To many insurance carriers, back-end processing of small-business insurance through accurate underwriting has long been a source of frustration.On the front end, providing thorough servicing for demanding business policy owners can represent another challenge. In the middle, furnishing independent agents with automated tools to build small-business volume has seen its share of tribulations.
From front to back and all points in between, thriving within the small to mid-size business insurance space is not unlike confronting a three-headed monster. In response, Seattle-based Safeco Corp. has unveiled a three-tiered solution, dubbed ESP.
To most people, ESP is an acronym for extra sensory perception, defined as possessing psychic abilities powerful enough to read someone's mind.
Michael Hughes, senior vice president, Safeco business insurance, underwriting, states that while Safeco, via ESP, may actually possess the ability to read deep into the insurance needs of small businesses, a more accurate summation of ESP is "Easy, Simple and Precise."
Over the next three years, the property/casualty insurance giant projects that ESP will be on the desktops of more than 50% of its 6,000 independent small-business agent network. Through a dynamic automated underwriting platform, Safeco predicts that ESP will empower 90% of new business to go "untouched" by a human underwriter. And, with ESP leading the way, Safeco's business unit expects to vault from the No. 5 writer of small to mid-size volume to the No. 1 position.
"We determined in 2001 that we wanted to be the top writer of small to mid-size business insurance, which is a market defined as premiums of $100,000 or less," Hughes explains. "To vault from No. 5 to No. 1 meant that we had to make several enhancements to our value proposition. We have to offer quality, low-cost products. For agents to embrace our product line, we have to provide an ease of doing business."
The Power of Three
ESP is parceled out into three independent but integrated pieces. Full delivery of the strategy will occur throughout 2002 and 2003.
The first component is an automated underwriting platform (AUP) that was launched in July. The AUP is an internally developed technology that delivers rapid underwriting decisions, along with once-and-done pricing for small to medium businesses. Dynamic automated underwriting should free underwriters to work with agents on more complex accounts that also can potentially generate greater profits.
Currently, the system handles all Safeco business owners' policy (BOP) renewals. Commercial automobile, workers' compensation and commercial multiperil will be automated by the fall.
The second piece is an Internet-based new-business entry module, which will be offered to agents in the fall. This technology, when linked to AUP, brings the approval and pricing decisions directly to the agent's point of sale. While currently offered as a proprietary platform, the new-business interface will eventually be built on an open architecture to increase user penetration.
The third component is a client service unit, which provides agents' customers with policy service, endorsement processing, certificates of insurance, renewal questionnaires and direct-bill service.
In its entirety, ESP's distinction is not only its breadth and its depth, but the order in which it was unleashed. Safeco executives assert that it made little sense to implement a slick Web-based new-business interface if an agent also had to spend hours or days to obtain a new-business quote. So the AUP was designed and implemented first.
"AUP enables us to provide much more precise pricing for both average risks and competitive risks," Hughes explains. "We had to get the back-end data piece in place before offering the Web interface. Without AUP, we would be unable to fully optimize our loss ratio and renewal rate position and get a quote right the first time."
Not only was accuracy important, but so was reducing labor intensity. The solution does that as well. "Low handling means low cost," Hughes says. "And low handling fosters ease of doing business. We anticipate that with AUP, 45% of business insurance activity will go untouched by an underwriter, and three years from now we think that more than 90% of the activity will go untouched."
Understanding Risk
AUP was developed over an 18-month period with input from Safeco business and underwriting units, while Safeco's IT unit, under the auspicies of IT director Dennis Ellermeier, performed much of the heavy lifting from a systems integration standpoint.
This effort was augmented by an outside technology consultant, whom Safeco did not name.
One of the chief challenges that the group faced was establishing and automating business rules that would serve as the heart of automated underwriting. Traditionally, classifying a business can be a difficult process within manual underwriting procedures.
"AUP analyzes profitability variables," Hughes explains. "The back-end automation can separate high risks from low risks and factor in a significant amount of compelling demographic data. That's because the business rules are deeply embedded into the program's infrastructure, and can be adapted without much pain."
As it set out to construct the new-business interface, the underlying objective was to provide superior service to customers and give agents the ability to bind products with the touch of a button, Hughes points out.
Currently, the new-business solution is proprietary, but over time Safeco plans to offer it as an open-architected system. This will enable any independent agent to activate ESP no matter what agency management system they chose to operate. This will occur through eventual alignment with such industry data exchange standards as IVANS Transformation Station.
Safeco executives are proud of the fact that while ESP is robust, it was also designed flexibly. "The system is sturdy enough to react to changes," says Ellermeier. These changes could range from those reflecting Safeco business rules or external developments involving industrywide data exchange standards.
"The key is that we will easily be able to tweak the system based on changes as they occur," Ellermeier declares. "And while the system may be proprietary, it's very smooth and slick as far as proprietary systems go."
The Price is Right
At the outset, Safeco is placing an emphasis on engaging those agents that have a good feel for electronic business processes. Yet at the same time even agents that are not regarded as technically savvy can easily learn the system.
When it goes live the last week of October, participating agents can activate the program by logging onto the Safeco Plaza intranet portal. Based on ACORD XML standards and deploying the Microsoft .Net platform, the system will feature various pre-fill screens that enable agents to input a quote request and have the process completed in eight to 10 minutes. "It's very easy to use and very intuitive," Ellermeier states.
Agents can quote and bind BOP policies; next year workers' compensation and commercial auto will be added to the system. As they provide quotes for various business lines, agents can do so confident that the coverage amounts and the accompanying premiums will be accurate.
For years this has been a bugaboo in the small-business space: business customers found that they were either under-insured or over-insured.
Currently Safeco, on average, figures that 10% to 15% of its small-business insurance is actually underpriced. This means that the margin separating what insurance coverage should be priced at and what it is actually priced at must be subsidized from somewhere else within the Safeco organization, says Hughes.
On the other end of the spectrum, Hughes says that 30% to 40% of the business coverage it writes should be "better credited," meaning that various customers are paying higher premiums. This often leads to customer discontent.
With AUP in place, Safeco can look to better align coverage with cost, and in the end improve its renewal and retention rate to 90% or better. Currently, this rate is in the mid-70% range, Hughes says.
In the quality assurance phase of developing ESP, Safeco enlisted its agents to provide input every step of the way. The back and forth proved meaningful, and eventually enabled Safeco executives to "recalibrate the business" in the context of product pricing by taking into account agent and company profit positions.
Agent Satisfaction
Keeping agents satisfied is a big priority. Industry e-business analysts know that this "happiness" begins with technology. "Agents are eager to offload administrative burdens any way they can," says Todd Eyler, senior research analyst for Cambridge, Mass.-based Forrester Research Inc.
"The administrative part is not a value-added part. Agents are charged with selling," Eyler adds. "So whatever a carrier can do to enable the agent to concentrate on selling is in their best interests."
From a technology standpoint, agent single sign-on solutions represent the gold standard of a dynamic agent interface, he says. "The Hartford has been one of the pioneers in this small-business space, and it appears Safeco is right there too."
Keeping customers happy is another priority. AUP and the new-business interface will accomplish that through more accurate pricing.
But beyond a fair price, customers demand on-going service. That's where the third component-client services-enters the picture. With 50 agents participating thus far, the client services unit is presently a telephonic-activated system that enables an agent to perform account queries for a business customer. For a small fee, agents can offer their customers an exclusive toll-free telephone number for direct policyholder services through Safeco.
In time, this service will expand to enable users to activate the Web to obtain account queries and perform other interactive account activities.
Taking into account the consolidated ESP program, Hughes projects that of its 6,000 agents who write insurance for small to mid-size businesses, 20% to 25% will be involved in ESP by the end of 2003.
