Optimizing tech budgets will be key as challenging market curtails insurers' spending

Our forecast: IT and tech spending will register weak mid-single-digit growth through 2026 as P&C insurers hunker down against a perfect storm of challenges: inflation, supply chain shortages, and a deteriorating risk landscape.

When it’s tallied up over the next few weeks, we expect US P&C insurance IT and technology spending will have risen only modestly in 2022, to $26.31 billion. In 2019, many P&C providers front-loaded their multimillion modernization programs. But from 2020 onward, profitability pressures have put a lid on growth and intensified the need for efficient budget allocation.

Behind the numbers: Our US P&C Insurance Technology Spend Forecast collates 66 data points from 15 sources and includes insurance providers’ expenses for creation and maintenance of tech for their P&C insurance products. Expenses include core systems maintenance, modernization, innovation, transformative technology, data processing, equipment, software, digital initiatives, and compliance and cybersecurity, but do not include salary.

Key areas of investment: Facing squeezed margins, insurers have doubled down on underwriting effectiveness and lower-cost distribution.

• Faster, more accurate underwriting: Evolving risks like extreme weather events, changing driving habits, and higher costs have complicated policy pricing. In response, insurers have focused on continuously improved algorithms and telematics matching pricing with consumer behavior.
• Digital self-service: Efficient digital channels like chatbots and mobile services seek to lower distribution costs and improve customer satisfaction through faster turnaround times. Per Bain and Company, consumers’ preferences increasingly are shifting toward a hybrid of human and digital interactions: In 2021, a Bain survey found that 42% of consumers had very favorable perceptions of digital interactions with agents, compared with only 18% in 2018.
• Better tools for agents: Digital tools, AI, and machine learning will help customer service representatives complete time-consuming tasks and free them up to better support policyholders. Some providers are extending these tools to offer virtual service and enable multichannel communications, per Capgemini.
• Claims automation: In addition to cutting operational costs and reducing fraud, a more efficient claims experience is an opportunity to make a good impression on clients, which can drive loyalty and word-of-mouth growth.
• Embedded insurance: To reduce customer acquisition costs and reach new audiences, insurers are increasingly integrating their products in third-party platforms. Embedded insurance products enjoy a distribution advantage because customers can purchase them where they are, and with brands they trust. They’re product features rather than something that’s bought separately.

Our takeaway: As insurtechs and Big Techs crowd the market, and customers become more demanding about their digital experience, insurers must keep evolving. Tech will play a critical part in ensuring they provide a great customer experience and make their processes more agile and efficient. Optimizing tech budget allocations will be key, especially as challenging market conditions dampen tech spending growth through 2026.

Read on: For specific examples of individual insurers’ tech investments and initiatives, see our report.