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.

Marketing Tool

During the mid- to late 1990s, most insurance companies viewed the Internet as a new marketing channel. Although some carriers, such as Progressive Insurance, used the Internet to automate policy sales, most insurers only used the Internet to advertise and generate sales leads.

Venture capitalists poured tens of millions of dollars into start-up companies such as Ins-Web Inc. and eCoverage Inc. to build new insurance brands-not to create technologies that insurance companies could use to serve their customers better or more efficiently.

By 2000, carriers realized it was too expensive to advertise on the Internet or pay for customer leads and then use traditional agent approaches to close sales-instead of integrating the Internet with other delivery channels. However, some leading carriers had already begun using the Internet to collect data, provide quotes and then close sales through call center representatives. John Hancock, for example, began refining this approach in the mid-1990s for term life insurance and experienced a breakthrough year in 2000, increasing overall close rates by 300%.

Channel Integration

Allstate Insurance became the first auto insurer to try a similar approach, committing in 2000 to spend $1 billion to integrate the Internet with its call centers and agent force. Other carriers, including Nationwide, Safeco and AIG, soon followed. And so-called e-marketplaces began to focus on fulfillment, with call center specialist InsLogic Corp. gaining traction in the marketplace and InsWeb building its own call center.

Among individual auto insurers, GMAC has so far created the best distribution approach, minimizing marketing costs by targeting an affinity group of customers and creating a streamlined process for collecting data, providing quotes and binding policies online.

Starting in 2000, carriers also began using the Internet to make the claims process more efficient. Carriers such as Progressive began using tools from companies such as ChoiceParts to advertise and increase usage of the repair shops in its direct repair Internetwork. Also, Farmers and AIG have begun using integration tools from software vendors such as and Visibillity Inc. to exchange claims data more easily with third-party service providers such as auto repair shops and attorneys.

Untapped Potential

Although insurers have so far gained a few process efficiencies by using the Internet, the greatest potential lies ahead-primarily because of the Internet's ability to connect insurers to external service providers at low cost.

Carriers will improve the customer experience by binding auto insurance policies in real time, issuing life insurance policies in days instead of weeks and providing real-time claims status updates to customers.

The majority of insurers' technology dollars now go to integrating internal applications and data sources-primarily through customer relationship management and agent extranet projects and increasingly through internal claims automation projects. Once carriers have integrated their internal data and business applications, they will look outward to new intermediaries to drive further efficiencies.

Indeed, carriers will use new Web services technologies-facilitated by ACORD XML standards-to more easily integrate with these new intermediaries.

Furthermore, insurers will simultaneously reach new markets-particularly customers of banks and brokers-and minimize acquisition costs by connecting their own fulfillment engines to distribution intermediaries such as InsLogic Corp. and AnnuityNet Inc. Life insurers will minimize turnaround times on new sales by integrating their fulfillment engines with health data intermediaries such as e-Nable Corp. and Intellisys Corp.

Hubs and Intermediaries

Auto and home insurers will drive down claims adjustment and indemnity costs by integrating internal claims processing hubs with new claims intermediaries such as, eMitchell (an Internet subsidiary of Mitchell International) and ptc-NET. Integrating internal claims hubs with claims intermediaries will provide carriers with visibility across the entire claims supply chain and allow for the intervention of claims adjusters by exception only.

Aggregated customer and business process data will enable insurers to optimize their products and business processes. With cheap access to industrywide fraud databases such as ISO's ClaimSearch, carriers will find it easier to not only detect fraud, but also optimize the number of questions asked on online policy applications and lower abandonment rates. With complete historical data about claims outcomes across the entire supply chain-including cost, quality and turnaround times-carriers will select the right employees, repair shops, doctors and attorneys to optimize claims outcomes for themselves and their customers.

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