IT Cost-cutting by Insurers Leads to Striking Decline in Large Application Outsourcing Deals—New Everest Group Report

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Digital technology adoption remains high priority, but piecemeal adoption rather than end-to-end transformation prevails due to cost pressures.

Insurance AO Buyers’ Priorities & Key Investments

Insurance AO Buyers’ Priorities & Key Investments

To date, the overall digital technology adoption rate in the insurance industry has been relatively poor compared to other industries.

In 2014, the number of new, large application outsourcing (AO) deals in the insurance sector declined 31 percent over 2013, and the total contract value (TCV) of those deals declined 81 percent, falling to a five-year low. IT cost-cutting measures are to blame, according to Everest Group, a consulting and research firm focused on strategic IT, business services, and sourcing.

However, Everest Group expects that IT outsourcing spending by global insurance firms will grow in 2015 and 2016 as insurance companies invest in digital technology themes to address the evolving customer needs of the growing technology-savvy generation.

“To date, the overall digital technology adoption rate in the insurance industry has been relatively poor compared to other industries,” said Jimit Arora, vice president and leader of the IT Services research practice at Everest Group. “Insurance buyers tend to focus their investments on a few technology areas that offer strong ROI in one of two ways: cost savings or revenue enhancement. Accordingly, the major IT spend areas for insurers in 2015-2016 will be risk and regulatory compliance, big data analytics, and automation of back-office functions. But, as the competitive landscape intensifies, we will increasingly see insurers investing in mobility, social media, and cloud-based solutions to enhance customer experience, gain cost advantages and reduce time to market with new products and services.”

Other key findings in Everest Group’s recently published IT Outsourcing in Insurance – Annual Report 2015: The Digital Frontier include the following:

  •     There was no major change in the share of deals with Application Development (AD) and Maintenance (AM) in scope (76 percent and 88 percent respectively). Demand for testing services grew (55 percent of deals in 2014 compared to 52 percent in 2013) as the proportion of multi-scope deals with testing scope integrated with AD and/or AM increased in 2014.
  •     AO activity declined for the life, annuities, and pensions subvertical due to reduced IT spending by the North American insurance firms serving this subvertical
  •     The industry witnessed a stable demand from property & casualty and specialty insurance firms.
  •     Asia continues to be the most cost-effective option for application outsourcing services delivery.
  •     More than 104 large AO insurance deals with a cumulative TCV of US$8.13 billion are coming up for renewal in the next five years.
  •     Key technology investment themes identified in this report are in the areas of big data & analytics, connected ecosystem (IoT), cloud, social media, mobility, and AI and automation.

The report provides an overview of the application outsourcing (AO) market for the insurance industry, including key trends in market size and growth, emerging priorities of buyers, areas of investment, and the future outlook for 2015-2016.

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  •     Large insurance AO deals slide down
  •     Insurance AO buyers’ emerging priorities and key investment themes

About Everest Group
Everest Group is a consulting and research firm focused on strategic IT, business services, and sourcing. We are trusted advisors to senior executives of leading enterprises, providers, and investors. Our firm helps clients improve operational and financial performance through a hands-on process that supports them in making well-informed decisions that deliver high-impact results and achieve sustained value. Our insight and guidance empowers clients to improve organizational efficiency, effectiveness, agility and responsiveness. What sets Everest Group apart is the integration of deep sourcing knowledge, problem-solving skills and original research. Details and in-depth content are available at research.everestgrp.com.

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Andrea M. Riffle

Robert Cathey
Cathey Communications
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