When it comes to aggressively using new technologies, the insurance industry has never been ahead of the pack. A long-standing observation is that as a business that's cautious by its very nature, insurance has been one of the last industries to take advantage of technology to improve its basic operations. And when it comes to blazing new trails by applying that technology to innovative uses, the industry continues its conservative stance. This apocryphal knowledge is regularly borne out in surveys.
Booz Allen & Hamilton's 1999 Third Annual Survey of Internet Insurance Usage and Trends found that insurers increasingly believe their Internet strategy is directly linked to their corporate strategy, rising from 11% of the companies surveyed in 1999 to 16% in 1997 to 37% in 1998. At the same time, more than half the companies surveyed are investing less than $500,000 in Internet technology.
Consumers, too, are slow in purchasing insurance on-line. A recent Cyber Dialogue survey found that 83% of adults who use the Internet are aware that insurance can be purchased on- line, but only 3% have actually applied for insurance via the Web, and 4% said they intend to apply but hadn't done so.
Several technology research firms, including Forrester Research Inc. of Cambridge, Mass., are quite bullish about the future. Forrester predicts on-line personal lines sales will top $1.9 billion this year, growing to $10.5 billion in 2003 and to $13.1 billion or 10% of insurance sales by 2004. Our researchers estimate that consumers purchased only $250 million worth of personal lines insurance on-line in 1999 and we expect a jump of almost 800% to reach Forrester's $1.9 billion prediction this year is unlikely. In any event, big Internet sales growth won't happen unless a large number of high quality insurers quickly begin selling on the Web.
Web sales are certainly logical, since on-line distribution has been proven to directly reduce distribution costs, which consume as much as 26% of premiums. Yet insurers still cite product complexity, lack of standardized claims management and concerns about transmitting confidential data as reasons for the lag.
So when you think of applying Internet technology and electronic commerce to the marketing and operations of the reinsurance business, it seems even more incongruous. After all, by definition, reinsurance is the business of insuring insurance. It's a retail business that caters to a relatively small number of customers, with business traditionally transacted on a relationship basis. In short, reinsurance is not your typical profile of an aggressive dot.com industry.
Despite all these preconceived notions about our conservative business, exciting new things are happening with reinsurance and technology.
At this year's Risk and Insurance Management Society (RIMS) conference, both new companies and traditional insurers unveiled Web-based products such as TLO-Online, a site that allows hull insurers and brokers to purchase total loss only reinsurance over the Internet.
And then there's business-to-business (B2B) exchanges such as Catex (www.catex.com), a five-year-old clearing house catastrophe exchange for risks or entire risk portfolios that can reduce transaction costs to less than 1%. Catex has now expanded to all lines of commercial insurance and reinsurance, and its clients include brokers, reinsurers, insurers and corporate risk managers - to the tune of more than 430 transactions representing more than $3 billion of insured limit.
The London reinsurance market has been on the e-commerce bandwagon for quite some time. The vehicle is the use of de facto e-commerce standards to handle premiums and claims processing through the London Insurance Market Network (LIMNET). While LIMNET has handled premium and claim transactions for many years, the opportunity to place business electronically has yet to materialize to any extent in the London market. LIMNET recently joined forces with two other global brokering networks - the Reinsurance and Insurance Network (RINET) and the World Insurance Network (WIN) - to create WISe, a company that is in the process of developing electronic commerce solutions to the industry.
These new technological applications stand to benefit both the insurer and the customer. By eliminating multiple data entries that can lead to errors, they will make the business more efficient, enhance communication between the parties and improve the quality of data.
One of the long-standing arguments insurers use for their lack of interest in electronic commerce is that non-commodity insurance transactions - such as reinsurance and large commercial property/casualty - are too complex to conduct on-line. This argument may be true today, but it probably won't hold true for long, as technology evolves to meet more complex demands, and as clients continually migrate to the Internet.
The examples cited above clearly indicate that insurers - and even reinsurers - are recognizing they must run with the herd or get trampled. Reinsurance may well be the last phase of the insurance industry to become electronically connected, but it most certainly isn't the least. And while electronic commerce applications in the reinsurance industry may still be in a developmental phase, insurers and reinsurers are gearing up for the day when it becomes standard operating procedure for a lot of the sales cycle.
A large part of the impetus for automation comes from the realities of having operated in a soft market. The market has been in a historically soft period, although commercial property/casualty insurance is starting to show signs of hardening. Written premiums dropped to $19.4 billion in 1998, a decrease from $19.9 billion in 1997, according to the Reinsurance Association of America (RAA).
In this atmosphere, holding down operating costs is an ongoing concern. E-commerce is a proven way to reduce operational expenses and improve the quality of data as well. It provides a way for reinsurers to respond quickly to client demands, expedite claims handling, and keep a finger on the pulse of results - all at a reduced cost.
For example, cycle times for cash flow in the reinsurance business are notoriously long. Treaty business bound in January frequently doesn't get premiums paid until May or June. While some of the long cycle time is due to terms of trade, a significant contributor is the redundant data entry and processing that occurs at the primary insurer, broker and reinsurer locations.
Another reality is the increasing globalization of the insurance business, which naturally lends itself to computer transactions and electronic commerce. Also, as the Internet becomes more globally pervasive and penetrates at the business level, customers will increasingly demand it be used for all of their transactions.
Finally, the emphasis on business-to-business electronic commerce is tremendously empowering to corporate risk managers and other insurance and reinsurance buyers, who can go directly to the source for their products. It's inevitable that this movement toward B2B transactions will change the role of the intermediary in the insurance transaction - just as it has changed the process in other industries.
As a global entity, HartRe Company is fully aware of the importance of delivering fast, accurate data and holding down distribution and operational expenses.
To position for the e-commerce world, Hart Re has implemented a new system to support its worldwide treaty and alternative risk business. This client/server, relational data base system known as SHARP (Strategic HartRe Automated Reinsurance Processing system) was implemented in phases commencing late 1998.
SHARP is a single system that allows everyone in all HartRe offices worldwide to view in real time the information involved in operating a reinsurance business. This includes functions such as underwriting, accounting, claim processing, actuarial and MIS reporting.
SHARP's goal is to apply technology to meet the business needs of HartRe and keep operating costs low. It also gives us a global, competitive advantage by linking HartRe professionals around the world, providing access to SHARP's relational database and reporting system. The system links 12 locations around the world with the dedicated Hartford database. We hope eventually to expand SHARP and create a Web-enabled front-end so we can do business anywhere in the world without the need for a dedicated network.
Systems like SHARP not only help reinsurers retain their current customers, but can also help them expand into other areas and locations. When HartRe acquired the renewal rights to the reinsurance operation of Birmingham, Ala.-based Vesta last year, we were faced with absorbing about $100 million in new business. In the traditional reinsurance model, we would have added a substantial number of accounting, claims and administrative staff to support the additional business. However, the networking and workflow management capabilities of the SHARP system meant we needed to bring in only about eight people to handle underwriting, business development and relationship management functions rather than 18-20 staff to support all business functions. Existing support staff in Hart Re headquarters essentially absorbed the back-office functions. The SHARP system enables HartRe to move the burdensome back-office work to virtually any location, or to spread it out to all locations, if necessary.
There are many other benefits as well. For example, SHARP can manage reinsurance processing in more than 170 different global currencies so business can be conducted quickly and consistently, with less back-office administration cost. This function has proved to be invaluable in HartRe's global operation. Further, since SHARP was designed for multi-currency capability, the transition to the Euro currency was not the substantial investment for us that it was for many other international companies.
Because the SHARP database is integrated, all captured information can be used to pre-fill the various subsystems that comprise SHARP. This allows HartRe to reduce the labor intensity of data entry while at the same time improving data quality. For example, coverage information is entered only once, when the treaty is bound. Afterward, if a claim is generated, all of the original information is passed along to SHARP's other subsystems. Subsequent information added in the binding, premium and claims paying processes goes to the reporting database.
SHARP also permits the HartRe management team to monitor the business across the entire enterprise database so we can keep close tabs on business development and exposures. This means we can scrutinize the business from multiple viewpoints, including claims, actuarial and underwriting. This is invaluable in management reports, where the business can be viewed from the top down, or by “slicing and dicing”.
However, in spite of SHARP's benefits, we recognize that we can't operate efficiently in a vacuum. If everyone in the industry cooperates to make electronic commerce work for all of us, the whole can indeed be greater than the sum of its parts. And one of the major issues that must be addressed quickly is standardization.
For example, HartRe accesses the electronic London market through LIMNET to transact business and process accounting information and claims. However, we do not originate business through LIMNET or other portals because of the lack of standardization in processing methods.
Standardization is a matter of international debate. The European Commission (EC) recently adopted its Electronic Commerce Directive, the main provision of which requires Information Society Service (ISS) providers such as insurers and reinsurers to comply only with the laws of the home state in which they have their place of establishment or country of origin. However, much of the issue still lies in a gray area.
The industry is moving forward with several approaches to standardization. For example, the Joint Venture, an international group of reinsurance and insurance organizations, has recently completed a set of standards for extensible markup language (XML) to exchange data over the Internet.
And WISe, the consortium of WIN, RINET and LIMNET, is working with the RAA, The Brokers and Reinsurers Management Association (BRMA), ACORD and IVANS, the US insurance standard-setting organizations, to help develop a single set of global standards for large commercial transactions.
HartRe has participated with organizations such as RAA and the BRMA to help create standardization for everyone using electronic commerce methods. In this context, SHARP has been positioned to accommodate the Joint Venture US standard and the London Market standard (LIMNET), although ultimately we would like to see them all come together.
Everyone in the insurance industry - including its clients - stands to benefit from making electronic commerce a workable reality. More to the point, we cannot afford to stand on the sidelines and let this technological revolution pass us by. In today's fast-moving New Economy, quick response times, faster claims handling and reduced expenses are no longer perks, but basic operational requirements. Our customers, who are increasingly accustomed to transacting business over the Internet, will stand for nothing less. And if we are to continue competing in a business that is changing as rapidly as insurance, we can't afford to stand still.
James R. Mackintosh is vice president, business technology, at The Hartford's international and reinsurance operations.