1. Empowering Companies Through Knowledge® Information Technology Trends and Spends September 2010 2010 AASCIF IT COMMITTEE WORKSHOP

2. Empowering Companies Through Knowledge® Agenda About Ward Group Some Industry Perspective Information Technology Trends IT Expectations for 2010 New System Development Activity Questions

3. Empowering Companies Through Knowledge® About Ward Group Insurance Focus – most comprehensive operational benchmarking programs in the industry Performed nearly 2,000 benchmarking exercises for more than 350 North American insurance companies since 1991. Annual evaluation of every property/casualty and life/health company in the United States. 3 ©Copyright, Ward Group 2010 Benchmarking Consulting Research Center The recognized leader in insurance company benchmarking and best practices and a major sponsor of primary operational research studies.

4. Empowering Companies Through Knowledge® Industry Premium Growth Trends 4

5. Empowering Companies Through Knowledge® Declining Investment Returns 5

6. Empowering Companies Through Knowledge® Major Tasks in 2009 Staying profitable Managing economic conditions and expense control Control Information technology spend Improving claims handling abilities and systems Recovering from the loss of surplus in 2008 Mixed ©Copyright, Ward Group 2010 6

7. Empowering Companies Through Knowledge® 2009 Surprises “Panic” in Q4 2008 and Q1 2009 - Companies stopped thinking/planning like normal, many bad decisions made Stronger surplus recovery than expected – Few major storms; strong investment returns; most kept insurance Reserve releases, at greater levels by small – medium, mutual and personal lines carriers Commercial lines stays soft longer, workers compensation hit particularly hard Avoided major federal intervention Personal lines able to improve pricing Few major staffing reductions Lack of merger/acquisition activity ERM was not a priority ©Copyright, Ward Group 2010 7

8. Empowering Companies Through Knowledge® Major Tasks for 2010 Staying profitable Managing economic conditions Preparing for hard market/balancing expenses Integrating new technology – make ROI work Improving customer services processes Understanding impact of healthcare regulation Increasing employee engagement ©Copyright, Ward Group 2010 8

9. Empowering Companies Through Knowledge® Information Technology Trends How much are companies investing in IT? Where are they investing? What are the expectations for IT spending going forward? ©Copyright, Ward Group 2010 9

10. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 IT Spending Trends Information Technology as a % of Premiums Written For 2009, the overall benchmark spent 4.11% of GPW on IT spend, compared to an average spend of 3.54% in 2005. Ward’s 50 high performers benchmark performed 26% lower in IT expense to premium. The Ward’s 50 group has invested in technology at the same rate as the overall benchmark, they have not have been affected to the same degree by declining premiums as the overall benchmark. 10

11. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 IT Spending Trends High Performers Make incremental, phased investments of technology. Tend to operate with custom developed systems (Many systems are legacy and have been incrementally updated.) Utilize less consulting resources. Lower expense in all functions. As a group, have minimal premium declines. AASCIF Benchmark Sharp increase in 2007 – 2009 in IT expense as a % of Gross Premium. Consistent with large premium declines in the same time period. Prior to 2007, AASCIF Benchmark compared slightly above the High Performer Benchmark. AASCIF companies have an advantage to the overall benchmark from a complexity standpoint (single line of business, single state). 11

12. Empowering Companies Through Knowledge® IT spend nearly the same as 2001 conditions BUT IT as % of total company budget 9.5% in 1998 and 10.63% in 2009 IT expense per FTE $15,116 in 1997 and $32,368 in 2009 More IT FTEs to support the business versus 10 years ago Are Companies Spending More? ©Copyright, Ward Group 2010 12 Will it Continue? Companies continue to invest in IT as a business enabler. Most common projects: System Replacement Business Intelligence Customer Capabilities

13. Empowering Companies Through Knowledge® IT Expense Distribution 13 ©Copyright, Ward Group 2010 Personnel Expense per FTE growth trends have slowed (lower merit increases, lower employer health premium contributions, and decreased bonus payout as a result of deteriorating performance). Consulting expense continues to grow despite recent efforts to minimize. 40% of hardware spend is depreciation expense and 25% of software spend is depreciation. 2009 IT Expenses by Category

14. Empowering Companies Through Knowledge® IT Expense Distribution 14 ©Copyright, Ward Group 2010 Applications expense has grown from 46% of the budget in 2005 to 53% of the budget currently. The only functions to decrease in spend since 2005 are Desktop Support and Mainframe Support. All other functions increased in expense compared to premium. 2009 IT Expenses by IT Function

15. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 IT Staffing Trends Information Technology FTEs per $100M of GPW For 2009, the overall benchmark had 17.25 IT employees per $100M in GPW. In addition, they had an average of 4.31 IT consulting FTEs. Ward’s 50 high performers benchmark performed 17% lower in IT FTEs, and 28% lower in IT consulting FTEs. IT continues to be one of the only areas in the insurance company experiencing resource growth. 15

16. Empowering Companies Through Knowledge® IT Staffing Distribution 16 ©Copyright, Ward Group 2010 Applications headcount is a greater percentage than the application expense. The distribution of headcount is consistent with 2005. Applications has seen the most hiring with employee growth, as it represents 62.58% of the IT employee base. 2009 IT Employees by IT Function

17. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 IT Staffing Trends High Performers Investments in technology are typically supported by employees. Tend to operate with custom developed systems (Many systems are legacy and have been incrementally updated.) Do not have a double legacy burden that is present in overall benchmark. Lower staffing in all functions. As a group, have minimal premium declines. AASCIF Benchmark Sharp increase in 2007 – 2009 in IT FTEs per $100M of Gross Premium. Consistent with large premium declines in the same time period. Applications functions represent the largest percentage of IT headcount. Prior to 2007, these functions allowed the AASCIF companies to benchmark below high performers based on the complexity advantages (single line of business, single state). 17

18. Empowering Companies Through Knowledge® IT Investment Observations Most companies are not realizing full technology benefits due to: – Poor Management – Dependence on Vendors – Unrealistic Expectations Over 50% more IT FTEs now than 10 years ago for average company IT consulting as % of total IT budgets up over 80% in last decade 18 ©Copyright, Ward Group 2010

19. Empowering Companies Through Knowledge® When asked to compare their 2009 and 2010 IT budgets, in terms of total dollars spent, only 24% of companies reported they expected the IT budget to decrease in 2010. 56% indicated they were increasing their IT budget in 2010. 20% of companies reported no change to the budget. On average, Ward Group expects a 3% increase to IT spend. ©Copyright, Ward Group 201019 Expectations for IT Spending 2010 IT Budget Percent Change Compared to 2009 (Including Capital Spend)

20. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 User Support Functions Growth Expectations Staff GrowthExpense Growth 20 20% decreasing Desktop Support expenses -Equipment cost decreasing -Extending refresh periods -Evaluating virtual desktops/thin client devices. 16% increasing Help Desk expense -Self-service capabilities drive increased customer base and call volume -Software packages for additional call management

21. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 Network Services Functions Staff Growth Expectations Minimal staffing changes to the network services functions 12% increasing server support staff – Virtualization – Conversion of systems to distributed environment 8% decreasing mainframe support staff 21

22. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 Network Services Functions Expense Growth Expectations 24% reducing mainframe expenses Server support function is mixed with 24% increasing expenses and 20% decreasing expenses. Companies are in various stages of their server virtualization initiatives. 44% increasing telecommunications expense. Significant VOIP activity. 22

23. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 Application Functions Staff Growth Expectations 24% increasing Application Architecture and Design staffing Volatility in projections for Application Development and Application Maintenance 20% adding staff to QA/Testing teams 23

24. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 Application Functions Expense Growth Expectations 52% investing in Application Architecture and Design 44% of companies are increasing investment for Application development and 24% are reducing 24

25. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 General Functions Staff Growth Expectations Few decreases in staff for General functions 28% increasing staff for data warehouse – Companies are in all stages of development, but almost no company is ignoring the need for better business intelligence – Increasing investment in data warehouse activities with the goal to leverage their information into actionable data 20% adding staff to Information Security – Large increases since 2005 25

26. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 General Functions Expense Growth Expectations More companies increasing external spend on General functions than increasing staff – Information Security – Disaster Recovery Trend of companies recovering their distributed environment internally rather than using a third party provider. This is more costly in the short term, but will provide additional reliability and flexibility. 26

27. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 Anticipated Change Companies believe in the value provided through IT organizations and are choosing to make investments during these trying economic times. Yet, there is not a blank check. IT leaders have made reductions in certain functions to provide for investment in other functions. Desktop Support and Mainframe Support have the largest net decreases. Information Security and Application Architecture and Design have the largest net increases. 27 Net Anticipated Change to IT Functional Expense for 2010

28. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 Anticipated Increase Evaluating only the companies that are investing in a function, the average investments range from 7- 10%. The applications and project driven functions tend to have greater investments than the user support and network services functions. 28 Average Increases to IT Functions for 2010

29. Empowering Companies Through Knowledge® New Systems Development Activity Are companies developing new systems? Are they using vendors? Why are they developing new systems? How do companies rate their project governance? 29 ©Copyright, Ward Group 2010

30. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 New System Development Activity 71% of companies are participating in a policy administration system implementation and 50% of companies are implementing a new claims system. Only 8.3% of companies are not currently participating in a system implementation project. New system projects remain a high priority item for insurance carriers. Many of these projects are based on driving out costs of other parts of the organizations in order to meet the ROI’s promised. Ward Group has also noted steady increases in system replacements among its client base over the past 5 years. 30

31. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 New System Development Activity Prior to the last 10 -15 years, it was common for many insurance companies to custom develop their systems with internal resources. With many available vendors in the marketplace and the need to accelerate timelines, the trend has shifted towards buying systems versus building them internally. As indicated, only 28% of companies are custom developing with internal resources. This trend was evident across all system types – policy administration, claims, billing and other. 31

32. Empowering Companies Through Knowledge® Only 1/3 of projects are in phase 2 with a product or location live on the new system. The other 2/3 of projects have significant milestones to achieve. This trend likely indicates the investment in new systems will not slow for 3-5 years since companies will need to continue to invest in these projects to get systems in production. 32 New System Development Activity Overall Project Status ©Copyright, Ward Group 2010

33. Empowering Companies Through Knowledge® A surprising metrics was that 35% of companies reported that their new system project was over budget. Comparing this over- budget statistic to the fact that only one-third of projects are in phase 2 does not provide a favorable picture for expense management issues. Companies are more likely to be over budget as the project continues into multiple phases. 33 New System Development Activity Overall Budget Status ©Copyright, Ward Group 2010

34. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 New System Rational The number one reason for a new system was to improve the efficiency of the organization. This can be a challenge for IT organizations when budgets are tight. While a new system will generally add expenses to the IT budget, the IT department does not control staffing or expense reductions needed in other business units in order to justify the investment once efficiencies are achieved While it was in the minority of responses, 33% of companies reported rationale for the new system as the inability to maintain the current system. Companies are determining that they cannot ignore the long term viability of their system environment. 34

35. Empowering Companies Through Knowledge® 27% of companies are adding a new system to their maintenance environment without eliminating a system, Although 73% of companies are retiring legacy systems, the retirement is generally not simultaneous with the implementation which will cause maintenance costs to increase 35 System Replacement Projects Includes Legacy System Retirements ©Copyright, Ward Group 2010

36. Empowering Companies Through Knowledge® ©Copyright, Ward Group 2010 Governance Level of Governance (alignment of the business and IT) Governance Process in Relationship to the Process 5 Years Ago 36 Maintaining good or excellent governance can mean the difference between success and failure. 21% of companies rated their governance process as excellent and 71% reported it as good. Another positive metric regarding governance is that 92% of companies reported that their governance process is better than it was 5 years ago. There have been many initiatives focused on increasing communication to improve timelines, prioritization and improving the relationship between IT and the business units.

37. Empowering Companies Through Knowledge® Leah Hollstegge Manager, Ward Group lhollstegge@wardinc.com 513-746-2416