Security risk

While in flight to Boston on the morning of Sept. 11, 2001 and hearing news of the horrific attacks in progress, Hemant Shah's first concern was the fate of the business associates he met with the previous day at the World Trade Center.But as the founder of Newark, Calif.-based Risk Management Solutions (RMS), he must have realized the seismic change the field he helped pioneer-catastrophe modeling-would soon experience.

Before the days of integrated marketing programs, independent agents or their customer service representatives picked up the phone and called customers in the hopes of retaining the business of the agency's most profitable clients.Times have changed. Today, it's too expensive and time-consuming for an agency to hunt and peck its way through a large client list looking for its most profitable customers-then conceive ways to keep them on board. And it's too expensive for agencies to have a marketing arm or customer service representatives who do anything more than sell, sell, sell.

As the needs and demands of e-business evolve, companies are faced with an emerging security threat. And it's not a new hacking technique or vulnerability in a particular technology.It's complexity-the complexity of technologies, the complexity of balancing business and security demands, and the complexity of relationships among user communities.

Until last month, the strongest positions regarding modernization of insurance regulation have been proposals for an optional federal charter for insurance companies. But another compelling-and opposing-perspective entered the debate in August, when the Alliance of American Insurers published a report that firmly argues against federal regulation for property/casualty insurance."Optional federal chartering entails a significant risk of adverse and unexpected consequences, no matter how carefully and narrowly initial legislation is crafted," the report concludes. "The better and more prudent policy is to reject federal chartering and encourage and support further modernization of state regulation."

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.

A major step in streamlining agent licensing across the states was taken in August when the National Association of Insurance Commissioners (NAIC) made the preliminary determination that at least 35 states had met the reciprocity requirements for nonresident producer licensing under the Gramm-Leach-Bliley Act (GLBA).At press time, the Kansas City, Mo.-based NAIC was expected to officially certify those states at its meeting in September in New Orleans.

Ever since Gramm-Leach-Bliley passed in November 1999, momentum has been building to reform the state-based insurance regulatory system. The landmark legislation, which allows banks, insurers and brokerages to merge and compete with one another, also ordered the states to enact uniform producer licensing laws by November 2002 (see "Here Come The Feds, May 2001).Yet, although the law mandates uniform producer licensing, it essentially left the rest of insurance regulation to the states. And, according to many in the industry, the state-based system puts insurers at a disadvantage-especially when they're trying to compete nationally with banks and brokerages.

Most insurers and reinsurers espouse a belief that new business doesn't always equal good business. To most insurance providers, the honeymoon period with a new customer ends as soon as claims activity intensifies.

For years, paper-based processing for a commercial insurance policy has made it exceedingly difficult to assess risk and issue accurately priced coverage. Moreover, many insurers and reinsurers have had a hard time fully analyzing client data due to the lack of disclosure by the client.But Schaumburg, Ill.-based Zurich North America launched in February a Web-based solution-called the Business Interruption Coverage calculator-which will be an integral part of its underwriting procedure for business interruption coverage.

As two bastions of tradition, neither the legal profession nor insurance carriers eagerly jumped onto the Internet bandwagon in the late 1990s.But now, the dust of the dot-com wreck is settling, and carriers and their counsel are beginning to see where it makes sense for them to use online technology to manage legal costs and improve collaboration.

Realizing that generating new insurance volume doesn't necessarily ensure profitability-and may even suppress it-State Farm Mutual Automobile Insurance Co. began implementing a strategy to suspend writing new homeowners policies in 17 states.The Bloomington, Ill.-based insurer is also setting the wheels in motion to fully exit the New Jersey auto insurance market over the next five years. State Farm's geographic retrenchment comes on the heels of a reported $5 billion net loss incurred since 2001. The losses were marked by rapidly increasing claims costs due to an inordinately high series of natural disasters-from hailstorms to flooding.

Some senior insurance executives have a hard time understanding how a seemingly esoteric technology such as artificial intelligence (A.I.) could possibly be used by the insurance industry.This mental juxtaposition is ironic because the potential applications are manifold. And more importantly, the insurance industry was one of the first to widely adopt artificial intelligence technology in the form of expert underwriting systems.

Over the years, insurers have faced criticism for their lack of data integration and customer relationship management (CRM) capabilities. This deficiency took on an added dimension with the passage last October of the USA PATRIOT Act.The USA PATRIOT Act-an acronym for Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism-is an anti-money-laundering law designed to prevent terrorists from setting up operations in the United States.

HNC is widely recognized as a leading developer of analytic and decision-management tools. But are carriers ready to turn their important underwriting and claims decisions over to machines?The similarities between fighting terrorism and combating insurance or credit card fraud are not very obvious. However, the Bush Administration's Homeland Security initiative is considering using some of the same technology that's now being applied to identify fraudulent transactions for more than 300 million credit cards worldwide, and by nine of the 10 largest insurance companies.

In an unusual move, Allstate Insurance Co. took the offense by filing counterclaims against agents who filed a lawsuit against the carrier last August. The agents sued the Northbrook, Ill.-based carrier for age discrimination and violation of federal civil rights laws they claim occurred when Allstate terminated them in June 2000 (see September 2001, page 8).Allstate filed its counterclaims against the agents in March in U.S. District Court in Philadelphia-charging the agents with unjust enrichment, fraud, negligent misrepresentation, and breach of duty of good faith and fair dealing. Allstate is requesting compensatory, punitive and other damages in an amount to be determined by a jury.

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.

Proponents of federal insurance regulation have moved one step further toward their goal. Two bills have been introduced in Congress that would establish a new federal agency to charter insurance companies choosing to bypass the cumbersome state-by-state system.In December, U.S. Senator Charles Schumer (D-N.Y.) proposed the National Insurance Chartering and Supervision Act. Then, in February, U.S. Representative John LaFalce (D-N.Y.) introduced the Insurance Industry Modernization and Consumer Protection Act. Both bills respond to lobbying from banking and insurance groups that want a simplified regulatory structure for licensing insurance companies.

The Internet has been around less than a decade, and already it has proved to be the quintessential double-edged sword-a potent weapon as well as a useful tool. The Melissa virus unleashed in 1999 cost companies as much as $385 million, followed shortly after by the Love Bug in 2000, which infected more than 10 million systems and cost businesses an estimated $10 billion.

The hardened insurance market, costly incidents of cyber crime, and a new ISO Electronic Data Liability endorsement, which provides clear limitations for cyber risks under its Commercial General Liability standard-are all factors driving commercial insurers to reevaluate their business liability coverage. And many of them are beginning to separate cyber coverage from commercial general liability coverage."You're clearly starting to see traditional insurance policies getting much clearer on their intent around cyber exposures," says Jon Farber, assistant vice president of global technology underwriting at St. Paul Cos. The St. Paul-based insurer is one of several commercial insurers offering cyber insurance. Others include Zurich North America, AIG, Chubb, and Lloyd's of London.