The insurance industry is in the midst of unprecedented change. Repeal of the Glass Steagal Act in 1999 has allowed new competitors to enter the marketplace; the Internet has created a powerful new distribution tool; and the financial effects of a prolonged soft market have caused industry-wide combined ratios to climb to unacceptable levels. Carriers and brokers are looking for opportunities to become more efficient and relevant to their clients.

Figures through year-end 2000 from ratings and data provider A.M. Best show an average industry-wide loss ratio of 117 percent with expenses accounting for 36 percent of the total. For insurance providers to compete in this new era, they must get costs out of the supply chain, become more efficient, and focus more on the customer. They also need to take a new approach to using technology. By integrating Web-based technology into their business strategies, they can reduce costs, increase efficiencies, drive top line growth through existing and new distribution channels, and improve system and data capture capabilities.

Overcoming the Legacy

Technology has always been a major expense and initiative for the insurance industry. Sadly, though, most of the expenditures have gone to support outdated systems. The technology companies that develop legacy and commercial insurance systems (CIS) for carriers bring a technology perspective, not an insurance industry point 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 old systems alive for job security among other reasons. And to make matters more complicated, generally speaking, CEOs do not understand technology and often believe that it costs too much and takes too long to implement once a strategic decision has been made.

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 IT department;
- 50 to 60 percent of the IT department staff focused on maintenance of the legacy systems, and;
- Managers and executives still complaining about lack of useful data/information on which to base decisions?

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

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

Leaving the Box

Advances in Web-based insurance technology offer creative solutions to old challenges. They provide new opportunities to remove redundant practices and costs while allowing the strong performers to continue generating revenue and serving clients. Following are some of the applications for Web-based technology.

Don't simply transmit data via the Internet. It may be a starting point, but that sort of thinking leaves you with the same functions and the same people in the supply chain-but with a better submission 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 create the “black box.” If anything, it will be harder for agents to get exceptions from friendly underwriters. In exchange for fair pricing, your distribution plant gets the ability to quickly rate, quote, bind, and issue from their offices. Data streams provide information back to the issuing carriers' systems so they can perform the statutory reporting, accounting and other administrative functions, and link to claims and risk management systems. Furthermore, rating criteria and underwriting guidelines can be changed in real time across the entire distribution chain.

Allow affinity and program business to be handled electronically. A large, homogeneous group with a single entry point is a perfect candidate for Web-based automation. Typically in this market segment, commissions average 17.5 percent to 22.5 percent or more. By automating the workflow process, you enable your distribution plant to do what it does best: generate new business, serve clients and-in the case of MGAs-manage other producers.

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

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

Ask an agency principal what that's worth to him in terms of cost reduction and improved customer service. He never loses control of the client, and you, the carrier, provide a price he feels is fair that can't be altered without underwriting intervention. Look at your own operation. How much redundancy throughout the supply chain can be eliminated? What do double-entry processes and fixing mistakes cost you each year in dollars or public perception? What would your distribution partners' margins look like with fewer points of commission, but a lot less work? How much could be passed on to your policyholders as a result of their willingness to get involved in their own account? What's it worth to them to be able to have access to their data, online, in real time?

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

Create cross-selling opportunities and increase your share of the customer's wallet. The Internet creates a single point of entry for the customer, or customer's agent, to you, the carrier. By understanding the demographics of the customers and other products they purchase, Web-based technology can identify and present complementary products that also meet the carrier's underwriting guidelines.

Managing the Money

Everyone in our industry is complaining about the costs of servicing small accounts. By offering a Web-based solution to your trading partners, you can lower commissions to the agent and lower expenses on the carrier side while improving both partners' overall margins. The quality of data you'll be able to obtain will allow you to make better decisions faster, and create a competitive advantage.

If you examine a carrier's cost structure for small commercial and professional liability lines of business, there are several main components excluding loss costs: taxes, overhead, and fees; underwriting and processing expenses; and commissions. These can total up to 38 percent of premium. Carriers have to pay taxes, some non-underwriting overhead and fees. This typically accounts for about six percent of premium. The second component, underwriting and processing, accounts for roughly 16 percent of the expense ratio, which leaves 16 percent for the third component, commissions.

Because taxes, fees, and overhead have to be paid, let's focus on the other 32 percent. Within these functions, there are ample opportunities to reduce costs and improve efficiencies utilizing Web-based technology. Many functions currently being performed by underwriters and brokers could be reduced or eliminated altogether through technology applications.

The online sales process that typically takes 30 to 60 days can be significantly reduced, operating expenses can be dramatically decreased, and carriers can increase their revenue opportunities.

Thinking Ahead

Change means opportunity-at least for those who can harness resources and execute. Agents and carriers will need to be honest with each other. Less paperwork and a more efficient process translate into less commission but potentially higher margins.

Web-based technology can help you to navigate these changing times. You can't expect your distribution partners to shoulder a disproportionate share of the burden. Bold thinking is needed-the winners 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 Technology Solutions (www.insurancetechnologysolutions.com).

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The Case for a Web-Based Solution

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