March 1, 2001 by Gordon Dunn, director, new business development at HUON
Rising expense ratios, soft market conditions, consolidation. Just when the insurance industry thinks it has weathered the stormy climate of the last decade, a new millennium brings the uncertainty of technological advancement. Companies eager to reduce costs may be prepared to make the mammoth investments required to take advantage of the latest high-tech offerings. But others will be left behind. And the alternative, outsourcing technology solutions, is as much an unknown factor as a key to survival for these smaller carriers.
For the Canadian property and casualty industry, the late 1990s were characterized by poor results, over-capacity and continuing regulation. This combination of market conditions proved singularly unappealing to dynamic “boomer” driven entrepreneurial organizations that continued to look elsewhere for quick returns on newly invested capital.
This same combination of market conditions drove a consolidation of capacity in the marketplace with a number of the stronger players, such as CGU and ING, overpowering a number of weaker players, Pilot, Guardian, Halifax, for example. This resulted in a marketplace in the early in the 21st century that, although it has fewer, larger players, remains somewhat fragmented with many smaller players continuing to scrape a modest, if precarious living.
The broker-driven distribution channel remained supreme with few consumers choosing to shop for new policies on the Internet. Even fewer were willing to buy. For most of the decade, service expectations remained low relative to other industries and brokers continued to “own” the customer relationship. Carriers continued to struggle to answer a number of strategic questions, including, who are our real customers and what sales and service expectations do they have? What new business models need to be developed to meet these expectations? What infrastructure is needed to enable these new business models? What is the most efficient, cost-effective way to develop this new infrastructure?
Carriers are only now beginning to truly understand the magnitude of the market driven challenges they face in developing a successful response to these questions. The “commoditized” nature of personal lines products and the lack of brand loyalty exhibited by consumers will dictate how carriers respond to each of these questions and what will be required for them to “win” in the marketplace. In a nutshell, carriers will need to be able to sell to, and service customers, however they define them, in whatever way and through whatever medium they choose. Carriers will also need to be able to deliver on these objectives while spending less than they do today to process each transaction. To be constrained by what existing technology will allow, will no longer be an option. Most carriers squeezed out the last drops of functionality and utility from their existing “Model T Ford” legacy systems long ago.
New business models
If carriers want to roll out the new sales and service business models that the advent of the Internet has made possible, they now have no option but to trade the Model T in for a brand new, 2001 Mercedes. These Mercedes infrastructures and supporting applications now allow carriers to gain a competitive advantage by getting closer to distributors and end customers through the effective harnessing of Internet based technologies, and respond rapidly to new market opportunities by utilizing robust product tailoring capabilities. They can also reduce operational costs through cost effective policy and claims administration, thus driving profitable growth, and generate an effective return on investment.
Internet-ready transaction processing engines can now power straight-through, “once and done” processing for all key users (i.e. distributors, customers, suppliers, reinsurance carriers) across the entire range of core insurance transactions, from rating through to claims management. Carriers have spent a good deal of money in recent years building sexy front-end websites and simply bolting them on to old, creaking, legacy based back-end processing systems.
There is now no longer any need for carriers to keep “putting lipstick on the pig”. New exchange platform technologies are enabling the creation of dynamic electronic marketplaces, or e-markets, that bring together buyers and sellers of insurance products. Individual carriers or groups of carriers can now create e-markets that are customized to their particular distribution strategies. Carriers and distributors can significantly decrease costs, increase revenue and improve service levels by using these new applications and technologies to conduct e-insurance transactions. By applying these new applications and technologies, carriers can provide a solid basis upon which to build towards achieving some key business objectives:
Enhanced distributor and end customer service. Fully integrated, functionally advanced and customer-centric capabilities provide real time, “once and done” processing and access to common information for all key users as well as instant response times, 24 hours a day, 7 days a week. The eternal distributor/carrier reconciliation issue is fast becoming a thing of the past.
Increased speed to market. Highly configurable designs can provide the scalability and flexibility to meet even the most demanding requirements. The result is a high degree of tailoring that can be easily and quickly accomplished right across the policy management spectrum from actual product configuration, through rating conditions to authorization and validation, enabling more precise market segmentation. Underwriters will cease to be limited in what they can sell by the technology that they have been forced to use. The only limitation on underwriters will be the breadth of their own imagination and the depth of their own creativity.
Improved cost control. “Turnkey” transaction processing solutions are available which have, in some cases, already been tailored to the Canadian market and are available “right out of the box”. They provide the enhanced levels of customer service now being demanded in the marketplace at a significantly lower cost per transaction. They also integrate easily with legacy systems and other complementary software solutions and enable efficient, cost-effective e-insurance transactions between carriers and suppliers. These linkages are essential if carriers are to fully leverage the true power of new exchange technologies.
Winners and losers
Those carriers who can deliver this kind of service “holy grail” to distributors and end customers will survive and prosper. Those who cannot will fail. The investment required to find and to deliver this “holy grail” is, however, not insignificant for most Canadian carriers. Unfortunately, since the market continues to suffer from over-capacity and poor underwriting results, many providers are not generating sufficient cash flow to fund this new, desperately needed investment. Many are left with no choice but either to spend what resources they do have on additional legacy system “band-aids”, bailing wire and string, or to seek the services of an application service provision (ASP) organization.
An ASP alternative?
While the ASP market continues to mature in Canada, few of these organizations have demonstrated that they really understand the p&c marketplace or have a comprehensive service offering that makes economic sense to Canadian providers, large or small.
Insurance carriers also know that deregulation, when it comes, will bring with it a host of new players flush with investment capital and unencumbered with old technology problems. The question is, without significant investment in new processing, customer service and exchange technology, can current providers hold on long enough to be rescued by one of these “white knights”, the faces of which they cannot yet see?
Carriers stand on the threshold of a newly deregulated, Internet enabled world. Radically different, distributor friendly, end customer driven business models are now possible. Carriers not only
need to define what these might be, and many have already done so, they also need to implement these new business models and do so quickly. For many, the level of investment in technology and new business applications required to enable these new business models will be prohibitive. The future for these carriers is clear. Find a “white knight” and find one quickly. Only those carriers with the vision and the resources to upgrade their existing technology infrastructure, as well as intestinal fortitude to embark on the long journey that this implies, will survive and prosper.
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