The insurance industry has always been paper-bound. Each policy sold is a contract; and although intangible, the promise behind each contract is legally binding. So when insurers move to a paperless environment, they must do so with extreme care.

Insurers that choose to reduce their paper burdens do so for many reasons: to address internal- and external-customer demand for efficiency, boost security, enhance accessibility and drive home a conscious effort to go green. For many insurers across all lines of business, converting paper documents to electronic files means a new focus on risk mitigation and regulatory compliance requirements.

Why? Because converting to a digital environment usually involves more than just scanning and storing policy declaration pages, faxes, applications, claims forms, print streams, volumes of Web content, multi-media files, e-mails, industry standard files such as ACORD XML and more. It also includes the transmission of entire packets of insurance documents for which electronic proof of delivery, signatures, tamper sealing and home routing are required from a legal and compliance perspective.

Insurers have had a legal framework for the use of electronic signatures and electronic delivery available to them for more than a decade, notes Patrick Hatfield, partner at law firm Locke Lord Bissell & Liddell LLP. Hatfield says that thanks to the natural course of events, a number of practices designed to help insurers emerged to supplement this framework.

"Compared to paper processes, a reasonably well-designed electronic signature process, coupled with the right technologies, can actually reduce overall risk," says Hatfield.

Depending on their line of business, insurers vary on their understanding of what comprises that process, Hatfield adds, noting that life insurers tend to be more advanced, chiefly due to the long-tail nature of the business, followed by health, with its associated Medicare Part B, long-term care and disability options, which require extensive signatures on forms and endorsements.

"Compared to personal lines P&C, for example, which typically requires a year-to-year contract, life carriers furnish long-term contracts, meaning the carrier is on that risk for a long time. If they don't get the process [of developing a well-designed e-signature process] completely right the first time, there can be long-term consequences," he says.

Lessons Learned

Since moving to a paperless environment in 1998, and reclaiming enough office space to accommodate expansion efforts, First Rehab Life knew the benefits first-hand. The privately held midsize insurer, which provides New York State disability insurance to 120,000 policyholders and more than a million of their employees, meets the same types of compliance requirements as does a workers' comp insurer.

"When we first planned to do this, the immediate goal was to take the paper from every file cabinet and convert to digital," says Anil Chacko, VP, technology, at the firm. "Our goal was to scan everything."

A joint effort between First Rehab's operations and technology groups, the team studied ways to implement a total e-delivery solution that would do more than reduce paper; it also wanted to capture signatures and deliver documents to policyholders, agents and claimants.

In converting 4 million paper documents to digital files, First Rehab Life was able to toss 200 file cabinets and recover 24 working spaces, but realized that it would face compliance challenges.

"We had document retention policies for paper, but once we started putting items into digital format, we had to deal with the possibility that the electronic document could be deleted by accident. So our legal counsel said we should follow the same format as paper," Chacko says. "From an IT perspective, this duplicative process became a data management nightmare, with backups taking 30 to 40 hours." To resolve the issue, the company built a process into the system that retains electronic documents permanently and paper documents for 90 days so originals can be retrieved if necessary.

The next challenge related to how they viewed and accessed information quickly and efficiently. While the new system obviated the problem of the underwriting, claims and policy services departments trying to simultaneously access the same paper files, it became evident that the design of the new digital system had its drawbacks, too. With some of the files holding up to 120-pages worth of data, retrieving specific pieces of information within those files could negatively affect customer service levels as well as audit processes.

"Before we ended the project, we decided from an efficiency standpoint to change how we electronically filed these documents. And now we classify by broker, policies, agreements, etc., and index them in a common naming platform. This will also help from an audit perspective," Chacko adds.

Following the Audit Trail

Audit logs play a key role in paperless storage and transmission, regardless of whether a signature is required, agrees Kelly Purcell, EVP at eSignSystems, an e-signature software provider. "Insurers that are not ready to do e-signatures know they can do e-delivery and, because they are delivering electronically, they will have audit trails."

Maya Assurance offers special commercial-lines livery insurance and is bound to New York State's regulatory compliance requirements. Audit trails, records retention policies and privacy are critical to the growing insurer. KJ Singh, Maya's VP, says his decision to go 99-percent paperless is in part a result of learning from others.

"We were aware of another company that stored its paper documents in its office's basement and found that termites had destroyed entire boxes of policies, endorsements, claims files and more," he says. "With no document images and no hard copies, we knew what that meant for that company," he said. The solution was not to simply house paper elsewhere.

With the help of Cabinet, an electronic document and workflow management software provider, Maya put in place document management policies and an efficient records retention system that provides privacy and security. Maya scans 200 pieces of incoming mail daily, then ships the documents to a storage facility. Maya's operations, underwriting, accounting, claims and finance departments all work exclusively with digital documents.

Singh says they researched other industries, such as banking, and other processes, such as Check21, which enables the recipient of the original paper check to create a digital version of the original check. This eliminates any further need for the physical document. So rather than the 40 agents only having the capability of transmitting e-signed documents, they get the signatures on-site, scan and e-mail them for archiving.

"Regardless of whether agents mail us a paper copy of the original or take the original document and convert to digital, that document becomes a non-editable original document. From those scans, we can reproduce a legal document that's sufficient in a New York court of law," Singh says.

Grinnell Mutual Reinsurance also sees the value of automating workflows, so much so it incorporated that initiative into its records retention program, notes Martina Hull, director of content management and business intelligence at the 100-year-old company. Responsible for enforcing records-retention rules, Hull's team considered both business and legal needs as her department automated almost every department over the past four years. The billing department is scheduled for 2013.

"It's not just the documents we are focusing on, but also the data," Hull says. "We must be in compliance with state and federal laws, and we must create a secure environment to reduce risk."

Grinnell users can work remotely and view business documents through a secure site, removing the risk of taking documents home and possibly having something happen to them.

Hull says that Hyland Software's Onbase enterprise content management software facilitates the flow and placement of electronic documents. "We scan everything, and 75 percent of the communications we get from external sources are electronic, too. We suck them into Onbase, so our users don't know the difference."

Grinnell's mutual companies and agents can access electronic policy notes that fit inside the Onbase "workview" area. For policy processing, customers can go to Grinnell's Web front end and sign documents, Hull says. And although they are not managed in Onbase, the documents end up there. To further reduce risk, Grinnell's FTP site holds access to medical records, Social Security numbers and other sensitive data.

"I used to get funny looks talking about the notion of electronic compliance reducing risk," says Lockelord's Hatfield. "Not anymore."

Need-to-Know Terms

There is still plenty of confusion about what certain terms mean from a compliance standpoint. in guidelines issued to ACORD on insurance e-signature and e-delivery, Greg Casamento and Patrick Hatfield, partners at Locke Lord Bissell & Liddell LLP, explained some of the more common terms:

Digital Signature - A method of encrypting an electronic record using a hash value with a private key and may or may not be an electronic signature, which is a signature in electronic form having legal significance.

Electronic Record - A contract or other record created, generated, communicated, received, or stored by electronic means.

Electronic Signature - An electronic symbol or process having legal significance and attached to, or logically associated with, a contract or other record that is executed or adopted by a person with the intent to sign the record. it does not necessarily need to be a process qualifying as a digital signature. A process where a person speaks his or her consent in a way that is associated with terms and conditions in a record with an intent to be bound to those terms can be an electronic signature.

ESIGN - The electronic signatures in Global and National Commerce Act, 15 U.S.C §70001 et. seq., the federal electronic signature law.

Tamper Seal, Tamper Seal Signatures and Tamper Evident Signatures - A digital signature applied to an electronic record in a way that the record can be verified to ensure that no changes have been made to the electronic record since the seal was first applied.

UETA - The version of the Uniform electronic Transactions Act, as published by the National Conference of Commissioners on Uniform state laws and enacted in 47 states, as of the date of this paper (ill., N.Y. and Wash. being the three that have not enacted UETA).

Many Still Hesitant

Insurers Tend To Understand The efficiencies to be gained by moving to a digital environment, but some still are hesitant to adopt electronic documents. "Companies such as Docusign, e-SignSystems, Cabinet and Silanis have been beating this drum for years to insurers," explains Patrick Hatfield, partner at law firm LockeLord LLP. "But it requires investment, and if their move to digital includes e-signatures, it also includes new thinking about internal workflows as well as how they will be dealing with their channel."

Insurers with captive agents, or strong distribution networks, are pursuing digital and e-signature policies and technologies that can be extended out to the channel. for carriers relying on non-captive agents who represent as many as 10 other carriers, it's another story.

"A couple of the technology vendors come at this from the agents' perspective, which helps," Hatfield says, adding that he believes that the competitive advantage, along with needed changes in agency management systems, will also help change the tide.

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