September 1, 1999 by Sean van Zyl, Editor
While speakers at this year’s Strategy Institute conference did not all agree on a specific technology and business solution approach that will enable traditional property and casualty players to stave off future outside competition in their markets, they did concur that consumerism and cost-efficiency demands will eventually separate the winners from the losers.
And, although the future prominence of the Internet in insurance distribution and product development drew mixed responses from speakers — representing independent brokers, broker consolidators, insurers and technology vendors — all agree that the commercial opportunities opening up through the web will have a significant impact on the insurance industry.
“There is no silver-bullet solution in terms of a single solution,” observes Doug Davis, president of Davis Consulting Inc. However, brokers and insurers can ill afford to ignore the fact that the rules of the business are changing. Five years ago, he notes, 70% of brokers individually held less than $1 million in commission whereas in today’s market that figure is less than 40%. Consolidation within the brokerage market will continue in response to competitive pressures, he predicts, with insurers promoting the growth of the large broker consolidators in the chase for more cost-effective large books of business.
Technology will also enable direct writers to make further inroads into the brokerage slice of the personal lines pie, Davis believes. Comparing the use of technology as a marketing tool by traditional versus non-traditional operators, he comments: “Brokers are a mile wide and an inch deep, while direct writers are an inch wide and four miles deep.” To survive in this evolving market environment, brokers and insurers will have to become more sales-driven and attentive to consumer needs, he says.
Barbara Addie, president of Baron Insurance Services Inc., stresses the importance of increased consumer expectations. Not only are consumers looking for greater product diversity and access, they are comparing the cost of insurance, she adds. “The consumer is more sophisticated, more willing to accept responsibility for making decisions on what and how much insurance should be bought. This is particularly true for personal lines, more specifically automobile insurance.”
In that respect, Addie observes, personal insurance has already become “commoditized” to a large extent — “price definitely does matter”. But, despite this “commoditization” of the product, insurers and brokers have so far done little to enhance the value of their wares or address operational productivity, she adds. “Even this movement towards the commoditization of the personal lines products has not been able to force the necessary changes in productivity. The expense ratio for the p&c insurance industry as a whole actually increased from 1998 (31.2%) to 1999 (32.3%) and is largely unchanged from the 1970s. Why has the industry been so slow to adapt?”
In essence, Addie believes that productivity and product development have been hindered by a lack of effective management and interface technology and the prohibitive costs associated thereof. In the past, consumers were also restricted in their purchase options which allowed the industry to continue operating in a less than efficient manner. “While the first problem remains [being restrictive industry interface technology] and will likely remain unsolved, the second problem does not. The Internet and call centre technology combine to give the consumer what he wants.”
Addie believes that the Internet will change the future design and distribution of insurance. In addition to bringing the consumer directly into the relationship between brokers/sellers of insurance and the underwriter, the rapid growth of web-based applications has considerably reduced the cost of technology, she points out.
As such, Addie says the current style of broker-to-company systems are becoming redundant due to their limited flexibility and cost. “EDI is dead…the technology has limited potential and there are too many versions of broker management systems…there is currently 27 different upgrade versions [in use] of just one management system. EDI is also business-to-business based, it does not include the customer — the Internet offers everything that EDI is not. If you’re continuing to put money into EDI, my advice is to pull back…stop spending money on processing the business and rather spend it on customer relations and understanding them.”
Davis concurs that Internet use in customer relations will play an increasing role in financial services. “I expect that in five years from now the Internet will be a formidable distribution channel.”
Michel Trudeau, senior vice president of insurance at Allianz Canada, supports Addie’s view that too much technology investment has been focussed on the processing side of the business rather than customer relations. There are currently two weak areas which have to be addressed, he adds, the first being that brokers have to shift emphasis to understanding the customer. The second area lies on the company front — insurers have to look beyond organizational parameters, he says. “The sales and underwriting sides of the business are not sharing information. The dollars should go from technology processing to data mining and developing targeted customer marketing.”
Technology development around customer needs will continue to steer the direction of the market, Trudeau predicts, “24-hour access and the quality of service will be become increasingly important to remain a player”.
Internet growth potential
While the Internet as a sells distribution channel does pose a threat to traditional insurance players by opening up yet another door to outside competitors, it also provides growth opportunities, says Douglas Grant, senior industry specialist of insurance and e-business at IBM Canada. “A cup half empty is also a cup half full,” he quips.
It is not a question of whether the Internet will have a significant impact on the insurance industry, but rather a case of when, he notes. Referring to trends in the U.S. and U.K. insurance markets, he points out that companies and brokers are already combining web use with call centre technology. The objective behind this development, he adds, is not just an opportunity to increase sales through a new distribution channel, but to combine the various elements of business to enhance customer service. Furthermore, future development of Internet technologies will mean that customers will have several options to accessing the web in the not-to-distant-future. In designing web services, insurers/brokers will also have to take this into account. In addition, from a cost-saving perspective, the Internet offers financial service providers the ability to reduce operating overheads by passing on many of the administrative functions to the consumer. “The Internet enables customers to do some of the work, thus eliminating the cost of doing the transaction.”
Patrick Vice, director of sales at PMSC Ltd., points out that the growth in Internet use has been far more rapid than any past communication medium. “It took radio 40 years to impact on 50 million people, it took television 15 years to do the same, the Internet achieved this in five years.”
As such, companies/brokers would be making a grave error to not consider the revolutionary impact the Internet is having on socio-economic trends. Already, from a commercial standpoint, the use of the Internet has evolved from the simple to complex transactions. “There are insurers who are using the Internet for transactions with their brokers, and they are also linking brokers and customers through their sites. This [companies and brokers working in unison] will ultimately protect the future of the broker.” However, Vice cautions, the insurance industry is lagging the other financial service sectors in applying Internet customer-focused technology. “The question is, why are insurers lagging other industries?”
From a company perspective, the greatest obstacle to adapting new technologies is cost, says Sophia Norkus, assistant vice president of commercial lines at Dominion of Canada General Insurance Company. Dealing with Y2K also swallowed up millions of dollars and insurers have not had time to regroup their visions of technology use of the future, she observes. “I want our systems to be seamless, and my brokers to be able to talk to other companies on the same system. And, I don’t think my views are that different from my competitors.”
While gaining industry cooperation on a common use of technology is essential, Norkus admits that cost-pressures combined with the rapid speed of new application development have made companies hesitant to invest further. Norkus also believes that the structure of the Canadian insurance industry, in terms of the number of companies and brokers operating in the marketplace, means that no single technology solution developed by a one vendor will be viable. “I don’t believe that we can rely on any one vendor to provide the solution — we don’t want the process to be driven by the system, but the system to be driven by the process.”
That said, Norkus believes that the industry has to make better use of the information available in transacting between companies and brokers. “We only use one of eight pieces of information sent, we have to make better use of what we already have.” In addition, she expects Internet-based technology will form the basis of third-party electronic interface for the industry. “The emergence of web technology is probably the system we’re going to be looking for, the technology is already there.”
Brokers, however, are becoming impatient with the slow pace of technology development on the company front, notes Rick Grass, president of Canada Brokerlink Inc. He points out that, in comparing the impact technology has had on reducing costs in the banking industry, “it used to take five years to achieve breakeven on a bank branch, now it is 12 months”.
From a broker position, Grass says the profession has to identify what it is that customers want from systems-support. From a company and technology vendor standpoint, the parties need to get together and apply serious commitment to developing a common information technology platform. “We have to find an overall solution for commercial and personal lines connection, doing uploads and downloads [of data] is insane, the problem is the vendors blame insurers and insurers blame the vendors — let’s get over it.”
Despite some views within the industry that future consumer use of the Internet for transacting will be limited to a small group, Grass is convinced that the opposite will most likely prove true. “Any consumer under the age of 60 definitely wants electronic convenience [in financial service transacting], there’s no doubt about it, despite what others might say.”
And, even if the Internet does not attract the extent of consumer transacting support which is widely predicted, Grass still believes that an open technology format (regardless of the platform used) is the direction which the insurance industry should be heading toward. “[This] allows for database and credit-card information collection and opens up prospects of true customer database-mining. We don’t have that today, and we can’t afford to wait another four years. What I want to know is why we don’t have it.”
David Scharman, vice president of The Precept Group, adds voice to Grass’s ire, “we want fast and easy from vendors, the multiple solutions and industry jargon is beginning to wear thin”. Although system vendors should be applauded for having reduced technology costs, the fact is they have not kept up to speed with the requirements of the industry, he notes. “Our needs are changing as fast as technology allows, quite frankly, the vendors are not keeping up.”
Furthermore, Scharman points a finger at the outdated legacy-based systems of insurers. “[They] are limiting our ability to design new products. As an example, one broker is now acting as an underwriter and product developer for a company – carrier systems have to keep pace with the development of the market.” In conclusion, Scharman believes the only road ahead for the industry is for all parties, from adjusters, companies and brokers, to build information-sharing capability into their systems. And, he observes, “we don’t have ten years to get where we’re going”.
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