The London market is well aware of the potential advantages to be gained from e-commerce. Adrian Ballardie identifies the considerations that will affect how and when (re)insurers take the plunge.
There has been an explosion in the volume of business transacted over the internet in the past few years, and it is impossible to imagine that business practices within the London (re)insurance market will remain unaffected by this electronic revolution. Media coverage of the phenomenon has been hard to escape. Internet stocks have soared over the past 18 months, creating a new wave of millionaires overnight. The latest and most spectacular example has been the AOL/Time Warner merger. It seems it may be some while yet before this bubble bursts.
Ever since the Coopers & Lybrand report of 1995 predicted administrative savings to the London market in the region of £300 million, the search for greater market efficiencies has been actively pursued. Given the current climate of greater co-operation between Lloyd's and the company market, there are clearly savings to be made from some form of merger or rationalisation of bureau activities. However, these pale into insignificance when one considers the potential for a radical re-engineering of the market's business processes, in particular through the use of e-commerce.
The rate of growth of internet commerce in the business to consumer (B2C) sector is extremely rapid. Analyst organisations, such as Gartner Group, Forester Research, and IDC, predict that, by 2002, B2C e-commerce will amount to more than $333 billion. The financial sector is playing its part in this consumer revolution, with banking operations, such as Egg, Smile and First-e, springing up to challenge the traditional channels. Insurers, too, are setting up in retail commerce, whether through exclusive web-based vehicles (such as e-coverage and e-surance) or by established insurance providers like Eagle Star setting up web-sites through which to conduct electronic sales, linking back to call centres for support.
The insurance industry has generally moved slowly towards new distribution models. The potential for e-commerce is perceived as relating primarily to motor and household household insurance, term life products and fixed annuities. However, although most of the current internet sites offer on-line product information, policy application and potentially real time quoting, only a few companies offer end-to-end interaction of front and back office facilities.
Obviously, there are huge savings to be achieved in the retail area by converting to a virtual insurance company, reaching customers directly through the internet, rather than through the expensive traditional distribution system of bricks and mortar branches and agencies. With the proliferation of internet-enabled business initiatives for consumers, it is perhaps surprising that we have yet to see a virtual broker.
Turning to the business to business (B2B) sector, in the banking world SWIFT is radically improving inter-bank processing throughout the world, and electronic data interchange (EDI) is already a reality in the insurance and reinsurance markets. The real bedevilling factor in the uptake of integrated e-commerce systems in the London market, however, is the formidable challenge of effectively linking front and back office functions. Increasingly, this is seen as a competitive rather than a co-operative issue as underwriting and broking entities re-orient their plans to seek increased efficiency from business process re-engineering. One idea might be to form a central processing or clearing centre in London through which e-business can be conducted on a global basis. Clearly, there is a big opportunity here.
On the basis of its long and mainly successful history, the London market has an in-built tendency to be somewhat conservative. However, this aside, there are a number of areas which concern the managements of (re)insurance enterprises, be they brokers, reinsurers or insurers, as regards the conduct of e-commerce going forwards.
The first, and most obvious, hurdle we have already touched upon, namely the potential difficulties in linking existing EDI processes with front-end process. Allied to this is the fact that most enterprises have legacy systems, oriented to the old way of working. Few managers will be tempted to speculate on re-engineering their legacy systems, until the way forward for e-commerce becomes much clearer. There is also a perception that, where front-end process are concerned, redundancies are inevitable.
Another major stumbling block is that the underwriting and broking community has been used to face-to-face trading for so long that any de-personalisation of the negotiation process is expected to be counter-productive to competitive advantage. Finally, there is a widespread belief among managers that existing methods of sending supporting information by fax or e-mail present very little obstacle to the efficiency of the placing process in European markets.
The current e-commerce approach, favoured by reinsurers, carriers and brokers, is to open web-sites and extranets for their business partners, rather than to use value-added networks to which each have their own access. This is particularly true of the US markets, where brokers and risk carriers alike are eager to keep their clients serviced by tying them in to bespoke electronic information systems. A good example of this is the Aonline initiative launched by Aon to service its clients better. Such systems are as much aimed at keeping the client informed (about the progress of a claim, for instance) as they are at being used as sophisticated customer relationship management tools.
Large corporate insurance buyers, who now typically employ full-time risk managers, are starting to insist on having direct electronic access to their brokers and carriers. This is already true of most large US corporations, and is spreading to Europe and the rest of the world.
Inhibiting factors abound and it remains unclear whether the market will favour a co-operative approach to e-commerce or whether individual participants will continue to see a competitive advantage in developing their own ventures. The next 12 months will be critical in deciding which approach dominates and, therefore, what role e-commerce will play in shaping the future of the London market.
Of course, the existing ways of doing our business are open to radical re-engineering. It is possible that a new entrant could dramatically change the manner in which business is transacted, in the same way Amazon.com has reshaped the way books are sold. In a complex and highly traditional wholesale subscription market, however, this currently seems unlikely to happen with any great speed if the past is any indicator.
Adrian Ballardie is chief executive officer, AXA Re UK.