Canadian Underwriter

The Year of Business

January 1, 2001   by Sean van Zyl, Editor

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First came the “ startups”, then came the “ crashes”. The year that Internet business is expected to break the backbone of traditional business operators has been widely and inaccurately predicted for some time, speakers at the Insurance Information Centre of Canada’s (IICC) recently held executive technology forum acknowledged. However, despite the hype surrounding the advancement of e-commerce, the competitive business advantages of Internet-based technology will ultimately bring about a convergence of “new” and “old” business approaches, and those companies ignoring this development will lose the game, attendees at the forum were warned.

“It’s all about competition and remaining competitive,” remarks John Wetmore, president of IBM Canada and the opening speaker at the IICC technology forum. Wetmore’s comment relates to the growth and development of e-commerce across business sectors, including the property and casualty insurance industry.

According to Wetmore, there are two critical components which have to be taken into account when weighing up the decision to enter the e-commerce marketplace: firstly to identify your objective and “the reason why you’re doing it”, and secondly, the realization that consumers are not going to easily lose their grip on the buying and information freedom which has opened up to them through the Internet.

With regard to the latter, Wetmore points out, despite the excessive hype of recent years concerning the expected growth of e-commerce revenues, the actual amount of money spent by consumers through the Internet over the past two years has exceeded the highest predictions of the past. And, although distribution efficiency remains a key driver behind the rush by companies to go online, the real advantages are far greater, he observes. “The Internet provides much more leverage to a business than simply a point of distribution for selling a product, it creates opportunities to build customer loyalty and develop the relationship experience.”

Wetmore predicts that the second “revolution” in online selling is already underway, that being the shift to wireless technology. “The Internet is currently about 90% reliant on access from personal computers. This is going to change radically within the next three years with the development of wireless access which could be anything from cellular phones, onboard auto computer systems to the kitchen refrigerator – this will have significant ramifications for how companies will identify and reach their marketplaces.”

In that respect, he cautions insurers not to fall too far behind in the technology race, as well as to pay careful consideration to how they structure their Internet initiatives. For instance, he notes that a recent survey of 75 insurance CEOs across North America and Europe indicates that over 60% of the respondents adopted a separate unit approach in establishing their online strategies. Whether this approach, which was most likely taken to avoid distribution channel conflict, will ultimately prove effective from a competitive outlook, remains debatable, he muses. Overall, he notes, “insurance companies have to pick up speed [on the online technology front] if they want to remain competitive”.


the business

The forum featured two panel discussions focussing on the impact of the Internet in the areas of company management and cost efficiencies, and the development of distribution strategies in line with added service values. In the first instance, Internet technology has placed greater emphasis on operational cost efficiencies, says Henry Rodrigues, president of personal lines at Lombard Insurance Co. It has also created an environment of “flexible distribution”, he adds.

“Ten years ago we [Lombard] did everything backwards [from a cost management perspective] by focussing on backroom operations like underwriting administration,” Rodrigues remarks. However, online technology enabled the insurer to “transfer this processing to the broker”, and at the same time shift a greater portion of the management responsibility to the frontline. The result was reduced internal management layers, happier brokers in that they had been granted greater underwriting decision making ability, and a significantly lower operating expense ratio, Rodrigues says. “Our net expense ratio is currently about 7% compared with an industry average ratio of 12%.”

Carol Jardine, vice president of claims at Royal & SunAlliance Co. of Canada, believes online technology offers insurers significant savings in the claims management arena. This benefit lies not only in reduced costs, but enhanced services and greater customer retention. “Increasing value is what e-commerce is really about.”

As such, Jardine says Royal and SunAlliance will shortly be switching its claims management systems over entirely to Internet-based applications, with the claims handling function becoming a 24-hour operational process. In essence, she notes, online technology has increased the field management capability of insurers.

Distribution and service

“Our focus is not on any particular distribution channel, but on the consumer,” comments Mike Haskell, president of Allstate Insurance Co of Canada. Allstate recently unmasked an Internet marketing strategy which Haskell describes as a “full online sales and service experience”.

The insurer has long operated through multi-distribution, employing inhouse agents as well as working through the broker channel. It has now added the Internet and call centers to the combined customer accesses of the operation. In this respect, Haskell is a firm believer in the concept of multi-distribution, noting that recent research carried out by the company in Canada clearly indicated consumer demand for all channels. And, although the Internet is “just part of our [Allstate’s] marketing strategy”, Haskell is adamant with regard to the critical element he believes a full online role will play in the future landscape of selling personal lines insurance. In addition, he points out that development of an online selling presence as a separate entity is unlikely to deliver the desired results. “This would mean building a new brand and becoming just another ‘me too’ among the Internet competitors.”

Corrine Charette, senior vice president at KPMG, says she is “perplexed by the fact that insurers are not embracing e-commerce”. There are subtle signs of action in the market, Charette acknowledges, but the pace can best be described as “tip-toeing to the ‘net”. What is even more puzzling, she remarks, is that most of the Internet initiatives are being driven by the large companies, which will result in these operators becoming even bigger in the future marketplace. The irony to this situation, Charette notes, is that “the web is a great equalizer…a web portal can disguise the fact that that there’s a small insurance company behind it”. In that respect, she expects smaller companies not reacting to the online movement will become marginalized, while the larger traditional insurers will still face tough competition from new Internet-based entrants unshackled by the costly operating burden of legacy type systems.

It is interesting to note that the views of financial services CEOs toward application of online technology in improving their distribution competitiveness has changed markedly over the last three years, says Howard Dempster, a consultant at Tillinghast – Towers Perrin. An annual survey carried out by the research agency shows for 2000 that “effectively using technology to create distinctive value” and “increasing direct marketing capabilities” as being the two top priorities of CEOs (see chart). The survey results of respondents for the last three years also shows a striking difference in attitude toward technology: this year more than 70% of the CEOs regard “improving use of technology” as being their highest priority against only 60% of respondents in 1997. The number of CEOs planning on using technology to create new distribution channels also more than doubled to 45% for 2000 compared with 20% in 1997. A
lthough there is a growing tide of support for multi-distribution, Dempster says such strategies will likely be expensive and difficult for insurers to implement.

Klaas Westera, president of the Centre for Study of Insurance Operations (CSIO) does not anticipate that direct Internet selling of insurance will replace traditional distribution modes such as independent brokers. “This is a people industry, you can’t replace people with technology.” However, Westera does hold the view that Internet generated revenue within the industry will grow significantly over coming years. This need not be at the detriment of brokers and broker-supporting insurers, he adds, as online technology can aide brokers as well as insurers. “Brokers must transform themselves as well, this [industry Internet development] is not just an insurer play.”

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