The re/insurance industry, unique in not having simplified standards for describing risks and transactions, is gradually catching up with its financial services contemporaries in its take-up of technology. As it limbers up, ready to address the matter head on, Global Reinsurance asks industry experts why the industry has taken so long to embrace technology and what it can look forward to as a result of its implementation?
The participants were:
Q: Why has the re/insurance industry fallen behind the other financial services sectors in using technology to aid the provision of data - speeding up business processes and streamlining operations? What has stopped insurers moving towards technology to date? How has the collapse of dot.coms impacted on the re/insurance markets take-up of technology?
Rowan Douglas: In a word, standardisation - or the lack of it. Re/insurance markets are unique in not having simplified standards for describing risks and transactions. Differences are endemic within companies, as well as between them. Without an accepted language there is no medium for technology to express its benefits.
Rowan Douglas: Probably the perception that risks are very different and cannot be standardised, but the main reason is the interdependent nature of our market. It is very difficult for individual companies or local markets to act independently and gain real external benefits because it relies on many other firms acting in harmony.
Kathrine Huelster: The traditional argument has always been that re/insurance is too much of a `people business' to properly embrace technology, but I don't think anyone still seriously believes that. What does it mean anyway? Simply that it is people who conduct the business; surely that applies to other sectors too.
David White: It is interesting to see how the insurance industry as a whole lags behind other industries when it comes to making use of advanced technology. Most manufacturers demanded very high performance systems, operating on a 24/7 basis, ten years ago.
Denton Wilde Sapte: The incentive to speed up and streamline business operations seems to have had greater impact within the broker/agent/adviser interface rather than the re/insurers themselves. The increasing trend for insurers to deal directly with customers is, of course, a driver for change in the future. It is also fair to say the huge market consolidation among insurers has meant that the industry has focused on making legacy systems work together in newly merged businesses rather than taking up new technology. It is also fair to say technology has played a smaller role in the re/insurance markets. Increasing globalisation, however, is likely to change this.
Igor Best-Devereux: An important consideration is that there are many different types of data involved in an insurance or reinsurance transaction. For re/insurance you may be dealing with a premium amount and an engineering report on a manufacturing process - some of this data lends itself to being structured, but some doesn't. Insurers and reinsurers have been using technology for years - the question is more one of moving with the pace of change in technology. Re/insurance companies don't seem to have been seduced by wild promises of efficiency or market transparency.
Mark Brockmeier: What incentive exists for the downstream players to bear the cost of data transform? If I send a risk to company A and they don't want to take it in that format, I'll just go to company B or C which will happily take my business on magnetic tape if they are hungry enough for the business. So the problem becomes one for the upstream party because competition is so fierce.
Q: The internet is said to have limited suitability for corporate insurance because big commercial risks need a heightened level of advisory input. Where are those limits? If they are technical can they be overcome? Where is the dividing line between business that can be reasonably conducted using technology and business that cannot?
Rowan Douglas: People become too focussed on automatic transactions; this misses the point entirely. The key is using the internet to help the right deal get done by the right people at the right price. There is no area in which improved communications cannot assist the business of reinsurance - and the internet is integral to that.
Igor Best-Devereux: The internet is a standardised communication network - it doesn't replace underwriting experience and judgment or analysis. It is one component of systems that can allow online collaboration between interested parties. The greatest value is in those areas where information is traditionally lacking and where this lack of information constrains effective decision-making.
Kathrine Huelster: There is no doubt that some reinsurance requirements will always necessitate individual, tailor-made solutions. But there are many products, which can and should be standardised. Exactly where the dividing line falls will only be decided on a case-by-case basis. The extent to which risk transfer via the internet is possible may however be greater than many people think.
Richard Hall: We will see increased potential for online tools in sophisticated re/insurance brokerage: portals which remember the client preferences, simulation systems that allow a range of risk transfer products to be explored and decision support tools that assist the broker in finding optimum coverage. But so far these tools have always been used internally or with broker supervision, but if you externalise and automate them, the broker will be able to demonstrate the best price.
Denton Wilde Sapte: Of course, certain insurance, for example corporate and long-term business, will continue to require a high level of advisory input. However, even where this advisory input is required, we can expect providers to use web-enabled applications to deliver products on e-procurement platforms. The web, as a delivery channel, is likely to remain very important.
Q: On the technical side, what can industry, IT companies and software developers do to overcome the problem of multiple field creation for more complex lines?
Swiss Re: Business and not technology should drive the process. Tools and approaches should be avoided in favour of ensuring that internationally agreed standards are used, where available.
Kathrine Huelster: The key to solving this problem is to critically ask, "What needs to be standardised and what should remain in free form?" For more complex risks a compromise of the two approaches is probably best with a standardised part supporting the basic fundamental elements of the risk and a free form part coping with the more individual specifications.
Igor Best-Devereux: I think the best we can do is to be flexible and recognise that for complex lines different underwriters require different amounts and types of information. The industry move to XML (eXtensible Markup Language) represents a great opportunity for flexibility. Tools that allow generalised reporting/analysis for XML are not as available or as developed as those in use for databases - but this will change as software vendors find additional ways to leverage XML technology.
Richard Hall: Adopting flexible data representation formats such as XML allows additional information to supplement a mandatory agreed standard, and permit easy parsing of expected fields and manual exception handling of non-standard information.
Q: Tracking documents in the industry has always been hazardous, often exaggerating claims settlement delays. Will the industry have to look to a unique referencing system to gain real benefits from new technologies?
Rowan Douglas: The short answer is yes, but this is unlikely in the foreseeable future. I am going to revisit a recurrent theme and suggest the major firms will have to develop unique referencing systems for their own business before they can embark on a broader market-wide approach.
Richard Hall: But it would be extremely difficult to come up with a single, unique system, not because of technical barriers but because different bureaux, carriers, markets and regulators will almost certainly insist on maintaining their own reference systems.
David White: One of the new features that will be brought about by the adoption of LMP is the new risk registration system - the contract management register (CMR). This ensures a unique number for all London risks.
Swiss Re: For the reinsurance industry, for example, the London market has a unique reference system - CLASS - in place. However, the question is about whether implementing a unique referencing system really solves the problem of tracking, or even whether tracking is the real problem in the first place. Surely the issue at stake relates more to the approaches involved in assessing a claim, sharing information about the claim, and providing clear and concise terms and conditions which would help to more easily assess a claim.
Igor Best-Devereux: Tracking documents is difficult when they are stored in boxes in a warehouse alongside a railway siding! In today's world documents should be in a digital format and stored in a database or data warehouse. When this transition has occurred there are plenty of ways of searching for appropriate records, with or without unique referencing systems.
Q: Some of the technologies used to date to computerise back-office systems are not incompatible with front office tools. How can industry prevent this from happening again?
Swiss Re: The problems here do not stem from using different technologies, but a lack of harmony in the use of data fields such as line of business, type of risk, entry amounts. There is also the issue that information sources used by front office systems that deal with free-text documents, hard-copy paper or e-mail attachments are not available in a suitably structured format, and need to be integrated with the back office. The upcoming XML developments are a step in the right direction in the sense that they will facilitate the interfacing of different systems. The real challenge is to find the right language from a content point of view.
Katherine Huelster: There has been a good deal of progress in establishing industry standards for the back office part of reinsurance business, but there is still work to be done in the placement area. It is partly due to the lack of standards at the front-end that interfaces to the back office are often individual to today's applications.
Rowan Douglas: My own view is that the trick is to start with the front office and work backwards. You can work on both simultaneously, but to work on back office functions without due regard to front office reform is probably an error.
Mark Brockmeier: Back office systems are mission-critical engines, which ultimately run the business. The shelf life is measured in decades, not years. Front office tools need to be more dynamic and change with the market. So there is no `compatibility' problem per se - it's a question of how great the system integration effort will be in connecting the changing front office to the stable back-office.
Q: Why are companies that try to map software to their traditional operating practices making a grave error?
Igor Best-Devereux: I'm not sure this can be generalised. Companies should keep an open mind about the relative cost/benefit of a change of process versus a change of systems. In many cases the optimal solution is going to be a combination of both changing workflow and introducing technology. It is rare that a company has a business/technical visionary that can see where development will ultimately take them and jump to that place without going through the replication process first.
Katherine Huelster: Evolution can be more effective than revolution. Having said that, if traditional operating practices themselves are inherently inefficient then IT can at best only marginally improve the situation.
Rowan Douglas: We are burdened with history and it is difficult to innovate within this cycle. Often they simply reinvent old inefficiencies with new technologies. But, without new work processes in the marketplace, there is a need to retain old processes.
Mark Brockmeier: Companies make decisions to buy software and new business tools for a reason, to leverage competitive advantages. So they buy the software based on that new vision and then immediately start mapping it with their current practices, effectively ignoring the `vision' they just purchased. One of the critical components of software integration is the business process work that occurs with the `super-user', a person who plays a critical liaison role. Companies that do not dedicate this resource, struggle both during and after the installation, and often end up trying to use their old practices. It simply doesn't work.
Denton Wilde Sapte: Any attempt to map software to traditional operating practices is likely to fail to take advantage of the time and efficiency savings that new software products can provide. In addition, the more time that is spent trying to `tweak' software products to suit particular business practices, the more implementation is likely to cost. This may also increase support and maintenance costs going forward.
Q: Why has the integration of legacy systems discouraged re/insurers from using more advanced technology?
Swiss Re: Technology is not the real issue. Instead, it is the underlying business processes and the approach taken by the people using the systems. Technology presents an opportunity to overcome this problem, which is why companies are exploring how to maximise the benefits offered by new software and systems.
Denton Wilde Sapte: In a sense, the integration of legacy systems has put enough on the re/insurers' plates for the time being. The need to ensure that legacy systems operate together, often following mergers and industry consolidation, has, in practice, discouraged re/insurers from adopting more advanced technology such as web-enabled applications.
Katherine Huelster: Legacy integration is often a daunting task. Many companies have different structures and integrating them with front-end applications can endanger the delivery of the system as a whole. Sometimes trying to integrate technology that is 20 years old with a modern advanced system can prove prohibitively expensive, more expensive than simply replacing the whole structure.
Igor Best-Devereux: It's not as simple as introducing two systems and suddenly they're married! You have to deal with the format of data, message standards, the means of packaging and transporting the message, security and encryption, unpacking the message, checking data validity and response requirements. This is compounded by the fact that technology is moving rapidly; no particular technology has pushed the others aside. It sometimes appears easier to wait for technology to stabilise before committing human and financial resources to re-training, re-tooling and re-engineering.
Richard Hall: Essentially, most legacy systems were built to support a fixed set of processes, and provide overnight batch data transfer to other parts of the business such as accounting. This is the antithesis of online platforms.
Q: Why is it so important for the industry to understand that addressing the legacy system issue is fundamental to extracting value from e-business?
Rowan Douglas: Unless legacy systems are addressed, a firm will be literally locked into its past. I return to an earlier point; it is probably best to begin with front-end process reform and use this as the rubric for developing appropriate back-office solutions, or do them both in tandem.
Swiss Re: In most cases, the issue is about an evolution of current business processes. The only exception is where the new concept is so revolutionary and compelling - for financial or other reasons - that all the participants in the market are willing to embrace change at once.
David White: If e-business is to bring maximum benefits to re/insurers, it is vital that it is able to integrate fully with the organisations internal processes. Disparate systems that only support traditional ways of doing business are unlikely to permit opportunities to be maximised.
Igor Best-Devereux: Value comes from some key areas including information accuracy, information management and process management. These objectives are compromised if you can't use the information in one system to feed another without the delay and quality compromise involved with repeated manual input.
Q: Standardisation may come, but at what cost, both in terms of spending and time?
Katherine Huelster: There is of course a development cost to standardisation, but the benefits generated will far outweigh any initial expense. Not only will standardised products make the transaction of simpler reinsurance contracts more efficient, it will also free expertise to focus on more complex cases and better deliver more highly customised solutions where necessary. Standardisation will not be a goal in itself, but a process through which transparency is improved and administration costs are reduced.
David White: To adopt newer standards, many organisations will need significant investment in their existing systems. As the standards arrive, they must truly be designed to allow us to build an industry we can all be proud of for the future. We must not allow the lowest common denominator approach to standards, as our investment will be massive without delivery of the major benefits that we require for our customers and ourselves.
Rowan Douglas: For firms developing new front-end systems, standardisation can come relatively quickly and cheaply. This should realise its own benefits and provide the model for back office reform. The key difficulty is the intellectual challenge in developing these standards and the discipline required to actually apply them across a company and, ultimately the markets, in the face of existing practice.
Mark Brockmeier: It is politically impossible for a company to say they will refuse to participate in a standards group, since that company will be seen as holding up progress for the industry or somehow advocating being renegade in taking advantage of synergies of data exchange, which are universally good for the industry.
Q: What does the future hold for brokers? Are they at risk of extinction if the passage of data from buyer to seller is made easier? How would internet-based trading platforms impact on their role?
Rowan Douglas: A bright one. Enhanced communication within and between firms will assist brokers in their primary roles. I think the major brokers will have an important role as de facto trading platforms, but they will provide the advanced support services that the market requires and have the skills, networks and relationships needed to apply these tools appropriately. The more complicated our markets become, the greater role brokers have.
Denton Wilde Sapte: When the e-business `revolution' first arrived, there was a theory that brokers would be disintermediated. In practice, however, many brokers have a strong relationship with their customers and, indeed, the exclusive rights to use the customer data. In any event, the need for advice and assistance in the purchase of financial services products continues. E-business provides brokers and other advisers with the opportunity to become `infomediaries' providing information on a range of financial products and services to their customers.
So much of the legwork of a broker going from company to company is eliminated, and the focus can remain on true advisory service, and less inventory checking on market availability.
Swiss Re: As for all other market participants, the same rule applies for the broker. If they have a sound value proposition, they will be accepted by the clients.
Igor Best-Devereux: Where brokers bring value in finding solutions for their clients, they will always have a role. We have seen a move towards a more consultative role for brokers over the past 20 years - I think this will continue and that brokers will use technology to redistribute their efforts from the mundane paper chase, to providing greater advisory value to their clients. This will be to the benefit of all parties - buyer, seller and broker.
Richard Hall: Where brokers add value they will stay.
Q: What are the legal ramifications of conducting business electronically, both in terms of business sales and electronic trading platforms? Will the websites, data exchanges and platforms be subject to the laws of the country where the buyer accesses the site, or where the vendor has established the site?
Maxine Cupitt: Most of the legal ramifications will not, in themselves, be new but will assume greater importance because of the medium in which the business is being conducted.
While it would appear sensible for the same principles to apply to e-business as to communications by telex, the determining factor is likely to be when the offeree is entitled to believe that his response has been reliably dispatched. The law in this area is, however, uncertain and the offering party would be wise to take steps to agree in advance what constitutes an acceptable method of communication for acceptance of an offer to enter into a contract.
Igor Best-Devereux: An important issue will be `when is a deal completed?' That is, when did each party `sign' the agreement, and can the signature be repudiated. Equally important if a contract is maintained in an electronic format is to determine how documents will be signed to ensure that changes do not occur after the agreement is completed. If the platform is actually a means of offering re/insurance capacity, there will be other jurisdictional and regulatory implications.
Maxine Cupitt: With a few exceptions, such as contracts under the Marine Insurance Act, there is no legal requirement for re/insurance contracts to be signed, or even written. The importance of signatures is, however, that they provide evidence that the contract was entered into, and authenticate the identity of the contracting party.
Katherine Huelster: The legal ramifications are actually far less extensive than many people might think. True, legal systems are still lagging some way behind the reality of electronic business - most countries do not even have B2B e-laws yet.
Ross McKean: The law in many countries now recognises the validity of electronic contracts although businesses will still need to obtain advice on local law as the specific rules governing contract formation vary considerably. A business must ensure that the terms and conditions of contract are incorporated into the electronic contract, which in most countries means that the purchaser must be given reasonable notice of the terms and conditions. In the insurance and reinsurance context, it is particularly important to clarify when the contract is formed and when the underwriter goes on-risk. The safest approach for a business to adopt would be to ensure that its website complied with the laws of all jurisdictions in which it is accessible. Obviously this is not practical if a website is accessible from anywhere in the world. As a minimum, however, businesses should assume that it would need to ensure compliance with the laws and regulations of those countries to which it directs its goods and services.
Q: How will this affect a multi-jurisdictional industry such as re/insurance?
Maxine Cupitt: The issue of jurisdiction and applicable laws, always prominent in the supply of insurance and reinsurance services other than domestically, is thrown into sharper focus in the context of supply of insurance services over the internet, where the relevant website may be open to internet users worldwide. Jurisdiction and applicable law in insurance and reinsurance contracts are governed by a detailed patchwork of legislation having different application depending upon whether the contracting parties are domiciled in the EU, in states participating in the European Free Trades Association (EFTA) or beyond. The provisions, as to jurisdiction, are in broad terms designed to protect the party considered to be in a weaker position by giving that party the choice of forum.
The practical effect of these provisions is that the re/insurer selling insurance products on the internet to jurisdictions other than that in which it is domiciled, is exposed to the possibility of being sued in another state. The costs and difficulties this may entail are clearly a disincentive.
Katherine Huelster: Of course there are a number of multi-jurisdictional issues within the re/insurance industry that need to be solved in order to make life a lot simpler for everyone. But these are not peculiar to e-commerce. If a contract has been agreed between two parties, is it really irrelevant whether data has been communicated via the internet, fax, post or even carrier pigeon?
Ross McKean: The activities of the business may be subject to an array of different laws and regulations. Businesses will need to obtain legal advice as to the potential laws and regulations applicable to their online activities and take steps to minimise the legal risks. There have been a number of regional initiatives to harmonise laws and regulations applicable to insurance and reinsurance providers. There are also specific regional rules governing the choice of law applicable to an insurance policy and the courts that can hear disputes arising under a policy. Since there are significant differences between the domestic insurance contract laws of different EU member states, it is of critical importance to the insurer and insured to know which set of rules will be used by the courts in interpreting a relevant policy.
Q: How advanced is the legal framework protecting the privacy of consumers, unlawful activities and trade practices for online business?
Maxine Cupitt: The sheer rate of growth of the internet and e-commerce has confounded expectations. As a result, the law, while now seeking to address e-commerce issues specifically, is necessarily playing catch-up and a mixture of general and e-commerce specific legislation applies to online business. Because the law governing e-commerce is currently both fast developing and piecemeal there is a significant danger that those conducting business on the internet may be subject to legislation of which they are entirely unaware.
Mark Brockmeier: Like anything else that is a new and changing technology, the laws will lag the actual use of the technology. We saw the same thing with document imaging, which took years to progress to a sufficient level. It will be the same with the internet . . . how do you regulate transactions in several countries that take place in the blink of an eye, in the case of electronic marketplaces?
Ross McKean: Five years ago, the internet was still being talked about as a `wild west' - devoid of laws and regulation. As an international medium, the internet poses new problems, particularly in terms of enforcing laws and regulations. As national courts become more familiar with new technology, they are increasingly willing to take jurisdiction over e-commerce disputes, even where the provider of the service is located in another country. For example, in November 2000 a French court ruled that US-based internet service provider Yahoo! must block French internet users from accessing Nazi auction sites hosted on its US-hosted sites, even though those sites were not directed at French users. In November 2001, Yahoo! obtained a declaratory judgment from a US District Court in California declaring that the French judgment was not enforceable under US law.
The international community recognises the internet as a new means for commission of crimes and in response the Council of Europe's Convention of Cybercrime was adopted in December 2001 by 30 countries including the US, UK and Japan. The convention aims to approximate laws on crimes such as online piracy and fraud.
Q: What can the industry look forward to in the future as a result of embracing technology?
Rowan Douglas: Self respect. I think there is a communal embarrassment about the state of our markets vis-à-vis our peers. Back office reform will improve costs management, but the symbolic revolution will come in the front office as we begin to provide the tools to trade in faster and standardised ways.
Maxine Cupitt: E-commerce offers re/insurers low cost and far-reaching access to a global market for the sale of their products and services, as well as opportunities for the swift and low-cost processing of claims. For the re/insurance industry e-commerce is, however, not just an option, it is a challenge to which the industry must rise.
Mark Brockmeier: The promise of technology is to make business more efficient. Let me be clear that technology has to be applied to be effective. The best systems in the world do not, in and of themselves, avail competitive advantage without human intervention. It requires a professional - an underwriter, accountant, claims person, actuary, manager, whomever - to do something with that data for competitive advantage.
I have met many executives of re/insurers who say that technology is the absolute number one priority for their company. Yet, in the same breath, they assert that as important as technology is, there are other competitive pressures, which prevent technology investment this year and that perhaps next year is the year to upgrade, or address a critical business need with a technology solution.
Richard Hall: Outsourcing and auctioning are apparent future trends. More than ever, re/insurers will have to be very streamlined when going online as any inefficiencies are exposed for all to see, which can rapidly result in the loss of client business to other more competent online operators.
Denton Wilde Sapte: New technology enables customers to deal with their suppliers more quickly and effectively. The re/insurance industry can look forward to stronger customer relationships and significant cost savings across an enhanced number of delivery channels. Greater targeting of products may increase profits for the industry as a whole.
Compiled by Clare Bates
Clare Bates compiled this roundtable. She is deputy editor of Global Reinsurance.