IT Spending Trends in the Japanese Insurance Industry: 2011

Celent published a new report “IT Spending Trends in the Japanese Insurance Industry: 2011” which is the updated version of IT Spending Trends in the Japanese Insurance Industry: 2010 (http://www.celent.com/reports/it-spending-trends-japanese-insurance-industry-2010). In March, Japan was rocked by one of the largest earthquakes on record. Despite the massive scale of the Great East Japan Earthquake, the insurance industry has weathered the disaster well. Celent forecasts that insurance IT investments will grow from USD 7.84 billion in the fiscal year ended March 2011 to reach USD 7.98 billion in the fiscal year ending March 2015. The March 11 earthquake will accelerate change in a number of areas, including prompting the industry to revisit business continuity planning (BCP) and reconsider the adoption of green IT. In terms of the latter, the disaster will spur companies that have been dragging their feet to study the introduction of technologies such as cloud computing and SaaS solutions.

Insurance and Japan

One might naturally assume that the tragic events in northeastern Japan would also be devastating the Japanese insurance industry. By the beginning of April some 320,000 P&C claims related to the disasters had already been filed with insurers. After the Kobe earthquake of 1995, when many home and business owners discovered their policies did not cover the damage, people got in the habit of buying earthquake / tsunami insurance. So fortunately more properties were insured on 3/11 than may have been otherwise. In conversations with Japanese carriers, however, Celent has found that insurers are remarkably sanguine about the likely effect on the industry here. Firms say they have adequate reserves set aside precisely to cover an event of this magnitude, which has long been predicted. As a result, Celent expects that major Japanese insurers will continue to invest in strategic initiatives to boost competitiveness and lower costs in this very crowded market. IT spending growth at Japanese insurers, which has been close to flat for years anyway due to the maturity of the market, will suffer a modest dip in the short term. Smaller insurers are likely to put off renewal projects for a while. Pressure to merge will increase at some firms, but again the industry has seen a spate of consolidation activity in recent years already. The recent events are likely to encourage Japanese insurers to accelerate their international expansion efforts, which are already underway. Carriers have been looking abroad for growth opportunities, especially to the Asia Pacific region but further afield in the Americas and Europe as well. In Tokyo, along with the concern, there is a new competitive spirit in the air. April is the start of Japan’s fiscal year and businesses look determined to find ways to grow even as the economy is forecast to contract. The insurance industry would be no exception. For example, the past year has seen the emergence of new internet and mobile based distribution models and products, approaches which seem almost tailor-made for the post-3/11 era. Technology suppliers will want to know that amplified interest in business continuity is leading insurers to think seriously about cloud computing. The blooming sakura and early spring sunshine might be distracting me from some of the harsher realities of 21st century Japan. But certainly a little optimism is not misplaced in what is after all one of the world’s major insurance markets.

Accepting the need for Electronic Trading

In its recent history,the Asian market has been characterized by the adoption of technology in a much more compressed time-frame as compared to its counterparts in the western world. This has been true of the industrial as well as the services sector, where it is also holds true for electronic equity trading. Asia is well poised for a rise in the share of electronic trading in the next few years. Markets such as Japan, Australia, Singapore, Hong Kong and India are seeing a lot of investment happening that is related to Direct Market Access (DMA), Smart Order Routing (SOR) and High Frequency Trading (HFT). The associated infrastructure such as market data services, co-location and so on are also being paid attention to, as is the requirement for helpful regulation. However, in some markets, the regulators are not very confident about and supportive of the needs of greater electronic trading. This is partly because of the financial crisis and rising requirements for risk management, and also due to the flash crashes that have occurred in the NYSE and OSE markets. We expect the regulatory framework to become more flexible in most markets, but there is still an important element that needs to be addressed across the board in the Asia-Pacific. That is the role of smaller brokerages and the buy-side. Unlike larger brokerages, these are still reluctant to adopt electronic trading and to make the investments required to have the same. While attitudes and capabilities do not change overnight, I believe that market investors in Asia need to be made aware of some harsh realities. To start with, the way HFT and algorithmic trading evolved in the US and European markets, there was very little time for market participants to react to and adopt such trading. The change happened so quickly that a number of brokerages and buy-side firms were unable to cope and had to operate in a more constrained fashion or even shut down. The incentive that HFT provides for those trading larger volumes means that the smaller players are at a relative disadvantage. This increases even more if they are slow to react and do not adopt electronic trading. So it is not just the speed of trading that is important to succeed, it is also the speed of thought. Hence, smaller brokerages and buy-side firms in Asia should be more positive and not be afraid of investing in DMA, SOR or HFT. The gains from these might not be apparent immediately, but if the lessons from the western markets teach us anything, it is that the quick and nimble-footed firms were the most successful during the rise of electronic trading. With the trading infrastructure in Asia changing so rapidly, there is little reason to believe things are going to be different here.

Welcome to Celent’s Asia Blog

Celent is continually looking for ways to better connect and interact with the financial and technology communities. Continuing in the tradition of Celent’s industry-specific banking and insurance blogs, we are now launching a blog focused on issues in business and technology strategy in the Asian financial services. Welcome to Celent’s new Asia blog. From the beginning, a differentiator at Celent has been our coverage of financial and technology issues from a global perspective. As part of this commitment, over the past few years, we have been ramping up our research on Asia and India. We have now built up quite a substantial library of research on these regions, which we think is pretty unique. Building on this, we have recently also launched two new research services, one focused on India, the other focused on the rest of Asia. These services essentially bundle reports from our banking, securities & investments, and insurance services into regionally-focused services aimed at firms seeking cross-vertical competitive information on Asia and India specifically. And now the Asia blog. We have a baker’s dozen of analysts ready to lob commentary on what we see developing in the region, as well as on Celent’s activities. We think you will find our essays informative and stimulating. And we encourage you our readers to participate in the feedback loop by sending us your comments and questions. The goal is to create an active dialogue on the evolving financial services and technology markets in India and Asia.