Technology is starting to make substantial inroads into business processing.
For the insurance community as for the wider world, 2001 will always be remembered for the appalling and tragic events in the US on September 11. Those events will precipitate wholesale changes in the industry but, we venture, it will be a long time yet before the metaphorical dust settles.
This year will also, hopefully, be seen in retrospect as the year when the international insurance and reinsurance markets finally made the breakthroughs to integrated back offices, global electronic standards, an acceptance of e-commerce as the way ahead and the emergence of transnational accords on security issues such as public key infrastructure (PKI). Or perhaps not.
In all the activity over LMP 2001, Ins-sure, ACORD/WISe and the like, one needs to ask the question: when we have this wired world of insurers, reinsurers and brokers, all speaking the same language over the same secure, infrastructure, will we actually transact business over it?
The answer depends on whom you ask. An in-depth survey commissioned earlier this year by SilverStream Software among 84 respondents comprising insurers, Lloyd's managing agencies and brokers showed that while there was a willingness to transact business across the Internet, little e-business had actually been done.
Of those surveyed, 16% of brokers, 25% of managing agencies and 53% of insurers had interactive websites. That said, 50% of agencies, 21% of insurers and 8% of brokers used it “a great deal”. However, while there is general agreement that the internet is probably the way ahead and can deliver tangible benefits, the sheer complexity of the product meant that 75% of underwriting agencies, 66% of insurers and 55% of brokers saw that factor as a significant barrier to them moving to e-business solutions.
All those caveats notwithstanding, the report does acknowledge that there is an overwhelming recognition that operators in the London insurance market need to become more efficient, and significant improvements to their businesses could be made through greater use of the internet. Underwriting agencies were the most enthusiastic and brokers the most reserved on this point. All companies seem to share similar priorities too, with marketing, product development, sales and training as the primary focus. And one of the market participants interviewed for the survey spelled out starkly the reality behind that drive for efficiency: “For every insurance risk that is placed in the London market, for every £100 premium that a customer pays, £45 will go in the cost of doing business and only £55 will go against the actual insurance risk itself. That to me is just ridiculous!”
Radical end goal
It was just over a year ago that the ‘green book' for London Market Principles 2001 – LMP 2001 for short – appeared, the result of the usual committee-driven collaborative effort by Lloyd's and the London market communities. The shorthand adopted to describe the end goal was pretty radical: nothing short of a modernisation program featuring a series of major reforms whose objectives are a complete overhaul of the market's business processing methods, making them simpler, faster and supported by a single market system. It also seeks to make greater use of new electronic commerce technologies. Simply put, LMP2001 represents the biggest market-wide reform of procedures ever undertaken by London.
MMT management consultants, contracted to drive the programme through, had an unusually high degree of co-ordination to create and maintain. As well as four of their own staff, they had a further eight on full-time secondment from the market and no fewer than 170 part-timers to matrix into a functioning team. The ultimate target for the year was the introduction of a new slip for all London market business, a target which was subject to delay and which, eventually, fell victim to the events of September 11. The uncertainty the events of that day brought to the 2002 renewal season meant that to have simultaneously introduced a radical new business process would have caused chaos. No one doubts the need for the LMP 2001 reforms, which now look likely to get underway in February 2002.
An essential part of market reform is the eventual convergence of all the back offices and bureaux. Significant progress was made during the year with the creation of Ins-sure by Lloyd's, for the Lloyd's Policy Signing Office, the International Underwriting Association, for the London Processing Centre and Xchanging, the latter describing itself as a pure-play business process outsourcing company. The immediate goals of Ins-sure extend only to the £20bn ($28bn) of London market transactions but, as a commercial operation, it has ultimate ambitions beyond this.
It was perhaps inevitable that the remaining process bureau, Lloyd's Claims Office (LCO), should also move out and become a third party commercial operation, which it duly did in November. Again Xchanging is the business partner in a deal worth £100m ($140m) over a ten-year period.
The new company, Xchanging Claims Services (XCS), will continue to offer a range of comprehensive claims management services, including all marine, non-marine and aviation claims, on a commercial basis. The stated objective for the new company is to become a world-class provider of a full range of claims services and outsourced claims management to insurance market participants worldwide.
These international ambitions were mirrored during the year by the accreditation of the first non-UK brokers entitled to transact insurance and reinsurance business in the Lloyd's market.
While a seemingly small step for the brokers concerned, the ramifications in technical terms are considerable. As one commentator pointed out, a reliable system of electronically transferring information is an absolute requirement for non-UK-based brokers to fully participate in the London market. The only way to guarantee equality of access for a broker in Los Angeles is through the internet. In that sense ‘globalisation' assumes a very real meaning. Without the technical means available to implement it, building a worldwide brokerage network would be impossible.
The first essential is a set of common standards for everyone involved and 2001 saw the merging of the standards activities of ACORD and WISe into a single body dedicated to achieving just that. At the time of the merger in June, ACORD chairman John Leonard said, “Bringing ACORD and WISe together creates a strong platform to provide standards for insurance business processes, from quotation to settlement – and for various classes of business, including personal lines, commercial lines, surety, life and reinsurance.
“Integrating the standards activities of the two organisations combines our complementary skills and strengths,” Leonard added. “For more than 30 years, ACORD has been providing standard forms and EDI to the insurance companies and their distributors for P&C and, more recently, the life industry. WISe and its predecessor organisations have worked with industry associations to define standards to enable reinsurance and large commercial global e-commerce. Joining forces is a logical step.”
A reinsurance/large commercial lines steering committee within ACORD's established standards program was created to support new participants from the joint venture (JV) community. The JV, established in 1992 and previously managed by WISe, comprises the Reinsurance Association of America (RAA), Brokers and Reinsurance Markets Association (BRMA), IVANS and WISe.
By October, this committee had released a new version of the joint venture XML standards for reinsurance and large commercial insurance. It was based on extensive pilot testing by a number of brokers and reinsurers in the US, UK and continental Europe, of the 1.0 release issued a year earlier.
Also in October, the remaining activities of WISe were transferred to Ins-sure. These include the WISe Trusted Trading secure e-mail service and the WISe Business Centre data translation and exchange facility. WISe had provided e-commerce infrastructure services to facilitate secure trading and data exchange to the majority of the global insurance industry.
Michael Taylor, vice-chairman of Ins-sure, said at the time that he felt Ins-sure was well positioned to combine business process services and advanced technology to provide solutions that would assist the insurance industry in driving forward the adoption of e-business, building on the work completed by WISe. Ins-sure also confirmed that BIS, a provider of technology infrastructure and services to the insurance and shipping communities, would continue to provide the technology supporting the trusted trading service.
Beyond the market-wide initiatives, several other trading platforms acting as exchanges have established themselves. Inreon (Insurance and Reinsurance On- line) has provided one of the forward-looking market initiatives. Munich Re and Swiss Re have created their own risk submission system for quoting using inreon, providing insurance companies with an online trading platform for standardised reinsurance capacities/products. While using the techniques of an exchange (quote requesting and quoting), inreon enables insurance companies (buyers) to distribute a share of the risk to more than one reinsurer. Inreon now has 20 primary buyers and five brokers in Europe and North America trading on the platform.
Short of a guaranteed-secure closed-user group system for global insurance transactions, reliance on any other networks will require adoption and consistent use of public key encryption. After a lot of initial resistance, PKI is now acknowledged by the majority of legislatures worldwide as a necessary requirement for global e-commerce. As Tim Pickard of RSA Security in the UK says, most people now agree that strong encryption and PKI enable e-commerce to take place.
Recognising this, the EU signed into effect a directive in July establishing a common framework for electronic signatures, giving them the same legal status as handwritten ones. At the same time, the US Senate attempted to backtrack on its own legislation but, as Pickard says, the PKI genie is now out of the bottle and no attempts to rewrite laws can force it back in.
At this juncture it is worth taking some stock of what e-commerce is all about. It is the exploitation of the mind-boggling advances made in integrated circuits and memory storage over the last four decades. One of the gurus of the business is Gordon Moore of Intel who formulated the now-famous Moore's law as far back as 1965, at which time 100 devices per integrated circuit were the norm. His formulation, that the number of devices on a chip doubles every year, was subsequently modified to ‘every 18 months' and still holds true after 36 years.
By the time the first Lloyd's and London market e-commerce initiative, Limnet, was agreed on in 1987, the benchmark PC chip was the 286 which was the first to incorporate one million transistors, ran at 10MHz and whose attendant disk drive usually provided 10Mb of storage space.
In a recent statement from Intel it was revealed that: “The (Pentium 4) processor debuted with 42 million transistors and circuit lines of 0.18 microns. Intel's first microprocessor (in 1972), the 4004, ran at 108 kilohertz (108,000 hertz), compared to the Pentium 4 processor's initial speed of 1.5 gigahertz (1.5 billion hertz). If automobile speed had increased similarly over the same period, you could now drive from San Francisco to New York in about 13 seconds.” Not only that, but ten gigabyte memory for each PC is now commonplace.
The progressive availability of more computing power and memory at a constant or declining price has been the key to such successful insurance applications as underwriting systems. Eurobase Systems, for example, was formed in 1988 and its original products designed to run on then available technology. From the start, the programs had built in scalability and have been able to progressively migrate to ever faster and more sophisticated hardware platforms as these have evolved.
This has been a key requirement for their users as economic growth and mergers and acquisitions have spawned ever larger databases to process, and leaner and fitter companies have demanded ever better, real-time management information to keep ahead of their competitors. Increased computer power has also enabled lateral extensions of functionality, simplifying tasks or de-skilling them completely. One of Eurobase's recent innovations, for example, is a sub-routine that enables a user to click on a policy or claim number whether submitted in a scanned letter, e-mail or other communication and go straight to the system's relevant data file without having to exit one application and open another.
The events of September 11 also highlighted the need for speed and accuracy in calculating exposure. The information required by insurers to determine premiums and conditions may have to be pulled from tens of sources and put through thousands of calculations. Reporting cycles may take weeks to complete.
One of the main issues is the number of different data sources; one division may input data via an Excel spreadsheet while another uses a standard database, and yet another uses a customised database. The answer, so-called analytics solutions, enables disparate data sources to be fed to and organised within a single data repository.
Analytics solutions such as ROOM Analytics use OLAP (Online Analytical Process) to deal with the huge volumes of data required for complex calculations. Enterprise-wide data can then be viewed according to trends and patterns.
Fast and accurate assessment of risk across many disparate sectors is essential for global underwriting, claims and reinsurance programme management. Risk aggregation products also speed up and simplify assessment of impact and exposure to events. Formerly such products were the province of the pure-play catastrophe modelers and risk assessors such as RMS, but they are now becoming components of other insurance analysis products such as underwriting systems.
Solutions such as EXACT from ROOM Solutions accommodate recording and storage of policy terms relevant to risk aggregation, offering global aggregation and reporting facilities for all classes of business. If, for instance, a windstorm is tracked across the Gulf of Mexico, EXACT will assess risk in a marine environment, plus landfall impact, with exposure broken down by policy and coverage.
Looking ahead, 1 January 2002 will be a testing time for the IT directors of many organisations. The official introduction of the Euro will coincide with the renewal season. The conversion work needed to adjust accounting and finance computer systems to use the new currency and to calculate foreign exchange should also be in operation at this time. Although the UK is outside the Eurozone, many organisations will be dealing with buyers and sellers using the Euro.
Small-to-medium size enterprises (SMEs) may be hardest hit due to their tendency to concentrate operations in domestic markets, but will still have to bear the cost of adapting to the Euro. A report by the European Commission found that less than 10% of European SMEs classify themselves as truly ready for the Euro. A generic solution to the cost issue for SMEs is outsourcing.
The internet allows organisations to take advantage of the most advanced products to improve their business process and competitiveness, whilst paying a fraction of what it would cost to buy and maintain a system in-house.
ASPs (Application Software Providers) such as eNterprise are well placed to provide browser-based development for SMEs. Users can leverage new opportunities without waiting for the IT department to build or change systems to meet that requirement which increases transaction speed, reduces administration time, increases flexibility and improves broker and client access to products.
Events of recent months have concentrated insurers' and reinsurers' minds on the basics of their business. The cycle has turned, a hard market is back and everyone needs to get down to the fundamentals of underwriting, no more so than in the reinsurance sector. As the SilverStream survey – quoted at the start of this article – reveals, it seems doubtful that we will shortly be buying and selling reinsurance programmes over the net like car cover. But certainly, with the initiatives under way to reduce frictional transaction costs and the mind-boggling computing power now sitting on our desks, we should be able to squeeze a few more points of profit from the coming hard market than we used to.