Two sharp, entrepreneurial techno-providers are capitalizing on the transformations taking place within the insurance industry by selling software that offers a cost-effective, efficient and exciting alternative to the old way of doing business, writes Russ Banham.

Just one year after a successful initial public stock offering, INSpire Insurance Solutions in Fort Worth, Texas, has developed a $1.6 billion market selling claims and policy administration software allowing insurers to become "virtual" companies. Its northern neighbor, Toronto-based LAVA Systems Inc., which has been a publicly-traded stock on the Toronto exchange for only a year, offers claims processing software that frees claimants from nearly all the legwork involved in filing a claim.

Both software vendors are taking advantage of the enormous changes underway in the insurance business. Carriers are overhauling their distribution strategies, paring their expenses and rapidly improving their services to attract and retain customers. With competition at ferocious intensity, insurers are desperate for anything that can help them cut costs and enhance customer relations at the same time.

INSpire and LAVA have similar histories. Both companies are amalgamations of previous companies with expertise in insurance or technology. Each also is predicated on the promise of an entirely new way of approaching a hidebound insurance process. And both companies are extremely successful. Here are their stories.

Virtual relief

INSpire was spawned from the seeds of Miller Insurance Group, the oldest insurance company in Texas with deep roots in the agricultural insurance business. "We started as a small claims servicing outfit within Millers and then branched out into servicing the claims administration of two other carriers, one in California and the other in Michigan," says Jeffrey W. Robinson, INSpire executive vice president for outsourcing.

"Our breakthrough was in 1996, when Allstate was looking to find some relief for the 137,000 homeowners policies it had in Florida, a state vulnerable to hurricanes. The company felt it was over-exposed, and they contacted broker E. W. Blanch to match them up with another carrier to take on the policies. Eventually, Clarendon Insurance agreed to front the policies."

The missing link in the transaction was an organization that would act as the policy and claims administrator for Clarendon in the state, providing underwriting, rating, billing collection, customer service, claims adjustment and settlements. INSpire (called Millers Risk at the time) filled the void. "Clarendon agreed to outsource all their policy and claims administration for this huge book of business to us," Mr Robinson notes. "Suddenly, we were on the map - big time."

At the time, Millers Risk was using software developed by a Wisconsin vendor, Strategic Data Systems, as the enabling technology for its outsourcing services. After the Clarendon deal, the company decided to buy SDS, purchasing it for $22 million in March 1997. Five months later Millers launched a successful IPO of Millers Risk and it re-emerged an independent company, INSpire. Millers retains 22% of the company's stock.

INSpire has two lines of business. It continues the previous SDS practice of licensing software to other companies (customer comments from this endeavor help its R&D engineers improve INSpire software). But the bulk of its business is its outsourcing services (plus software) to the virtual insurance company market.

A virtual insurer can be anything from a few executives, no actual corporate building and a bank account to collect premiums and pay claims to a full-scale enterprise that looks and acts much like a traditional insurance company, except that various services are outsourced to others. "Virtual insurers are an extremely fast-growing trend in the business right now," Mr Robinson maintains.

"Companies are increasing their surpluses at a time when the market is growing extremely slow. That, in turn, is creating much greater competition to reduce expenses and improve costs. The outsourcing model allows companies to enhance their productivity and increase customer satisfaction simultaneously. They do not have to buy the technology or build it; they simply outsource it to us for an incremental charge."

The optimum candidate for an INSpire solution is the company that seeks a paperless environment and enhanced customer service. Most INSpire customers, so far, are start-ups, such as Kemper Insurance Company's new direct personal lines insurance entity. "When Kemper decided to get into the direct market, it wanted a speedy debut," Mr Robinson says.

"Our software is not tied into old, legacy systems or mainframe technology. We told Kemper we could meet a 90-day timetable to market its first policy, which we met with days to spare. Most importantly for Kemper, it did not have to put a lot of money upfront to enter the market." INSpire now handles the carrier's direct policy and claims administration, and is paid on a monthly basis for the service. Price is based on the size and needs of customers.

A major marketing opportunity for INSpire is the stated desire of banks and other financial institutions in the United States to offer insurance products. "These are entities that do not know how to run an insurance company, or do not want to," Mr Robinson says. "A mortgage lending institution obviously sees a cross-selling opportunity if it can offer homeowners' insurance to the mortgage applicant. Our service helps them close the sale and handles all the administrative headaches, without the need to start-up a major insurance organization."

Now that is INSpiring.

Volcanic vision

Despite its catchy name, LAVA Systems is neither an acronym nor has anything to do with molten eruptions from the earth's outer crust. "We just kind of liked the way it sounded, sort of short and snappy," says Martin Owen, LAVA vice president of corporate marketing.

Anyone who has ever filed an automobile insurance claim would agree the process is anything but short and snappy. Hence, LAVA's simple yet profound mission: to make the claims-filing process a much happier experience.

Formed in 1996 as an amalgamation of two companies, a systems integrator and a technology provider, and then broadened by the acquisition of three companies specializing in the insurance marketplace, LAVA has developed software that, when a claim is filed, immediately notifies the various parties involved in the claims process. "We like to say the software handles the 'customer-facing' aspects of claims processing," Mr Owen says.

Here's the typical scenario that occurs when a driver bangs up the car and files a claim: The company is notified by phone or in person. The driver is then asked to obtain at least three quotes from auto repair shops detailing how much it will cost to fix or replace the car. Meanwhile, less-than-honest drivers (and equally mendacious repair shops) may collude to raise prices in order to reap a windfall. In either case, the claimant is left to control the early, loathsome stages of the claims process.

Now here's the LAVA approach: The customer files a claim by telephone and is led through a series of questions enabling the insurer to ascertain the details of the claim. The insurer takes control of the situation, sending the claim through its preferred auto repair vendor route. These companies are known by the insurer to be scrupulously honest, thereby reducing the chance of fraud. Costs are reduced because of the commercial agreements the insurer has with the repairers stipulating specific payments for specific repairs.

There's more. "Once the information about the claim is entered, all sorts of notifications are made - to the tow truck to pick up the car, to the claims adjusters to investigate the claim and even, in some cases, to the rental car company to provide a replacement vehicle," Mr Owen says.

"We have mapped out the entire process and developed best practice workflows. All the relevant facts are captured and routed around the organization at the same time, until everybody deals with their particular part of the process. The typical procedure of moving a claim from one office to another is simplified. Customers, meanwhile, know they are being taken in hand through what is often a difficult time. After all, the last thing anyone wants after a car accident is additional headaches."

LAVA already has made sales in the UK to Admiral Insurance and Northern Star Insurance, part of the Generali Group. It is now making a marketing push in North America. "There are other companies providing this type of service, but they do not have the same breadth we have as far as multiple, immediate notifications," Mr Owen says.

Like INSpire, LAVA also is eyeing newcomers into the insurance business. "In the UK, we focused on the financial services players that were coming into the insurance marketplace," Mr Owen says. "We were able to ease them into the (insurance) business without the baggage of huge insurance departments. With information technology, they were able to leverage their existing client base and undercut the prices of their competitors." LAVA will employ the same marketing strategy in North America.

While the obvious benefit of its software is streamlined operations and visible savings vis a vis more traditional methods of claims administration, Mr Owen touts the softer side of his product. "The customer is drawn into this security blanket of having the claim dealt with by others," he explains.

"They are then more willing to renew the policy with the same carrier the next renewal period. And if you try to sell them homeowners' on top of their automobile insurance, they are going to be more willing to listen."

In that regard, is it fair to say that LAVA is in the business of spreading warmth? "Really, LAVA has nothing to do with lava," Mr Owen insists.

Yeah, sure.

Russ Banham is a journalist specialising in insurance and technology.