US e-commerce needs more industry backing if it is to reach its potential.
Even before the start of the internet frenzy in 1998, many companies were seeking to more efficiently process transactions. But in order to do so successfully, reinsurers and their ceding companies had to answer some vexing questions, and still continue to face these problems: what is the incentive, how does that happen, who bears the costs, and what are the returns?
Much of the trouble starts in these companies that caught internet fever. In the rush to get their companies ‘internet enabled' they rarely defined what that meant in tangible terms. Few companies sought to focus on the issues in any detail, instead touting the benefits of the total picture:
At the same time, industry analysts were putting pressure on companies to have an e-commerce strategy. Companies responded to their demands by creating smart-looking web pages and some elementary data interfaces in which information could be entered. But any follow-up was through a telephone call, as if e-commerce did not exist.
Everyone agrees that the benefits listed above really exist, but they need to be further analysed to be effective, and questions need to be asked. Who is to benefit in the first step of e-commerce? Employees, business partners, customers? All of these groups? And what are the metrics surrounding these efficiency gains? Is the focus on revenue growth, expense reduction, workflow efficiency or greater capacity for more tasks? To say ‘it's all of these' returns to the same undefined quagmire facing many companies and their management.
No strategic plan
The crisis for the information technology (IT) professional is one of yet another big business venture which will give untold benefits for every level of business transaction. And they were supposed to make that happen within 12-18 months.
Many insurance companies were forced to rely on vendor solutions to quickly become ‘e-commerce enabled'. There were many vendors in those early days – many are still around in varying levels of success – and a new one has sprung up for each one that has disappeared. But the rush to get a package installed often left the business people scratching their heads, wondering if they had achieved their objectives and return on investment. Research organisations' opinions can differ somewhat, but they all agree that of the companies that begin an internet or e-commerce venture, on average only 28% achieve their expected result.
Businesses became frustrated as they purchased a customer relationship management (CRM), reporting or payments processing system that did not necessarily interface with that of their major business partners, for example a broker, that were developing these types of system in-house. The promised data exchanges were left with mis-matched data; where one company would call a data field ‘customer name', another would say ‘name of customer'. Or perhaps one customer was identified by a number protocol and another had a series of numbers and letters. Many early ventures produced some good results but also an equal volume of erroneous data and mismatched transactions. At the end of the day companies were no better off than they had been a decade earlier – frustrated and unable to trade data.
Reinsurers suffered mightily from this phenomenon, dealing with literally dozens of ceding companies which had proprietary systems or ones designed to their specific standard. This left the reinsurer in the unenviable position of trying to efficiently interface with every one of them in a common fashion.
Enter the industry and industry-sponsored organisations – Joint Venture (JV), ACORD, WISe, IVANS and others. These organisations have tried mightily to corral the re/insurance industry into common formats of data, attempting to realise efficiency on behalf of the entire industry, whilst the re/insurers have quietly been building proprietary links to their major trading partners and largely ignoring the work done by the industry committees. Sadly, much of the work done since 1985 has gone largely unimplemented in any substantial form.
Why does this exist? Because the industry organisation, although it ultimately settles on a common standard, is in the position of most IT organisations: to map to a single standard, you need a static environment to analyse and map, one which will not change substantially for a period of time and from which a basis can be formed for future development work. Unfortunately, today's insurance climate is anything but stable, and the standards that are used and have worked the best are in the largely regulated personal lines. Commercial insurance lines and corporate risks largely fend for themselves due to their quickly-changing nature and loosely regulated structure.
Undoubtedly, the abandonment of the JV to WISe and then WISe to ACORD can only bode well for common industry data formats. The announcement of the first set of joint venture objectives is an encouraging step. But to what end will they actually be implemented? No company will publicly admit that they are opposed to the ACORD standards – to do so would be to admit that they do not want to be efficient and follow an industry standard.
The problem becomes that data, as a two-way stream, is bundled and unbundled at various transactional levels, so the various parties handling the data from original consumer all the way through to retrocessionnaire can be eight or more. If each transaction required electronic exchange, that's 16 different data bundles and un-bundles. It is an enormous task by any stretch of the imagination, and when multiplied by the 1,600 companies in the US and Canada, the figures become almost unimaginable.
Ceding companies know that they can happily exist in their current world and that reinsurers and their main trading brokers will take their data in whatever form they send it. If the cedant is a big enough customer, the reinsurer or broker is unlikely to demand change in data format or refuse the business. A common data standard is interesting and perhaps needed, but who should bear the cost of making upstream transactions more efficient? The entity sending the data or receiving the data? Who is the main beneficiary? The simple answer is both companies benefit, but no one will pay for the efficiency gains because they believe the other party ultimately benefits more and should therefore bear the cost burden.
Each ACORD release is already more or less freeware to its member companies, but it needs to be implemented. And that commitment to the XML-based future of the industry needs to be internalised by re/insurance management. XML is a wake-up call to the industry that is ubiquitous as other office machines, like the PC in its early days, when many managers were reticent to place one on every desktop in the belief that the dumb terminal was all an employee needed to be productive. I hope XML does live up to its promise and becomes a platform and vendor-neutral standard for data exchange.
Let me also say that I have ignored on-line exchanges because there is plenty written about them already. The proprietary company sites are clearly part of this article while the public sites are much like other technology and software vendors, holding out the promise of efficiency. And that efficiency promise has had many successes, and can be fulfilled in a well-defined project with clear objectives.
What is hoped for is a ‘lite' version of the ACORD standards and an installation that won't take much time and energy, and won't cost a lot. The reality is that IT projects are an investment of time, energy and, ultimately, corporate history, because with each conversion and new standard a little less data is made current and new data comes into play. But unlike other standards, XML appears to be an enduring one that can serve as an industry basis going forward. The message to management is whatever time it takes, try to embrace the XML data exchange formats because that will allow the most flexible exchanges whether they are London market, EDI, internet or your own proprietary networks. Make the investment. Make XML work for you, or in time, it will work against you as other companies ramp up.
What does the future hold?
Let me qualify my opinion by stating that 11 September changed everything. Where the industry had some seemingly intractable issues such as overcapacity and price competition at the low end of the market, those issues no longer exist, and whether the industry will return to a hard market similar to the one it experienced in the mid 1980s remains to be seen. What I can state with confidence is that the pressure to reduce expenses due to these losses and their impact on the industry will be widespread, and e-commerce initiatives will come under new scrutiny to produce results. Where initiatives were once entered into frenetically, whether with vendors or internally, they will now be entered into with sharper focus and greater organisation.
Some organisations, including my own employer Computer Sciences Corp, are polling companies to determine new industry imperatives and new e-commerce definitions since the 11 September attacks. How industry attitudes and priorities are changing are yet to be determined, but one thing is certain – they will change. Initiatives will be aimed less toward blindly increasing capital to keep cash flow going without regard to the claims fallout – as is often the model in a soft pricing market – and more toward chasing profitable business. And new, aggressive niche firms and divisions of established firms will help write the rules of what e-commerce will look like, and with whom.
The industry will inevitably become more ‘e-commerce enabled', in many forms and with several standards. My personal belief is that XML will gain momentum in the US and significant following over the next decade to become the de facto standard, with ACORD as the major backer. Like any industry, the insurance sector is bound by regulatory checks, business tradition and tax constraints which allow – or disallow – various forms of data exchange. Legislators and insurance commissioners are helping to deal with these barriers as quickly as practicable while still letting the market determine the best standards and channels. But perhaps the greatest constraint is our own ability to trust in technology and its stability for the future.
Like everything, it's a leap of faith. I'm leaping onto open standards and the XML bandwagon.