decade, with new ICT-based initiatives largely financed through cost reductions elsewhere.
The need for greater organizational agility while simultaneously reducing operational cost will drive a significant shift in the sourcing of applications and infrastructure, away from traditional purchase-and-run on-premises models and toward cloud-based deployments. This will be particularly the case for procurement of new services, though insurers will also increasingly begin to migrate legacy systems to cloud infrastructure where possible, initially on private clouds but moving to greater use of public clouds by the end of the forecast period.
The operating environment for insurance carriers continues to be challenged by the combined pressure of low interest rates (which depress income from interest-sensitive assets, such as bonds) and regulatory compliance burdens (which are becoming a significant operational overhead and can constrain new product development). In addition, in many mature insurance markets, insurers compete in sectors subject to product commoditization and oversupply, and with limited opportunities for new premium growth. However, most insurers accept that this backdrop will be the status quo for the foreseeable future, and most are focused on simultaneously driving revenue growth where possible as well as driving operational efficiency.
Key for most insurers is a drive for digital transformation. This is both within digital channels, which are becoming the primary means of interacting with customers, and across an insurer’s operational infrastructure to support customer demands in a digital age. Customer experience needs to be strong throughout the product and service lifecycle, and account management and operations functions need to deliver fast, accurate, and resilient services. This has increased the relative importance of technology within insurance carriers.
While technology has played a central role in insurance since the introduction of mainframes in the 1960s, it is now driving both the processing workload and the customer experience, with the ability to access and analyze data critical for operational management and to provide added value to customers. However, while there is a greater need for ICT-led innovation, cost management pressures due to the industry environment continue to act as a significant damper on overall ICT expenditure growth.
These market forces are having an impact on the mature and established global insurance markets in particular. While not exactly a story of two halves, the differences in ICT spending growth rates between the mature markets of Europe and North America and the emerging markets is becoming more marked.
Overall ICT spending growth at a global level will be led by developing markets in Asia & Oceania, driven by the strong increase in demand for insurance products among the emerging middle classes in the region. India and China will become increasingly important global markets, due to their high CAGRs (9.5% and 8.1%, respectively, to 2022) and their growth in terms of absolute ICT spend.
In contrast, growth in the mature markets of Europe will be relatively low, especially in the UK, as the effects of and uncertainty surrounding Brexit have an impact on the economy. Despite the current strong performance of the US economy, growth there will be also be relatively modest, at a CAGR of 2.3% to 2022, though it is expected to remain the largest global market by a considerable margin, accounting for over 30% of total global insurance ICT spend in 2022.
ICT spend in the life insurance sector serves to underline the growing importance of the Chinese and Indian markets for technology vendors. Ovum expects that within the current forecast period, ICT spending within the Indian and Chinese life insurance sectors will overtake that of the UK, France, and Germany. In addition, life insurance ICT spend in both China and India will exceed that of Japan, currently the world’s second-largest life insurance market, within eight years.
Charles Juniper, Principal Analyst, Insurance Technology