Digital Platforms

Even though claims service provided by property/casualty insurance carriers represents a major factor in their ability to retain customers and attract new ones, insurers are not providing the level of service that is considered acceptable to corporate customers and consumers, two new studies conclude.Moreover, even well-capitalized carriers that possess the financial stability to support quality claims service appear to be dropping the ball.

While the downturn in the economy has slowed strategic IT spending across financial services, insurance companies that have committed to new customer relationship management (CRM) strategies have not slammed on the brakes. But they are proceeding with caution, according to Meridien Research Inc., Newton, Mass.In a report titled "Insurance Client-Centric Strategies: Reach for the Stars with Service," Meridien highlights insurers that have launched ambitious CRM projects, including an Australian P&C direct underwriter.

HNC is widely recognized as a leading developer of analytic and decision-management tools. But are carriers ready to turn their important underwriting and claims decisions over to machines?The similarities between fighting terrorism and combating insurance or credit card fraud are not very obvious. However, the Bush Administration's Homeland Security initiative is considering using some of the same technology that's now being applied to identify fraudulent transactions for more than 300 million credit cards worldwide, and by nine of the 10 largest insurance companies.

In an unusual move, Allstate Insurance Co. took the offense by filing counterclaims against agents who filed a lawsuit against the carrier last August. The agents sued the Northbrook, Ill.-based carrier for age discrimination and violation of federal civil rights laws they claim occurred when Allstate terminated them in June 2000 (see September 2001, page 8).Allstate filed its counterclaims against the agents in March in U.S. District Court in Philadelphia-charging the agents with unjust enrichment, fraud, negligent misrepresentation, and breach of duty of good faith and fair dealing. Allstate is requesting compensatory, punitive and other damages in an amount to be determined by a jury.

After spending the past several years sitting on the sidelines, mid-size insurance companies are poised to break out of their IT spending inertia.In a report titled "Technology Market Snapshot: Mid-Size Insurance Companies," Boston-based Celent Communications Inc. estimates that mid-size insurers-those with direct written premiums between $100 million and $1 billion-will spend $1.1 billion on new technology projects over the next three to five years, primarily on Web-enabled policy administration systems and agent extranets.

The stories are disconcerting. A 32-year-old secretary who always pays her premiums on time receives a renewal notice from her insurer that her rates are being raised 46% due to her credit. She discovers that her ex-husband's bankruptcy is to blame.A 65-year-old Hispanic-American man who has filed only one insurance claim in 26 years is told by his agent that his premiums are increasing 25%. Convinced that his carrier has discriminated against him, he and several other clients of the same agency file a class-action lawsuit.

The insurance industry has been noticeably quiet about its use of insurance scoring over the past few years. And its silence has raised the ire of consumers and agents who suspect insurers are using the arcane methodology to sneak around state laws that prohibit them from discriminating against minorities and people with lower incomes.In November, several people filed a lawsuit in U.S. District Court, Western District of Texas, San Antonio Division, against Allstate Insurance Co., accusing the carrier of using credit scoring to replace geographic redlining, which was forbidden years ago.

Proponents of federal insurance regulation have moved one step further toward their goal. Two bills have been introduced in Congress that would establish a new federal agency to charter insurance companies choosing to bypass the cumbersome state-by-state system.In December, U.S. Senator Charles Schumer (D-N.Y.) proposed the National Insurance Chartering and Supervision Act. Then, in February, U.S. Representative John LaFalce (D-N.Y.) introduced the Insurance Industry Modernization and Consumer Protection Act. Both bills respond to lobbying from banking and insurance groups that want a simplified regulatory structure for licensing insurance companies.

Carriers and agents have invested a significant amount of capital toward electronic interface initiatives that enable the two parties to improve their data-exchange efficiencies and overall operational competencies.But as they carry this out, consumers have been neglected, to the extent that many "lack faith in the quality of online customer service," says Madelyn Flannagan, vice president of education and research for Alexandria, Va.-based Independent Insurance Agents of America (IIAA).

The Internet has been around less than a decade, and already it has proved to be the quintessential double-edged sword-a potent weapon as well as a useful tool. The Melissa virus unleashed in 1999 cost companies as much as $385 million, followed shortly after by the Love Bug in 2000, which infected more than 10 million systems and cost businesses an estimated $10 billion.

The hardened insurance market, costly incidents of cyber crime, and a new ISO Electronic Data Liability endorsement, which provides clear limitations for cyber risks under its Commercial General Liability standard-are all factors driving commercial insurers to reevaluate their business liability coverage. And many of them are beginning to separate cyber coverage from commercial general liability coverage."You're clearly starting to see traditional insurance policies getting much clearer on their intent around cyber exposures," says Jon Farber, assistant vice president of global technology underwriting at St. Paul Cos. The St. Paul-based insurer is one of several commercial insurers offering cyber insurance. Others include Zurich North America, AIG, Chubb, and Lloyd's of London.

When Congress passed the Health Insurance Portability and Accountability Act (HIPAA) in 1996, one of its major objectives was to reduce health care costs by simplifying administrative and financial transactions across the industry. At that time, national health spending was heading toward the $1 trillion mark annually, and studies proclaimed that "administrative simplification" could save anywhere from $40 billion to $70 billion per year.

Virtually no payers in a HIPAA readiness survey conducted in December by Gartner Inc., Stamford, Conn., indicated they had completed their selection of technology tools to comply with the Health Insurance Portability and Accountability Act.But insurance companies are implementing privacy and security tools for their Web-based applications, and these tools will factor into their HIPAA privacy and security assessments.

Security isn't a new topic in business. Many years ago, businesses were concerned primarily with physically securing information within their facilities. We managed our companies' critical information on a "need-to-know" basis-if you needed to know, then the keeper of the information would share the information with you.With the advent of e-commerce and networked computers comes the added need to secure these networks. Businesses, including insurers, want to facilitate the sharing of relevant data while protecting proprietary and confidential data. And, of course, the need-to-know rule still applies.

The outsourcing of information technology is proving to be popular with carriers these days, reversing the industry's historical apprehension of working with third parties. But experts caution that time will tell how widespread the concept becomes.In January, PacifiCare Health Systems Inc. became the latest insurer to chart this course by completing a 10-year, $1.2 billion venture with Armonk, N.Y.-based IBM Corp. and Boston-based Keane Inc.

Insurers have invested significant amounts of capital on technology based on the belief that those investments will improve their top- and bottom-line performance. However, new research indicates that carriers are experiencing mixed results to date and they're seeking refined metrics to measure how technology is impacting their operations.Those are some of the conclusions of a recent survey of 248 North American financial services firms conducted by Tillinghast-Towers Perrin. The survey is the second in a series of industry studies conducted by the management and actuarial consulting firm intended to learn how new technologies are impacting carriers' performance, and how carriers are measuring the success of IT implementations.

When Allstate Insurance Co. announced its aggressive new business approach in November 1999, analysts praised the company for its bold leadership in the New Economy.

Biometric technology is in the throes of an identity crisis. Biometrics relies on matching algorithms that analyze the physical or behavioral traits that differentiate one individual from another, such as fingerprints, the retina or iris of the eye, or the patterns of an individual's voice.Through its use, financial institutions could reduce costs related to identity theft, while simultaneously assuring consumers that their financial assets are protected.

As insurance carriers expand into financial services and provide multichannel access for customers, many agents are not going along with the new program.Both State Farm Mutual Automobile Insurance Co. and Allstate Insurance Co. were sued in November by their agent associations. The agent associations are claiming the carriers have breached their contracts with the agents by increasing agents' production quotas, reducing their commissions, coercing agencies to forward their phones to call centers, and selling insurance directly to customers over the Internet.

More than nine months after it was created, Wilmington, Del.-based Fusura Inc., a Web-based personal lines insurance agency formed by global insurance giants AIG, Kemper and Prudential, is finally preparing to go live.As it prepares to launch-expected to be no later than March 31-the consortium capitalizing the venture can't be accused of rolling out the program too hastily. Since its celebrated formation was revealed, Fusura has witnessed its share of tweaks and modifications-from putting a permanent executive team in place to choosing its technology platform.

Electronic bill payment and presentment (EBPP) has experienced a mixed bag of interest among consumers, with payments of insurance premiums ranking low on their online bill-payment priority list.In fact, insurance carriers, along with utilities, telecommunications and mortgage companies, are among the businesses that are lagging behind in the expansion of EBPP, according to a recent report by Stamford, Conn.-based consulting firm Gartner Inc.

Insurers can't understand the benefits of wireless technologies unless they experiment with it, as Progressive Insurance has done for the past year. At the same time, the lack of industry standards, coupled with current limits on how much data can be transmitted and received by mobile devices, limits the types of services that wireless devices can support."This is a technology that consumers are dying to use, except for claims and servicing," says Jamie Bisker, a senior insurance analyst with TowerGroup, Needham, Mass., and author of the recent report "Wireless Realities In Insurance."

Within hours following the terrorist attacks on the World Trade Center, global insurers and reinsurers began the task of assessing the breadth and depth of the losses incurred by their businesses.With losses separated into five categories-property damage, business interruption, casualty, aviation and liability-estimates indicate that insurers worldwide may pay out as much as $70 billion as a result of the September 11 attacks in what will represent the most expensive disaster insurers have ever experienced.

When disaster strikes, insurance companies immediately mobilize their catastrophic ("cat") teams to deal with the accompanying sudden increase in claims.The aim is to provide expedient customer service to policyholders who have been injured or who have lost property or loved ones-and rightfully deserve compensation from their insurance company.

When one of its Web or application servers crashes, executives at Fireman's Fund Insurance Co. may have to cope with business down-time, but they can at least eliminate one major headache-they won't have to repair it.That's because the Novato, Calif.-based property/casualty insurer inked an agreement in October that some consider a watershed event-an outsourcing pact involving an internally operated information technology division.

The insurance industry received repeated criticism for failing to develop e-business capabilities quickly enough during the dot-com frenzy. Now, it appears that insurance companies are catching up with competitors in other sectors of the financial services industry.That's a conclusion of a recent survey of 150 North American financial services organizations conducted by Chicago-based research and consulting firm Andersen (formerly Arthur Andersen).

As the financial cost of the Sept. 11 terrorist attacks on New York and Washington, D.C., continues to rise, the ramifications for insurers remains unclear. Indeed, while carriers certainly have the financial reserves to cover estimated losses, industry observers say the wounds suffered from the devastating attacks will take many months to heal."While the hit to the economy will obviously put expense pressure on many companies, I think the disaster itself will have the effect of changing company priorities," says John Hodge, chief information officer for NAC Reinsurance Corp., Stamford Conn. The company is a subsidiary of XL Capital Ltd., which estimates its losses from the attacks at $700 million (see chart).

What if you could determine when policyholders were considering switching to another carrier and then identify which of those customers were profitable enough to justify trying to keep them? And what if you could determine the effectiveness of a marketing campaign while it was in progress, changing your strategy before investing a lot of money?

Over the past four years, independent surveys that measure and project online insurance trends have delivered what's become a recurring diagnosis: When it comes to the functionality of their Web sites, carriers remain a step behind banks and brokerages.And while two new reports conclude that carriers have made strides in narrowing the Internet gap, the reports also highlight the industry's continued e-business shortcomings.

Life and health insurers to date have been slow to sell policies online. But within the next four years, carriers will sell $12.8 billion in life and health products on the Internet-up from $1.1 billion last year.That's the conclusion of a forecast released by IDC, a Framingham, Mass.-based technology research firm. The growth in online life and health insurance sales will be spurred by several factors, according to IDC.

Although insurers are just now wading into the Web-based small business insurance market, research indicates this approach has great potential to improve carriers' revenue streams.There are an estimated 5.7 million small businesses in the U.S. with annual revenues between $50,000 and $500,000, says Matthew Josefowicz, an analyst with New York-based Celent Communications. He is the author of a recent report, titled "Web-Enabling Small Business Insurance Policy Origination."

It began as a mail-order business in 1922, providing automobile insurance to U.S. military officers who moved often and could not get coverage from other carriers. Today, United Services Automobile Association, better known as USAA, ranks as one of the best companies in America for providing customer service.With 4.5 million customers and $62.5 billion in assets, USAA placed first as the most reputable financial services company in America in the Financial Services Reputation Quotient study conducted by Harris Interactive, American Banker (a Thomson Financial publication) and the Reputation Institute. USAA also recently received top awards in the life, auto and home insurance categories from readers of Worth magazine.

Allstate Insurance Co. has received nothing but kudos from analysts for the boldness and vision of its Good Hands Network-the name the Northbrook, Ill.-based carrier gave its integrated call center, Internet and agent sales strategy.But some agents don't like Allstate's multichannel strategy-especially the part that cost them their jobs. On August 1, 27 current and former agents filed a class-action lawsuit in federal district court in Philadelphia, charging Allstate with nine violations, including breach of contract, breach of fiduciary duty, intentional age discrimination and retaliation in violation of federal laws.

r some insurance carriers, the Year 2000 compliance aftershocks are still lingering. But one such carrier, Charlotte, N.C.-based Royal & SunAlliance USA, hopes a court ruling in July spells the last Y2K trembler it will have to absorb.A Delaware Superior Court dismissed a lawsuit filed in August 1999 by Unisys Corp. The Blue Bell, Pa.-based computer giant, which has a commercial general liability (CGL) policy through two Royal & SunAlliance co-insurers, sought to recover more than $35 million in Y2K expenses to bring its computer networks into compliance.

The "Good Hands" people want to grab a bigger share of their customers' wallets. Allstate Corp. plans on launching its long-anticipated Internet bank by September 30 with a host of retirement, savings and investment products.Initially, the Northbrook, Ill.-based company is training its 2,000 agents in California and 1,200 agents in New York to refer policyholders to the new bank, which recently received a full-service thrift charter from the Office of Thrift Supervision.

Allstate isn't the first carrier to combine insurance and virtual banking. In February 1998, Principal Mutual Life Insurance Co. opened Principal Bank, and in November 1998, State Farm Insurance Cos. launched State Farm Bank.Although both banks still limit their marketing efforts to current policyholders, they still have achieved sizable growth in the past year. Principal Bank now has 34,300 accounts and $975 million in assets. The bank also has $900 million in deposits from checking, savings and CDs, in addition to issuing some 23,000 Visa credit cards.

The myriad complexities that comprise reinsurance lines often make it difficult to conduct business via the Web, industry observers say. However, buying and selling reinsurance offline is plagued by its own deficiencies- notably excess paper processing and other accountability issues surrounding the process.Providers of independent Web-based reinsurance exchanges believe they have a more efficient process of exchanging risk globally.

At a time when U.S. companies are cutting back on health care benefits and the number of uninsured Americans continues to grow, Web-based companies are stepping up their efforts to attract individuals and small-business owners.It's estimated that 43 million Americans do not have health insurance. In targeting this untapped market, Web-based insurance companies continue to expand their products and service offerings, and are actively pursuing more partnerships with both online and offline insurance providers, financial groups, civic organizations and other businesses.

Although asset management is a relatively new focus for carriers, they're on a steady course for targeting affluent customers with a wave of products and services.As the U.S. economy caught wind during the past decade, more consumers joined the ranks of the affluent population. Recognizing this socioeconomic shift, insurance carriers began steering their business strategies toward asset management services.

ess than a year after launching an ambitious program targeting small-business owners via the Internet, Wausau Insurance has shut down its eWausau operations.The decision was stunning, given that the company in April partnered with InsureZone to offer its products to banks and Web portals.

The Internet will continue to be a major focus of insurers' technology spending plans, according to the findings of a new global survey of insurance industry leaders.The survey, conducted by The Economist Intelligence Unit and PricewaterhouseCoopers, reveals that spending on technologies supporting e-business initiatives will increase 89% over the next three years. More than 150 leading insurance providers including carriers, agents/brokers, reinsurers, banks, broker-dealers and dotcoms, participated in the study.

Although the insurance market has proved to be a hard nut to crack for dot-com startups, that hasn't deterred new entrants from trying to gain a foothold on the Internet.One of the more recent entrants is NetInsurance, an online insurance agency that, claiming to be the first operation of its kind, offers customers the ability to comparison shop for and buy auto insurance in a single online session.

Conseco Inc. has undergone rapid change in Gary Wendt's brief tenure as chairman and CEO. In 10 months at the helm of the Indianapolis-based insurance and consumer finance company, Wendt has overseen the disposal of $1.7 billion of assets-including a $122 million stake in the Argosy Gaming riverboat-and the elimination of 2,000 jobs at Conseco Finance.In April, the company stepped up its efforts to rein in expenses by announcing plans to shift some of the company's call center servicing and back-office processing to India. Related to this decision, Conseco is acquiring exlService, a firm specializing in these functions which is based in Hyderbat, India.

Following in the footsteps of the American Bankers Asso-ciation Insurance Association (ABAIA), which proposed an optional federal charter for insurers, Washington, D.C.-based American Council of Life Insurers (ACLI) has released its own draft proposal-this one geared to the life insurance industry.The draft-which was assembled by about 30 working groups involving more than 200 ACLI member companies-calls for the creation of the National Insurer Act, the National Insurer Solvency Act and an Office of National Insurers in the Department of the Treasury.

On November 13, 1999-the day after the passage of The Financial Services Modernization Act-insurance companies formed steering committees, project teams and task groups to determine what work needed to be done to comply with Title V of the Gramm-Leach-Bliley (GLB) legislation. Title V requires financial services institutions to establish privacy policies and deliver notices by July 1, 2001 to their customers informing them of how the company uses and shares nonpublic personal information. If a company shares that information with nonaffiliated third parties for marketing purposes, customers must be able to "opt-out" of such sharing. Thereafter, companies must distribute an annual privacy notice to their customers.

As the July 1 deadline nears, insurers have developed and begun to distribute their privacy policies to customers, but most companies in general haven't thought about privacy as a component of customer relationship management (CRM), industry observers say."No one is looking at privacy from the perspective of how can we establish a value proposition in which the customers will say, 'yes, please share my information,'" says Peter Reid, privacy director at Fiderus, a Research Triangle, N.C.-based security and privacy consulting firm. Privacy can be good for business-as opposed to something that is being legislated, he says.

Making good on its promise to vigorously defend a lawsuit filed Feb. 20 by eHealth-Insurance Services Inc., InsWeb Corp. filed a countersuit March 22 in U.S. District Court, Northern District of California, San Jose.InsWeb is denying allegations made by eHealthInsurance that InsWeb sent a considerable number of illegitimate referrals to a co-branded Web site built and maintained by eHealthInsurance (see "eHealthInsurance Sues InsWeb," April).

After several years of sitting on the sidelines, insurance carriers are now getting up to speed in selling products over the Internet. However, dealing with the state-based regulatory system, which requires carriers to jump through multiple hoops to engage in e-commerce on a national basis, threatens to slow their efforts to a crawl.

The insurance industry was one of the last to open its private gates to the Internet. Apprehension about exposing confidential customer information and other proprietary data to the outside world prevented insurance companies from jumping too quickly on the e-business bandwagon.

The financial success or failure of a property & casualty carrier largely depends on the company's ability to manage risk. Based on sophisticated actuarial models, carriers can formulate a risk model for virtually every type of physical risk exposure, and through these assumptions decide whether the risk is worth bearing.

Three years ago, when Jim Klotz became senior vice president and CIO of The PMA Insurance Group, the carrier's IT assets were purchased and managed in a decentralized environment. Consequently, some of the company's PCs were nearly 10 years old, seven or eight versions of operating systems were installed across the company, and technology assets were accounted for manually.

Advances in catastrophe modeling technology are enabling carriers to take a more microscopic approach to assessing underwriting risks and predicting losses.History does repeat itself. Between 1989 and 1999, insured losses from hurricanes that struck the United States, when adjusted for inflation, totaled $45.7 billion, according to Insurance Services Office Inc. (ISO), New York.