Theres no doubt that the Internet is a wonderful technology. Over the last five years or so weve heard about the ways it will impact the insurance industry. At first, the Internet was expected to overturn existing distribution arrangements, whether through dot-coms or incumbent carriers.

More recently, its thought the Internet may best be put to work helping carriers serve their agents and agents their customers. Commonly recognized Internet issues include proprietary carrier Web sites versus multi-carrier arrangements, single-solution XML versus standard ACORD XML, straight-through versus single-step processing, and so on. There are other issues as well. Youre probably familiar with them all and have an informed opinion about whats right for your company.

But there are other, perhaps more important issues relating to the Internet that are being ignoredeither because theyre invisible or because we havent appreciated their potential impact. Ill touch on three: the certain failure of the Internet, the misuse of capital, and the overselling of remote Web services. All three could prove disastrous to the insurance industry.

The Certain Failure
of the Internet
Let me be clear that I dont think the Internet will fail for most casual and consumer purposes. But ultimately it will not work for what are usually described as business-to-business applications (e.g., carrier to agent). It is inherently too fragile.

The Internet was developed to have a high level of physical resiliency. For the most part, transmissions dont depend on any specific physical routing. If a part of the network goes down, traffic is automatically rerouted. Its a clever arrangement.

But physical resiliency isnt enough. As weve seen over the last few years, denial of service attacks, worms, viruses, and other forms of interference and destruction have become more serious, far-reaching, and persistent. Even with advanced warnings, anti-virus software, and readily available software patches, whole companies have been taken off line for hours or even days to clean up the mess.

Its not going to get better. And the serious problems havent even shown up yet. What would happen if a small group of modestly sophisticated technical people decided to make the Internet unusable through a massive proliferation of denial of service attacksnot just for a day but over weeks or months? Is it technically possible? From what I understand, yes. Would anyone have the desire to make a concerted attack on the Internet itself? Given the events of the last few months and the unfathomable motivation behind them, it would be rational to assume the Internet will come under furious and frequent attack.

The industry becomes more dependent on the Internet dailyyet the Internet is likely to fail in ways we cant yet imagine. As a prudent and risk-averse industry, we should anticipate this eventuality and arrange matters to minimize its impact. One solution might lie in moving industry B2B traffic from the public Internet to a shared and carefully managed private IP network.

The Misuse of Capital
The inevitable bursting of the dot-com bubble may have been satisfying to the extent that business reality finally overtook fantasy. To a large extent, the ridiculous business-to-consumer insurance services have disappeared or are limping along living on the remains of their capital. The roar became a whimper and finally a sigh.

Angels, venture capitalists, insurance carriers, and other risk takers who expected hundred-to-one returns lost millionseven if they havent acknowledged it yet. Write-offs, work-outs, bankruptcies, mergers, and other financial adjustments are underway. In most cases, the investors will live through the debacle. We neednt worry about them.

But the real damage isnt visible. The consequences of squandering capital on absurd business models didnt end with the demise of those businesses. The misuse of more than $1 billion intended for the development of insurance technology may kill a whole generation of promising insurance technology businesses before they can come of age. Opportunity has been lost and that will harm the industry for the next decade or more.
Heres the residual problem. Its now enormously difficult for promising start-ups and existing small insurance-technology businesses to get funding. Eighteen months ago, venture capitalists competed tooth-and-nail to dump tons of money into idiotic insurance technology ventures. Now the VCs wont talk to legitimate investment candidatesor if they do, they make absurd demands.

I know of five small insurance technology businesses that have great promise and could really make a difference to the industrybut theyre having a terrible time getting any funding. The VC sins of the past are being visited on companies that deserve better.

If these and other small, ingenious insurance technology firms fail outright or fail to realize their potentialnot because of poor ideas, execution, or management, but because of an investment atmosphere polluted by the dotcom stupidityits not just these entrepreneurs who will suffer, its the carriers who could be saving themselves millions by using these new products and services.

Whats the answer? A more intelligent approach to insurance technology investmentone built on the idea of creating excellent, solid, valuable companies that grow at a sustainable pace and deliver ten to one returns over four or five years. We need new ways to connect capital to opportunity.

The Problem with Web Services
Microsoft, IBM, Sun, HP, Oracle, and a cast of thousands are working hard to develop an expectation that remote Web services will solve the perennial problems of computing. Want to be able to reuse code? You got it. Want to avoid problems of software installation and maintenance? No problem.

Weve heard these claims before, of course. Object-oriented programming, component architecture, integrated development environments, CORBA/ DCOM, whateverthey were all going to do the trick. But they didnt.

In the past, software panaceas were marketed as solutions to internal problems. The claims for remote Web services are more grandiose. They promise that systems of interconnected business, maybe whole industries can interconnect via remote Web services to achieve incredible efficiencies. The backbone on the effort rests on a variety of XML standards, not simply the data transmission standards that are ACORDs preoccupation, but business rules, and higher, even meta-level standards.
How will all this work? One piece of software, say a rating service in need of an MVR, will consult a Web services directory, find a candidate, inquire into what it offers and what data it needs, decide to use it, make the connectionand then its off to the races. Everything will happen under the covers. The user wont need to pay any attention. The technology will handle all the problems.

Does this make any sense? I dont think so. Its just too complicated. Heres an example of how Web services can cause unforeseen problems.

The inefficiency of current processing systems, the use of paper, the need to re-enter data, and so on, is much maligned. Web services, we are told, have the potential to automate these processes end-to-end, even across corporate boundaries. That sounds like an unalloyed good.

But what happens when some part of this automated end-to-end process fails? Who will know what has failed where? How will it be repaired? What are the work-arounds and how will they be put in place? The inefficiencies of systems actually sometimes serve a salutary functionas a kind of firewall. The absence of automatic linkage means that the whole can stand even when one part fails.

Whats the solution? A world of free-standing Web services wont work, but a collection managed from a central site could. Whats needed is some kind of service that can take responsibility for integrating a select set of services for a particular population. In this industry, carriers will need to orchestrate the Web services they use and agents will need to depend on integration services that oversee and manage what they cant possibly cope with on their own.

The Unintended Consequences
The move from private networks to the Internet can save carriers money and make it possible for agencies to link to multiple companies through one IP connection: the Internet.

Unfortunately, public Internet reliability and security problems arent soluble; to depend on the Internet for survival is to court disaster. An industry-wide, private IP network might be the answer.

Greedy VCs and others hoped to make a killing by investing in brave-new-world insurance Internet technology. The failure of that initiative is killing rational investment and needed technological development in better-faster-cheaper solutions. A special purpose, practical, lower-expectation fund or funds could provide the needed antidote before the whole industry gets sick living on stale technology.

Remote Web services are an interesting and promising idea but one thats oversold by miles. Were the industry to follow the path as marketed, little would really work as promised. Web services have the potential to create more chaos than order. On the other hand, managed integration platforms and servicesand generally less ambitious expectationscould bear nourishing fruit.

The law of unintended consequences is absolute. It has no exceptions. Shouldnt this industry anticipate and then ameliorate the unintended consequences of the Internet? Makes sense to me.

John Ashenhursts company, Sound Internet Strategy, provides consulting, Web site evaluation, and seminar services to carriers and their trading partners. He can be reached at johnashenhurst@soundingline.com or (978) 318-1944.

Special Reports /

How the Internet Is Damaging the Insurance Industry

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