The insurance industry is in the midst of unprecedented change.Repeal of the Glass Steagal Act in 1999 has allowed new competitorsto enter the marketplace; the Internet has created a powerful newdistribution tool; and the financial effects of a prolonged softmarket have caused industry-wide combined ratios to climb tounacceptable levels. Carriers and brokers are looking foropportunities to become more efficient and relevant to theirclients.

Figures through year-end 2000 from ratings and data providerA.M. Best show an average industry-wide loss ratio of 117 percentwith expenses accounting for 36 percent of the total. For insuranceproviders to compete in this new era, they must get costs out ofthe supply chain, become more efficient, and focus more on thecustomer. They also need to take a new approach to usingtechnology. By integrating Web-based technology into their businessstrategies, they can reduce costs, increase efficiencies, drive topline growth through existing and new distribution channels, andimprove system and data capture capabilities.

Overcoming the Legacy

Technology has always been a major expense and initiative forthe insurance industry. Sadly, though, most of the expenditureshave gone to support outdated systems. The technology companiesthat develop legacy and commercial insurance systems (CIS) forcarriers bring a technology perspective, not an insurance industrypoint of view. As a result, the systems are not user friendly,creating a data rich yet information poor environment.

The carriers' IT employees have a vested interest in keeping oldsystems alive for job security among other reasons. And to makematters more complicated, generally speaking, CEOs do notunderstand technology and often believe that it costs too much andtakes too long to implement once a strategic decision has beenmade.

How many carriers can you think of with:
- Several legacy systems;
- Inadequate links between systems;
- 10 percent or more of the entire staff allocated to the ITdepartment;
- 50 to 60 percent of the IT department staff focused onmaintenance of the legacy systems, and;
- Managers and executives still complaining about lack of usefuldata/information on which to base decisions?

Add to these the difficulty (or flat out inability) of makingthese systems Web-enabled, and you have a huge technologychallenge.

With such significant challenges, you need to focus on amulti-year, phased approach. In the short term, however, you canmaximize the value of the data you're capturing to make decisions.The best place to start is with a strong, flexible front-end systemthat interfaces with other partners in the insurance distributionprocess, as well as the customer.

Leaving the Box

Advances in Web-based insurance technology offer creativesolutions to old challenges. They provide new opportunities toremove redundant practices and costs while allowing the strongperformers to continue generating revenue and serving clients.Following are some of the applications for Web-basedtechnology.

Don't simply transmit data via the Internet. It may be astarting point, but that sort of thinking leaves you with the samefunctions and the same people in the supply chain-but with a bettersubmission process. Costs don't decrease.

For example, let the agents rate the product over the Internet.Many small commercial product-rating tools can be placed online.Afraid you'll lose control of the rating? Think again: You createthe “black box.” If anything, it will be harder for agents to getexceptions from friendly underwriters. In exchange for fairpricing, your distribution plant gets the ability to quickly rate,quote, bind, and issue from their offices. Data streams provideinformation back to the issuing carriers' systems so they canperform the statutory reporting, accounting and otheradministrative functions, and link to claims and risk managementsystems. Furthermore, rating criteria and underwriting guidelinescan be changed in real time across the entire distributionchain.

Allow affinity and program business to be handledelectronically. A large, homogeneous group with a single entrypoint is a perfect candidate for Web-based automation. Typically inthis market segment, commissions average 17.5 percent to 22.5percent or more. By automating the workflow process, you enableyour distribution plant to do what it does best: generate newbusiness, serve clients and-in the case of MGAs-manage otherproducers.

Maximize the Internet as a distribution channel. The winnersover the next three to five years will be the carriers that canmaximize all the distribution channel options available to them.This includes the more traditional agents and brokers as well asdirect channels. But it also will require the understanding andmastery of some not-so-obvious channels-selling through banks,forming alliances with competitors, and seeking new outlets forproducts and services.

Provide clients with access to Internet tools. Imagine allowingclients to come to your agent's or sub-producer's Web site-a sitethat is powered by your back-end technology. The client hasimmediate access to her information, can handle service needs, viewclaims data, get a quote, and bind and download the policy orbinder on the spot. All parties involved in the transaction,including the carrier, agents, and sub-producers, get copies of theinquiry and transaction.

Ask an agency principal what that's worth to him in terms ofcost reduction and improved customer service. He never losescontrol of the client, and you, the carrier, provide a price hefeels is fair that can't be altered without underwritingintervention. Look at your own operation. How much redundancythroughout the supply chain can be eliminated? What do double-entryprocesses and fixing mistakes cost you each year in dollars orpublic perception? What would your distribution partners' marginslook like with fewer points of commission, but a lot less work? Howmuch could be passed on to your policyholders as a result of theirwillingness to get involved in their own account? What's it worthto them to be able to have access to their data, online, in realtime?

Web-based technology is a powerful tool to address and answereach of these questions, and many more.

Create cross-selling opportunities and increase your share ofthe customer's wallet. The Internet creates a single point of entryfor the customer, or customer's agent, to you, the carrier. Byunderstanding the demographics of the customers and other productsthey purchase, Web-based technology can identify and presentcomplementary products that also meet the carrier's underwritingguidelines.

Managing the Money

Everyone in our industry is complaining about the costs ofservicing small accounts. By offering a Web-based solution to yourtrading partners, you can lower commissions to the agent and lowerexpenses on the carrier side while improving both partners' overallmargins. The quality of data you'll be able to obtain will allowyou to make better decisions faster, and create a competitiveadvantage.

If you examine a carrier's cost structure for small commercialand professional liability lines of business, there are severalmain components excluding loss costs: taxes, overhead, and fees;underwriting and processing expenses; and commissions. These cantotal up to 38 percent of premium. Carriers have to pay taxes, somenon-underwriting overhead and fees. This typically accounts forabout six percent of premium. The second component, underwritingand processing, accounts for roughly 16 percent of the expenseratio, which leaves 16 percent for the third component,commissions.

Because taxes, fees, and overhead have to be paid, let's focuson the other 32 percent. Within these functions, there are ampleopportunities to reduce costs and improve efficiencies utilizingWeb-based technology. Many functions currently being performed byunderwriters and brokers could be reduced or eliminated altogetherthrough technology applications.

The online sales process that typically takes 30 to 60 days canbe significantly reduced, operating expenses can be dramaticallydecreased, and carriers can increase their revenueopportunities.

Thinking Ahead

Change means opportunity-at least for those who can harnessresources and execute. Agents and carriers will need to be honestwith each other. Less paperwork and a more efficient processtranslate into less commission but potentially higher margins.

Web-based technology can help you to navigate these changingtimes. You can't expect your distribution partners to shoulder adisproportionate share of the burden. Bold thinking is needed-thewinners will find a way to compete through more useful technology,efficiencies of the Web, and knowing the customer better.

Rick Ulmer is senior vice president of Insurance TechnologySolutions (www.insurancetechnologysolutions.com).