Sept. 11 Heightens E-Commerce Needs

Its no secret that technology can impact the fundamental competitiveness, franchise value, credit quality and the ongoing strength of insurance companies.

Furthermore, one of the greatest risks any insurance carrier can take is to be competitively unprepared by not having a comprehensive e-commerce strategy and an implementation plan for its operations. The events of Sept. 11 make dealing with these risks much more time urgent.

The insurance industry will suffer its worst losses in history, estimated to be between $50 billion and $70 billion, as a result of those attacks. In addition, industry underwriting capacity will be significantly reduced and reinsurance rates will rise very significantly.

On the other hand, a decade of underpricing risks is coming to an end and there will be meaningful changes to policy forms as well as rate increases.

This will require carriers to act and react much more quickly and efficiently to rapidly changing market conditions to reduce expense ratios and improve loss ratios.

Creating an e-commerce strategy for a carrier's organization is a process that starts with executive management, including the chief executive officer. The principal issue that should be addressed by this group is how to create competitive advantages and eliminate competitive disadvantages within acceptable cost and time frameworks. The cost issue requires an analysis of build-versus-buy. The speed-to-market issue requires this same analysis.

Senior management should assess existing technology capabilities, and develop a clear understanding of the company's competitive advantages and disadvantages, as well as what changes are required to execute the business strategy. This analysis is essential for virtually every facet of a carrier's technology, including product requirements, underwriting, rating, issuance, distribution channels, and back-end processing.

This process increases the probability that the e-commerce project will be successful. Most systems fail because they dont really have the commitment of senior management and the project often becomes lost in the committee process.

A one-year competitive disadvantage in a key product segment may result in an unacceptable business risk. Alternatively, creating a one-year technology lead, properly exploited, can be a significant factor in increasing the size of an important book of business or re-pricing it to reflect changing market conditions.

Industry experts estimate that e-business technology spending within the insurance industry will rise by an average of 89 percent over the next three years.

The events of Sept. 11 make this estimate conservative. While there is no doubt that expenditures are necessary to bring a carrier's e-commerce strategy to fruition, you can do so in a cost-effective manner that will pay for itself in improved efficiencies that produce lower expense ratios and greater underwriting control that improves loss ratios.

An important step in mapping out an e-commerce strategy for the organization is determining a realistic timeline, given the competitive environment, budgetary constraints and the human resources necessary to develop and implement the new technologies. Often, the lowest-cost solution is the purchased or externally customized solution.

The principal challenge to a fair evaluation of purchased e-commerce technology is the desire of internal IT departments to do this work themselves. Too often, the internal team underestimates the cost and time needed to complete the project. This is especially true when they are expected to build and, at the same time, continue their normal functions. Finally, the internal team may not be skilled or experienced at building an e-commerce system.

An organization should place emphasis on finding cost-benefit technology solutions that match the companys unique set of competitive requirements, budget and priorities, rather than getting caught up in the hype of “new” technology. When reviewing systems capabilities, one should investigate if there is an opportunity to extend current systems capabilities rather than replace them.

Pursuing and implementing an e-commerce strategy requires a wide range of technology capabilities. While some insurance providers have strong in-house IT departments with experience in developing and implementing e-commerce technology solutions, there are many others that should turn to outsourcing and alliances because they lack the required skill sets to pursue these initiatives or to supplement internal capabilities.

I believe an increasing number of carriers will choose outsourcing to implement their e-commerce solutions. I also think they will turn to outside vendors for services ranging from Web site construction and maintenance, to online solutions for real-time underwriting and rating, actuarial services and claims handling.

Determining whether a carrier is a candidate for outsourcing will depend on an assessment of its competitive environment, speed-to-market, technology requirements, internal skills and outsourcing choices. For many companies, outsourced solutions can add significant value in the development, implementation and ongoing management of e-commerce technology solutions.

Straight-through processing with Web-based technology is one solution that can create real value for an organization. The benefits of being able to rate, quote, bind and issue policies and endorsements online in real time are far-reaching and include reduced operating expenses, improved risk management and loss ratios, enhanced customer service, improved connectivity and relationships with appointed agents, broader distribution capabilities and business growth.

A system that offers straight-through processing enables the automation of labor-intensive policy origination and maintenance activities, which will reduce administrative costs, with significant savings that go straight to the bottom line. In addition, straight-through processing reduces data input by eliminating re-keying.

Straight-through processing gives underwriting control back to the insurance company. It yields accurate and timely access to premium and underwriting data in a uniform format that allows the opportunity to assess risk simply and precisely. Finally, mining data accurately and efficiently creates opportunities to focus on lowering the loss ratio with properly priced risks as well as identifying profitable niches.

Fully automated systems enhance agent support in this competitive, service-focused market. While competitors are shuffling through paper files to answer simple questions or provide certificates of insurance, endorsements, or other policy renewal or maintenance services, straight-through processing provides agents with online, real-time service.

Automating administrative tasks allows professional staff to focus on what they do best. As offline processes are streamlined through the use of straight-through processing, sales staff, underwriters and risk management professionals can focus on growing a book of business and improving profitability.

The question that faces any insurance enterprise is not if, but when, where and how they will create and undertake an integrated e-commerce strategy. Sept. 11 increases the time urgency of this task.

The insurance industry faces huge challenges in the short term. Carriers that fully understand their competitive landscape, speed-to-market requirements and all possible technology choices, and fairly assess their internal skills, should be able to compete effectively in this rapidly changing marketplace.

Lou Kwiker is president and chief executive officer of Insurance Technology Solutions, Inc., based in Torrance, Calif. The company can be reached at www.insurancetechnologysolutions.com

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 26, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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