The insurance industry has made great strides in recent years in transacting insurance electronically. Yet there is no doubt that the barriers that still exist, whether real or perceived, must be toppled to allow insurers to join other industries in the pursuit of technological advances that provide greater choices and better service.State insurance regulators have taken the lead in addressing the barriers to electronic transactions. In the last few years, clarifications regarding electronic transactions were reviewed and guidelines issued with the release of a model bulletin by the National Association of Insurance Commissioners (NAIC). The NAIC model stated that electronic transactions should be treated no differently than paper transactions.

However, even with insurance regulators providing a green light, some specific barriers to e-commerce remain. Unfortunately, these challenges often are not directly connected to laws regulating transactions over the Internet but instead to state and federal statutes that apply to other areas of business transactions.

Although most property/casualty insurers currently conduct many business operations electronically, the type and sophistication level of these functions varies dramatically.

Some insurers use the electronic media to assist their agency force in day-to-day transactions, while others use electronic media in regard to specific elements of the insurance transaction, such as receiving applications. Still others use electronic media for as many elements of an insurance transaction as possible.

Privacy notices

Sending privacy notices is one area that insurers have had to grapple with in trying to make the leap into a paperless environment. Proposed federal law would require consumers to receive notices and give consent prior to providing sensitive personal, financial information to an insurance company.

This notice requirement, if enacted, would place an undue burden on carriers to send the notice and also to establish clear methods of obtaining consent and tracking that information. Recently enacted privacy requirements pose additional difficulties for insurers. While banks and other non-insurance financial institutions deal with privacy in terms of the individual "opting out" of the disclosure of personal financial information, some jurisdictions, including certain localities in California, require that the consumers "opt-in" to giving the consent to use personal information.

NAII has filed an amicus brief challenging the position of those localities. In Vermont, NAII and the other trade groups filed suit against an opt-in position of the Department of Insurance. This two-sided approach of opt-in versus opt-out adds to the complexity of providing notices via the Internet. Insurers would have to create different program screens for different jurisdictions with different data retention methods.

The situation creates expenses for companies because of additional program costs and the dangers of inadvertent noncompliance. Carriers continue to view the situation as a definite barrier.

Form filing

Another barrier to e-commerce involves traditional regulatory rate and form filing requirements that can place a tremendous drag on introducing insurance products.

Although insurers are able to solicit and process application information and issue quotes electronically, product introduction continues to be a slower process because rate and form filing mandates differ from state to state.

In addition to state-by-state variances in insurance policies and rate forms, insurers must develop Web processes, file the screens used in the transaction and then file not only the initial screens, but also the screens that contain any modifications. All of these processes dramatically slow down the insurers' ability to market new products and the consumers' ability to view and select the products.

These barriers hopefully will be removed as efforts by the NAIC and the industry is considered over the next few years to streamline and make uniform all types of filing requirements.


The actual signature of the insured or an applicant remains somewhat of a barrier. Some insurers accept the electronic signature of the consumer if a state has adopted the Uniform Electronic Transactions Act (UETA). While there is also a federal law covering electronic signatures, some companies are reluctant to accept an electronic signature except in states that have UETA in place.

Insurance companies fall back to the paper world with "wet signatures" in states that have not passed UETA or other specific statutes.

NAII has been in the forefront of urging states that have not yet done so to adopt UETA in its original form. However, customer authentication remains an issue to insurers relating to the certainty that the person they believe they are dealing with on the Internet is indeed that individual.

Another barrier and one of the last steps in the transaction is when the insurer receives payment for the coverage. Generally, there is no problem receiving the first payment by phone or other means, but without authentication, the insurer must send the applicant a form to sign to authorize further withdrawals or accept a credit card payment. The requirement for a follow-up with a paper signature is federal law and is required for other types of transactions processed over the Internet or by telephone.

However, that step can be eliminated by permitting instant authorization for however many periodic withdrawals are necessary for the policy term. In the case of insurance carriers, streamlining would mean permitting authorization over the phone of all 12 monthly withdrawals for an annual policy. In addition to viewing barriers to transactions that involve issuing a policy or selling a product, sending cancellation and non-renewal notices continues to operate outside the electronic environment.

Some of the problems are simple to evaluate. For example, someone receiving an envelope indicating that it contains important policy information, via first class mail, is more likely to open that letter than someone receiving e-mail. Problems such as a server being down, a new e-mail address or not checking e-mails for several days could delay review of important policy information.

Also, some jurisdictions maintain that an insurer who has not sent out a notice correctly will remain on the coverage until the notice is delivered correctly. Without clear statutory provisions specifying procedures for electronic cancellation and nonrenewal notices, insurers are likely to remain reluctant to use electronic notices over traditional notice methods.

Another area of hesitation in the electronic world exists because of the relative newness of electronic transactions of insurance. Not much historical experience exists regarding states and market conduct examinations via new technologies.

For example, one state may ask to see the entire file of screens, both new and since inception of a company's Web site. Other states or jurisdictions may not make the same request.

Companies that want to make the leap into new technology may want to consider retaining the entire file of screens as modified-and, if feasible, all the screens involved in specific transactions.

Online claims

A technological leap is being made by insurers that have tapped into electronic claims processing. One barrier is the reluctance by some state courts (less often federal courts) to accept electronic signatures. It is incumbent upon insurers to be able to retrace all the steps in the claims transaction.

Consumers are reluctant to file claims online. It may be that it is simply easier to pick up a phone to report a claim. Or, it may be a concern about privacy regarding an accident or claim, or just the need to talk to a human voice when an accident or damage to property occurs.

However, it is likely that the reluctance of consumers to file and access their claims online will lessen as consumers find using the Internet to file and access their claims more comfortable and secure.

For now, the barriers to successful use of the Internet in all aspects of insurance seems to be growing smaller, and in five years those barriers could be a thing of the past. The companies that can anticipate these changes and adapt quickly could have a significant competitive advantage in the coming years.

Michael G. Koziol is senior director and counsel for the National Association of Independent Insurers, Des Plaines, Ill.

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