Insurance

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.

Bob Lucas isn't your typical insurance company CIO. For starters, he has been with one company-The Hartford-for 30 years. What's more, he's a business administration major who was hired right out of college by the Hartford, Conn.-based financial services firm.

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.

In the beginning, Corporate America created a concept known as full-service, and it was good. The epitome of full-service is gasoline marketing, where a service station attendant rolled out the red carpet to customers, who could expect to have their tank filled, windshield cleaned, oil and tires checked and the transaction processed-all without unbuckling their seat belts.

It's always been assumed that an insurance agency can find a way to provide adequate service to its existing customer policyholders while at the same time optimize its new-business opportunities.But most realize that it rarely works that way. Internal operational inefficiencies, marked by a paper-intensive communications process and antiquated data-exchange platforms, often undermines an agency's agility in generating new business.

Success in designing Web self-service capabilities does not subscribe to a "build it they will come" philosophy. The business sponsoring the Web site must first conduct diligent research to determine the specific blueprint of what Web features will be regularly accessed.BlueCross BlueShield of South Carolina was one of the first health providers in the nation to offer its members, doctors, hospitals and other health care professionals a large array of self-service transactional capabilities with real-time access to mission-critical information.

Chris Mower didn't want to spend a lot of time-or money-building a Web portal for independent agents. But those restrictions didn't prevent him and Royal & Sun Alliance's Professional & Financial Risks Division from developing a comprehensive offering that is designed to develop new revenue streams, improve productivity by eliminating manual processes and help small-business clients understand management liability exposures."The business model, which we validated with customer feedback, was to create a way to distribute products through new channels without creating channel conflict," says Mower, manager of e-business solutions for Royal & Sun Alliance's ProFin division based in St. Louis. "It was about re-inventing existing processes and taking advantage of new technologies."

In today's highly competitive environment, financial services are largely a commodity, with institutions distinguished as much by service and price as by products and product features.Web self-service can significantly improve service quality. By automating much routine service, Web self-service enables users to quickly and easily resolve most of their service needs around-the-clock More importantly, because users aren't placed in a call queue for an available agent, Web self-service is often more responsive than contact centers.

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).

Northwestern Mutual's IT philosophy is right out of Aesop's Fables. By applying the strategy of the tortoise and its slow and steady approach, this insurance giant with $92 billion in assets and annual revenues of $15.4 billion gets the most bang for its information technology buck.The Milwaukee-based company has to be careful how it uses technology because it can't jeopardize its shining reputation. This year, it was voted the "most admired" life insurance company for the 19th year in a row in a Fortune magazine survey. And, it ranks as the nation's best in customer satisfaction among all financial services studied, according to a Wall Street Journal 2001 report.

The surety bond business has long been plagued by razor-thin profit margins, with many providers satisfied just to break even on the issuance of a new product.Most surety bond issuers therefore understand that success hinges on robust volume. But as providers strive to generate greater sales, they're confronted with a troubling reality: processing surety bonds, which are contractual agreements guaranteeing a certain behavior or fulfillment of an obligation, can be labor-intensive.

Last year was viewed as a coming out party for Enterprise Application Integration (EAI)-related investments in the insurance industry. A larger coalition of carriers made a commitment in 2001 to identify the role that EAI-and within it XML-plays within the context of their operations.Financial services firms spent more than $4 billion on EAI-related hardware, software or other services in 2001, and this year projections are they will spend almost $6 billion. By 2006, EAI expenditures will reach upwards of $12 billion, reports Newton, Mass.-based Meridien Research Inc.

Environmentalists should be happy about the new document scanning and imaging system at Prudential Group Insurance-because it's saving a lot of trees. The insurer's disability insurance customers should be pleased too-because it's enabling the company to process their claims more quickly.What had been a manual, paper-intensive process of receiving disability claim documents via fax machine or mail has been replaced by a nearly paperless operation.

Poor first impressions are often extremely difficult to shake. Just a few years ago, Web-based insurance programs of all varieties got off on the wrong foot with Internet sophisticates seeking speed, interaction and convenience.

In the late 1990s and into 2000, several carriers and third-party providers began to recognize online calculator tools as invaluable in helping consumers perform needs analysis for life insurance."We have come to believe that few consumers have the patience or the understanding to spend a lot of time filling in forms to get the information they need," says Terry Burt, president of Canton, Mich.-based Interlinx LLC. Interlinx operates a Web site, www.budgetlife.com, that provides dynamic marketing and pricing data on a stable of life insurance products from more than 150 carriers.

It may be an old joke, but it's not a laughing matter: The only people who really understand the legacy policy administration systems running at most insurance carriers have either retired or passed on.Nonetheless, most carriers are reluctant to replace these systems, preferring to live with the devil they know, even though their systems may impose limits on their operational flexibility.

Insurance CIOs report that the emerging mix of legacy and Web systems in their enterprises creates a set of integration challenges that dominate their list of IT priorities. Not only are these integration challenges technically demanding, they're becoming increasingly critical to the business of insurance.Spending on enterprise application integration (EAI) in the insurance sector reflects growing levels of commitment to achieve legacy-to-Web integration. Gartner Dataquest forecasts that worldwide spending on EAI-related services in the insurance sector is poised to grow from $654 million in 2000 to more than $1.7 billion in 2005.

Insurance is an important component of modern economic life. The logical outcome of the millions of policies in force today is a proportional number of claims to pay for covered losses.From an operational cost and policyholder perspective, the claims handling process is the heart of property/casualty insurance. It's true that performing risk analysis, selling policies and retaining customers are important issues for carriers.

Layton Christensen's best-selling book, "The Innovator's Dilemma," discusses how business leaders at large companies have usually underestimated the long-term impact of disruptive technologies. This trait certainly applies to insurance and the Internet.Insurers' unsuccessful efforts of using the Internet as a lead-referral channel in the late 1990s have soured senior executives' current perception of the Internet. However, recent successes by companies, such as John Hancock's strategy to sell term life insurance online and innovations by some property/casualty carriers in claims processing, is beginning to turn the tide. By 2005, maturing Web services technologies and data intermediaries will become key business drivers for carriers.