2000 GENERAL INSURANCE CONVENTION
25-28 OCTOBER
DISTRIBUTION CHANNELS OF THE 21ST
CENTURY WORKING PARTY
1
Distribution Channels Of
The 21St Century
A GlRO working party
report by:
Ade Akinlaja
Shamit Biswas
Dick Cheesman
Michael Eves
Stephen Patfield
Michael Tripp Chairman)
David Westcott
Summary
The aim of this report is to
stimulate discussion and thought.
Etis seen not so much as a learned
paper, but a series of thoughts to
help actuaries (and others)
improve their awareness of the
fundamental changes taking place
in what we currently call the
insurance market.
Perhaps the biggest conclusion is that no one knows what our industry will look like in 5 years (let
alone 20). The speed at which customers adopt the new technologies, the speed with which current
insurance providers adapt and experiment, the imagination that they and other (new) players employ
in designing products that truly meet customers’ needs and creatively use customer information are
imponderable. Likely scenarios include greater automation, lower expense bases, greater
competition brought about by price transparency, further changes to the role of ‘middlemen',
globalisation, virtualisation and mobilisation.
Ail of this will impact on the way that actuaries work in general insurance. Let us open-mindedly
seize the opportunities that are being created by this electronic revolution.
3
Contents
Title
Section 1: Introduction
Section 2: What are the distribution channels of the 21st century?
Section 3: The E-Consumer
Section 4: Accessing The Customer
Section 5: Expenses
Section 6: Underwriting
Section 7: Value Chain
Section 8: Globalisation
Section 9: Other Internal Change
Section 10: Externalities
Section 11: Regulation In Cyberspace
Section 12: Companies’ Strategies
Section 13: Likely Actuarial Involvement
Section 14: “20/20 Vision”
Section 15: Synthesis And Conclusions
Appendix 1: Examples Of Internet Marketing
Appendix 2: More On Regulation
5
"It is not the strongest species that nor he most intelligent but the ones most responsive to change Charles Darwin
1. Introduction
Would you describe yourself as an avid surfer - or do you see yourself more at risk from
drowning? Do you believe that all the talk about how the Internet, Interactive Digital TV,
WAP phones and so on is exaggerated hype - or that it’s a reality in the making?
Whichever camp you fall into, as an actuary we hope you see yourself as helping to shape
the world around you, and will find something in this document to interest you, or at worst
to stimulate a thought or two. We’ve written it as a series of views and observations - not
as a learned paper based on intellectual research, but as the summary of a number of
brainstorm sessions. Given that the majority of our thinking was completed by early June
2000, it’ll be interesting to see how far the world has moved on by the time we meet in
Birmingham.
Actuaries are very often among the more technology literate, which coupled with their
general analytic approach suggests they have a wide contribution to make. It has been said
we’re in the middle of a SO-year revolution -one that started in the late 1970’s with the
birth of the micro-processor. Do you see yourself as a leader, or a follower? Even if you
feel too remote from big business decisions, how well versed are you in the issues and
how much have you thought about the consequences for your own work? What will
change? What will remain broadly the same?
Although this working party was challenged to consider all aspects of ‘Distribution into
the 2Ist Century’, we’ve tended to focus on the technology driven components. This is not
to say other aspects are of less importance, far from it, rather that in the time available we
felt it better to concentrate on one aspect. Our time horizon has been 5 years into the
future, although in the final section we have attempted a glimpse beyond that. We see the
whole subject as one rich in opportunity for actuaries -there is insufficient analytic work
on this subject and we feel sure that commercially minded actuaries have a contribution to
make. We would like to believe that we can derive a sound analytic framework and
develop improved understanding of the dynamics of successful distribution strategies.
6
One framework for analysing change could be :
A revolution in the making?
To this framework we have added comment on globalisation, other ‘external’ forces,
regulations, some comment on what companies are doing and above all initial ideas on
what it might mean for typical actuarial work.
Perhaps the biggest area for exercising imagination is how new technology will enable
fulfilment of customer needs in new ways -how established value and supply chains can
be turned on their heads as sequential links vital in the physical world become
unnecessary in the context of the digital world. The section on value chains hints at this.
The challenge is to foresee how changes in personal lifestyles will impact on the insurance
industry. Perhaps we could have spent more time investigating progress in USA?
Products are likely to become more transparent - the information ‘superhighway’ enables
information about any product anywhere in the world to be presented through one screen
on one desk (or in the future one hand held ‘one mobile portal’?) It's easier to compare one
product with another, and to assess suitability to customer needs. Customer profiles can be
built and enable better one-to-one marketing. What will this do to our traditional insurance
products - is the very basis of insurance being challenged? Perhaps we are so wound up in
our industry that we forget the core customer needs we are trying to meet -financial
‘smoothing’, help, restoring things back to how they were. Can these needs be met in
different
ways? After
all it’s about giving
customers
a proposition
that (allowing
for their
time and cost of use) gives them greater value than the price charged.
Will
a new ‘net economy’
emerge?
If so, what will
the currency
‘Beenz’? How large is your virtual wallet?) How long will
come tumbling down -or will they stay forever?
Read on. We believe
people
we work
robust
analytic
forward
with.
there is more we can do -to
Next steps could include
framework,
to your comments,
expense analyses,
be they supportive
educate ourselves,
further
product
research,
and pricing
or challenging.
discussion!
8
be (have you had your
it take for national
barriers
and to inform
development
to
the
of a more
design issues. We look
Happy
reading
and active
2. What Are The Distribution
Channels Of The 21st Century?
There are numerous ways in which insurance business can be sold. The sales outlets at the
turn of the millennium include independent agents, company staff, direct tele-sales, the
Lloyds market, tied agents (e.g. banks, building societies, supermarkets & post offices)
and affinity partners. These outlets are continually developing and new methods of sale
are constantly being devised. Currently, most insurers are spending significant sums of
money to enable the selling of business through the Internet, mobile phones, interactive
(or digital) TV and other, as yet unknown, emerging channels.
9
Current MethodsOf Sale
Overthe period 1994-1998,
the shareof independentagentsandcompanystaff in the
personallines marketreducedasshownin the diagrambelow constructedfrom ABI data.
The growth of tied agentsin the form of bancassurers
and direct telesalesappearsto be the
main reasonfor this ratherthanthe growth in Internetbusiness,which accountedfor less
than 1%of all insurancesalesover the period Becauseof the slow rateof growth in pure
Internetbusinessto date,thesecurrentmethodsof salemightjust reducein sizeto make
way for the new technologybasedmethodsof saleratherthan die out completely.
MarketShareOfDistributionChannels
In Personal
LinesMarket,1994-8
Independent
Agents
company
staff
TiedAgents
DirectTelesales
Other
1994 1995 1996 1997
60.0% 56.0% 53.5% 53.2%
13.4% 13.0% 11.7% 11.5%
8.0% 9.2% 10.1% 10.2%
15.8% 18.7% 21.0% 21.3%
2.8% 3.1% 3.7% 3.8%
100.0% 100.0% 100.0% 100.0%
1998
54.0%
10.0%
13.0%
22.0%
1.0%
100.0%
(Note :the telephone is the most common physical mechanism used for insurance
according to a recent Datamonitor report 88%of motor insurance was sold this
way in 1999)
10
The Internet
The Internet is likely to be the most important of the new forms of distribution as the
government and EU are encouraging its use by providing incentives. It is already apparent
that customers are using the new Internet technology in other business fields (e.g.
bookselling). However, insurers have been slow to get to this market. For example, the
worldwide property and casualty market is estimated to be worth $l50bn but less than 1% of
these insurance transactions are currently being conducted online. (It is worth noting that
Direct Line recently stated they were now issuing over 180,000 quotes a month on the
Internet.)
This sluggishness is perhaps a little surprising as the simpler commoditised insurance
products should sell quite well on the Internet. Arguably, other more tangible products such
as clothing, furniture and sporting equipment may not sell so well because customers prefer
to see them before making a purchase. A recent survey conducted by the ABI of its member
companies states that they viewed the biggest barriers to using the Internet as product
complexity (62%), followed by need for paper signatures and regulatory restrictions (both
38%), security risks (32%), and cost of online development and integrating legacy systems
(both 29%). Factors affecting the propensity to purchase insurance on the ‘net’ are discussed
more fully in Section 3.
The lead in selling insurance on the Internet appears to be coming from America, where
start-up companies that cover the whole ‘quote-to-claim’ insurance process online now
exist. For example, eCoverage.com is now writing motor business in 2 US states (backed
by Japanese venture capital from Softbank) & GeneraLife.com is selling life assurance on
the net. However European companies are following suit, such as ineas.com which has
11
become
the first
operating
European
One way of analysing
emerging
insurer
in the Netherlands,
to sell its products
France,
Belgium
the new business
types of web site through
models
which
exclusively
via the Internet,
already
and Germany.
suggests there are currently
insurance
business
three
can be sold (see Appendix
One for examples):
“Shop Fronts" -
(i)
Line.
These are the insurance companies
own websites, e.g. Direct
They are likely to have a short-term prominence
but are expected to
reduce in importance
over time as customer
comparisons
(see below).
increase
“Product Aggregators"
(ii)
comparable
products.
combination
- These are brokerages
The website
to consumers.
rates are likely
Aggregators
to acquire
are expected
will
Therefore,
to increase
“Portals”
package
audience,
from
the only one advertising
by the larger insurers
as the major drivers.
reasons as product
In reality
combinations
In the B2B segment,
claims
Software
settlement
Overall,
HTML
quotes and the costs of
from
multiple
websites.
or commission
other companies
On such a
if it is not
may be developed
with brand and customer
portals are expected
They
it to suit their target
To get round this, portals
AXA)
premium
Product
to grow rapidly
ownership
for the same
aggregators.
e-business
by ADSL
insurance.
against
competitive
in the long term because of
organise
via advertisement
(e.g. Zurich,
and variations
on extranets
supporting
now being replaced
that host content
a range of
this channel.
in importance
may have to compete
offer
quoting
through
third party providers,
and make their money
web site, an insurer
insurers
for price
the best price/value
can get comparative
- These are websites
content
which
aim to offer
most business
the speed at which the consumer
advertising
shop fronts.
(iii)
requirements
of the above three types of site exist.
solutions
seem likely
providing
support
has been key to the Internet
which
for policy
administration
and
to dominate.
is intended
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technology
to download
developments.
This is
text and images quicker.
Mobile
Phone
In 1999 before the explosion in the prepaid packageand reduction in tariffs, over 43% of
the population owned a mobile phone. David Edmonds, Director of General
Telecommunications said recently: “Today’s survey shows that a significant and growing
number of people prefer to use a mobile phone in preferenceto a fixed line telephone.
People find a mobile phone more convenient and flexible, and are able to control their
usagethrough prepaid vouchers. Over 97% of the UK population have accessto either a
fixed or mobile phone. 2.3m people live in homeswithout a fixed phone and of the
membersof the public without a fixed line, 55% use a mobile phone.”
Since they have such a widespreaduse,mobile phonesshould be taken seriously as a new
method of selling insurance.Indeed, some goods and services have already been
purchasedusing them. They enable the effective delivery of electronic commerce into the
consumer’shand, anywhere, using wireless technology suchas Microsoft MME®
At the forefront in Europe is the Wireless Application Protocol (WAP). WAP is the new
gateway to mobile data enabling usersto easy accessto Web-basedinteractive
information services& applications from the screenof their mobile phone.It has been
available since March 2000 in only a text basedform. Dial up can take up to thirty
secondsand then any large messageswill take time to download. All the time call (and
sometimesother) chargesare accruing.
The development of WAP is primarily through WAP Forum, a Europeancompany
directed by Nokia and Motorola. Nokia and Visa are introducing a standardisedmeansof
making securepaymentsusing a mobile phone, meeting different market requirements for
security, risk managementand dispute resolution. There is already talk of technology to
supersedeWAP e.g. MexE (mobile execution environment) and GPRS(General Packet
Radio System).
GPRS is a packet basedwireless communication service that, when available later in
2000, promisesfaster data transfer rates and continuous connection to the Internet for
mobile phone and computer users.The higher data transfer rateswill allow usersto take
13
part in video conferences and interact with multimedia Web sites and similar applications
using mobile handheld devices as well as notebook computers.
The following
•
•
•
??
??
points regarding
WAP & GPRS should be considered:
Insurers will need to be able to cope with large volumes of calls. Therefore, size of
insurer may be a barrier to entry.
The mobile Internet will arrive quicker than the PC Internet because the force behind it
is the cash-rich telecommunications industry which requires an excuse for people to
change phones. In addition, the mobile Internet will be able to draw from the large
existing stock of Internet material
Security is more of an issue with mobile phones as they are easier to steal than PCs
and Digital TVs
Currently, because of their small screens, it is hard to use mobile phones as
information channels. Therefore, in the short term, they seem best suited for direct
sales
Currently, the keyboard on mobile phones is awkward to use and this places them at a
disadvantage to other sales media.
14
Interactive Digital TV
Interactive Digital TV is increasing in popularity with an expected 13m to 15m
households having the service by 2003. It should be an ideal medium for branded
insurance products. Household & Pet insurance is currently on offer by FirstQuote on
Telewest Digital TV with Screentrade expected to launch on Cable&Wireless and later on
Telewest AXA is leading the insurance companies in the IDTV race, HSBC and Barclays
in banking
Interactive Digital TV uses an API (application programming interface) platform as a
base, which is linked to various Internet service providers at the moment. However, access
to the web is currently still limited. Increasingly the TV and PC forms are converging even though how consumers use the two is somewhat uncertain.
15
3.
The
E-Consumer
The Attributes Of The Personal Lines E-Consumer
In our opinion,
a prime attribute
by which
we will
be able to categorise
the new Personal
Lines E-Consumers
is age. The 25-40 year olds that are believed to have the highest IT
literacy are expected to be major buyers from the mobile phone and Internet. They are also
expected
surfers’
to be more confident
are expected
increase
with buying
to prefer interactive
cross border.
with one in ten over 55s now online
(Source:
over the next few years, changes
in behaviour
Of course
of the insurance
buying
public
cannot
The higher
TV. The proportion
‘Which’
premium
‘silver
of older users continues
online
as current
survey
teenagers
to
July 2000).
become
part
be ignored.
Over the last few years Swiss Re UK has carried out market surveys into the buying habits
of consumers and corporates and published their findings in annual “Insurance Reports”
and made this available
and one question
Internet?“.
compared
and others.
This year’s report was released on July
was “did you buy your last insurance
Surprisingly,
the answer is virtually
to 13% by post, 30% face-to-face-and
not particularly
via the Internet.
The survey
to clients
asked of consumers
encouraging
as only
also asked some general
respondents
were not interested
Not surprisingly
the percentage
year age bracket.
12
over the
unchanged from the previous year at 1.5%,
48% by telephone. Willingness
to buy is
29% would
questions
policy
even consider
about attitudes
buying
an insurance
to the Internet.
policy
44% of
in trying the Internet compared to 21% who would be.
not interested rose with age to over 80% for the 65-74
Of those that do use the Internet,
16
most use it for e-mail
(80%).
A third
use it for purchases of products and services which is up on the previous year’s figure of
24%.
By 2005, Swiss Re (Sigma No. 5/2000) suggest that only 3-5% of personal lines sales in
Europe will be over the Internet.
The Factors Considered When Purchasing Insurance
We believe all e-consumers, whether corporate entities or individuals, will continue to
select insurance based on the following four criteria:
“Price” -
This is usually the foremost consideration and is the principal driver
behind shopping around.
“Trust” -
Here there are two elements.
1. Is it ‘secure’ to buy on the web / a particular website and
2. Buying from a “trusted” name may mean customers are happy
not to research alternatives.
“Convenience” -
Although the customer retains his power to choose who to buy
from, the pressures of the modem world will mean convenience
buying becomes a threat to a “value” offering. i.e. a company’s
“spend protection” product may be better and cheaper but if the
customer can’t buy it from, say, Tesco on-line, when he makes his
shopping order, then it won’t sell.
“Service” -
Service is particularly important when a product is purchased and
when a claim is made.
There is evidence from research performed by Forrester in the US (April 2000) that of
these four criteria, price is predominant. According to their research, price has
approximately 77% more impact on consumers’ insurance purchase decisions than brand.
Price overshadowed all other purchasing criteria, including physical presence. (Trust and
Brand are strongly linked. Brand draws people to the ‘shop front’ and can be a proxy for
confidence in a given site.)
17
4. Accessing The Customer
To access this new e-consumer, insurers will have to promote their business and target
advertising in different ways
Promotion
To date, in the current world, the majority of the promotion of insurance has been through
TV, newspapers, bill boards and radio. In the new world, we are moving away from this
broadcast promotion towards one-to-one (‘narrowcast’
in the jargon of the advertising
world) and requested promotion
“One-to-one” promotion is where insurance companies target their advertising at given
individuals. Technology such as Broadvision now exists, such that an insurer’s web site
may have a number of different versions of a web page, and dependent on the viewer’s
characteristics, he will only be shown the page most relevant to him. This contrasts with
the current snail
‘
mail’ mailshots which many perceive as “one-to-many”.
We now see the
advent of mail shot by e-mail where customers are sent a whole lot of advertising first
thing in the morning when they log on or at specific times of the day, perhaps bundled in
with a service that they already subscribe to eg ft.com. “Requested” promotion refers to
advertising requested by the consumer. Examples are portals and search engine searches
for insurance, where as well as being able to provide quotations as requested, the insurers
sitting on the panel also gain useful personal information for use in future e-mail
resolicitations.
18
Targeting
In the new electronic environment, Customer data is being collected by everyone,
“register now !” “ sign in now!” and so on. Insurers to determine which customer
segments are best to sell to can use this data. Two aspects are essential to deciding which
segments to target: the likely risk profile and the sales potential.
A segment has an unacceptable risk profile if either the claims experience or policy
renewal rates are expected to be particularly poor. It has unacceptable sales potential if
quotation conversion rates are below a certain target level or the number of quotations
requested is too low.
Segmentation can be used to offer the most profitable combination of products to the right
sort of customer at the right time (ie when they call in or visit your web site - sell to them
now when you have their attention rather than by a mailshot in 3 months time). In
addition, insurers may aim to target and attract specific customers through appropriate
design of their web sites.
The finer aspects of this target marketing involve examining how customer needs can be
met and fulfilled, particularly with respect to the four main customer drivers: price, trust,
convenience and service.
19
Reducing The Cost Of Insurance
When we talk about “price”, we are actually referring to the total cost of purchasing
insurance. This can be split into two components: costs of using the new electronic
distribution outlets and insurance premiums.
The costs of using the new distribution outlets may mean that the target market is
restricted. For example, in the case of the Internet, even the recent introduction of several
“free” tariffs by various Internet Service Providers has not made a viable shopping option
- surfing time is still too expensive. With BT open world, the use of its latest ADSL
technology involves an installation charge of £l50 followed by payments of £39.99 a
month (as at July 2000). In our opinion costs of access will continue to reduce, however
she latest technology is always likely to command a premium.
The new distribution media do, however, help to reduce the insurance premiums. Lower
expenses (see below) are expected to be passed onto the customer in the form of lower
prices. Also, customers can request & compare quotations from different insurers with
are competitive.
A possible result of this “Price Transparency" is that companies will try to differentiate
their products from those of their competitors so they are not so easy to compare. In the
new market place, this could be achieved by the introduction of short and punchy “Brand
Names". In many respects, this branding may be more important than process.
In developing brands, companies will need to consider how much it will cost to catch the
imagination, The speed at which a brand can be grown (and much lost) can be estimated
by looking at examples of growing brands in the UK financial services sector such as Egg
and Smile. Also, the credibility of current brands will need to be assessed. They have scale
and trust -will this be sufficient to keep out new brands?
20
Pressure from consumers for lower prices, will also lead to a change in “Purchase
Models”. Examples of new purchase models introduced by e-commerce are:
“letsbuyit.com” -
where consumers act as a group to secure discounts from
manufacturers.
“qxl.com” -
on line auction site where you can bid for any items that a party
wishes to sell such as a TV, beanie baby or holiday. (Reverse
auctions where an entity or individual flags a need and a price seeking a supplier - are also emerging.)
Developing Trust
To become long term players in the new market place, companies will have to build trust
with the consumer and with investors. This takes time although E-coverage has achieved
this trust with investors already by appointing ex CEOs from American Express and Bank
of America on its Board.
Offering
Convenience
Under the new channels, the process of buying insurance should be a lot quicker because
of greater automation and advances in the speed of technology. For example
directline corn has made this speed the main feature of its television advertising campaign.
Also, increased competition forced by price transparency will mean that insurers make
their products simpler to understand.
However, consumers may be put off initially because in the UK there is currently a lack of
straight through processing -quotes may be available online but not policy documents.
This should improve in the next couple of years with full on-line purchasing facilities
being made available, as already used by eCoverage in the US and ineas in Europe. In the
21
longer term, software is being developed which will bring up data entered by the customer
on previous occasions thus aiding data input and helping to avoid too many data errors.
5 Star Service
Customer care may improve; for example once the initial sale has been completed,
companies may increasingly deal direct with the public rather than through intermediaries,
Electronic linking of accounts will assist with building customer relationships that develop
over time. One could predict a “mega-corp” company that acts to service all aspects of
your life- food, banking. utilities, insurance, clothing, childcare, schooling - from cradle
to grave (i.e. All Finance)
The global nature of the new distribution channels such as the Internet will allow
customers to communicate with anyone in the world 24 hours a day, 7 days a week,
compared to the current more traditional 9 to 5, Monday to Friday, servicing hours,
Customer Relationship Management (CRM) Databases.
Currently CRM databases held by insurers are being adapted so that they can be used
more effectively in managing customer relationships. A well structured CRM database is
essential for the targeting of marketing activity and in the service provided to the
customer when they make contact with the company.
The true value of CRM is in transforming strategy, product branding and operational
processes in order to retain customers and to increase loyalty and profitability.
22
As already discussed, marketing activity can be targeted by assessing sales potential and
risk profiling. Sales potential can be gauged from customer data such as:
Unique Customer ID -
Can be used in the electronic linking of accounts so that we
can tell what cover a customer already has.
Life Stage Data -
This data includes date of birth, postcode, marital status,
number & ages of children, gender etc. It may be used to
assess the timing of trigger events such as birthdays,
marriage, births & retirements, when the customer may
recognise the need for further insurance.
Purchasing Patterns -
Different customers may respond better to different methods
of sale. For example, some people may have a higher
propensity to purchase by phone than by mail. Purchasing
patterns may be discovered by recording past responses to
mailshots, number of quotes requested, the customer’s
satisfaction rating etc.
Risk Profiling can be performed using the Life Stage data as well as other lifestyle
information such as occupation, employment status, home ownership & income.
Information provided by external organisations such as credit agencies and county courts
can also be very useful in assessing the risk of fraudulent claims. Some of this data is
already available on existing databases but much of it is new. The new lifestyle based data
can help actuaries with their risk modelling (see Section 13).
5 Star Customer Service must be provided when the customer makes contact with the
company Therefore, any CRM database must hold data which is appropriate to dealing
individually with each customer when they make contact. Such data includes contact
history, mailing history, satisfaction rating and details of complaints.
23
5. Expenses
Automation & Expense Savings
A major advantage to the insurer of selling through the new electronic channels is the
scope for greater automation. Under the new channels, it is the customer who enters
personal details directly onto the ‘web’, through computer, mobile phone or digital TV to
obtain a quotation. If the customer accepts it, his data will be fed automatically
to the
insurer’s mainframe - using an updated version of the process called “Electronic Data
Interchange
(EDI)”. All administration
such as sending out policy documents and setting
up direct debits can then be processed electronically.
As data is entered only once (and by
the customer) there is a huge potential for reducing initial administration
expenses
Expense savings will arise not just at the front end but also throughout the life of each
policy and particularly
when a claim is made. The level of savings will be dependent on
the degree of each customer’s appetite for electronic fulfillment. Savings and
improvements
in service will also follow from B2B initiatives as insurers increasingly
eempower distributors with end-to-end web enabled communication
and processes.
Commission
is also expected to reduce through the use of B2B applications
commoditised
products and move from being premium based to transaction
based.
24
for
and/or service
Examples of the comparative level of savings expected are illustrated below:
Estimated Policy Origination Cost
50
40
30
20
10
0
Broker
Call Centre
Estimated Policy Administration
Internet
Cost
50
40
30
20
10
0
Broker
Source:Meridien
Call center
Internet
Research
But it won’t all be savings . . . .
There will undoubtedly be areas of significant extra costs - largely in development (see
below) and marketing. The marketing costs will be in getting customers to make the
electronic choice to go with a provider’s brand and products. This will incur additional
advertising (to promote brand and website awareness) and commission / fees paid to other
websites and e-introducers supporting the provider’s products. The case for the efficiency
of reaching the customer using this form of marketing has still to be proved although on
25
the face of it some organisations may achieve marginal cost advantages by making sales
on the back of other (non-insurance) products or other forms of customer contact.
A further paint is the increased potential for shopping around, leading to lower conversion
rates and higher levels of lapses.
Further significant costs arise in the IT developments necessary to support the edistribution routes chosen and in delivering the connectivity between host applications and
the ‘web’. There will not only be a wide variety of web sites to connect with but also a
wide variety of emerging technologies to support. Selection and the continuing support
and upgrading of appropriate hardware, software and standards relative to the pace of
change and to Moore’s Law’ will severely challenge a provider’s ability to contain costs
given the additional need to maintain service standards and appropriate levels of customer
satisfaction.
Undoubtedly there will be winners and losers. With a mature market in the UK and with
relatively flat consumer demand, customers are more likely to be moving between
different forms of distribution and fulfilment than increasing demand. Those who add edistribution to their infrastructure without cutting off what become the less used (legacy)
forms of distribution will be the losers. Those that generate higher demand and/or
anticipate and act on the new flows of business by appropriate ‘pruning’ of their
distribution infrastructure will be the likely winners. The key will be in developing and
maintaining a better understanding of customer needs and behaviours, and adapting
current infrastructures and products to efficiently face and meet these needs.
Much will also depend on whether business goals are appropriately aligned with incentive
schemes for staff and managers to ensure internal resource is suitably motivated to match
the demands of the changing infrastructure and to deliver on the evolving customer facing
requirements. Providers will also need to be flexible in delivering the right balance of
services and needs based solutions through each channel it supports.
With new e-channels emerging at a much higher frequency, the use and integration of
existing technologies within each new development will need to be fully considered in
designing the new ‘end to end’ process in order to ensure costs bases do not run out of
control. A current example is the combined use of website and ‘phone based applications’
by Direct Line in its current Internet offering to customers. If a customer has an enquiry
or wants to fulfil over the phone rather than on the ‘web’, he/she phones a dedicated
number provided on the website armed with a reference number provided following data
entry. The Direct Line tele-operator is able to access the customer input data (having been
Well known empirical LAW devised by Gordon Moore of Intel which predicted the doubling of semiconduct
performance every 18 months and which proved remarkably accurate.
26
given the reference
over the ‘phone.
number)
and seamlessly
complete
27
the transaction
with the customer
6.
Underwriting
At the front
end, the ease with
mean greater selection
‘
reasons may restrict
development
which
quotes from
different
Also, short proposal
the information
of CRM
data helping
Further,
against’
insurers
forms
can be compared
produced
available
for underwriting
databases may provide
the underwriters
However,
with
may
for marketing
the
more lifestyle
based
them to assess risk more accurately.
a customer’s
quote engine
personal databank’
‘
,
at the touch of a button,
containing
enabling
all relevant
a tailored
details
can be sent to a
quote to be calculated
without
input of every data item.
At the back end, the automation
potential for fraudulent
claims
the Internet
will
using the Internet
Another
online
have a higher
will
underwriting
shopping
data input,
introduced by an electronic
It is too early to say whether
or lower propensity
to claim
market place may increase the
customers purchasing over
- or indeed whether
tool may emerge as a result of monitoring
behaviour.
could become
Dynamic
common
algorithms,
place. (Think,
reflecting
customers
for example,
is a prospect
their caution
Further
and stress arising
what are possible
PC screens and constant
be
next?
new risks ? Radiation
communication
E-commerce
frauds,
bombardment
tax
evasion,
28
-or
are already
money
(or prospects)
the order of screen access and
studies terms and conditions
a better’
‘
risk given
want to know all the loopholes in advance!)
could
the act of
prove to be a rating factor.
a poorer’
‘
who carefully
risk as they
from over exposure
to
being discussed.
What
laundering.........?
7. Value Chain
The effect of these new 21st Century distribution channels on the traditional insurance
value chain is two-fold:
a) On an individual party’s value chain, deploying new technologies will achieve
transparency and visibility, so creating a new value proposition.
b) These new technologies will also allow the connection of the value chains between
and across businesses, as well as between businesses and consumers.
The result should be:
??
Improved service
??
Reduced costs
??
The creation of new distribution channels
On the left hand side of the diagram below, we show the value chain for a typical insurer
In the UK most of these links in the chain are currently handled by the insurance company
itself. However the advent of new technologies may mean that the insurer improves the
performance of individual functions in the value chain so leading the new value
proposition in a) above. Possible improvements to the value chain are described in the
right hand side of the diagram.
But in the 21st Century, e-business has led to better communication and better information.
This allows the potential for the specialist third party providers to provide their services
seamlessly. For example, policy administration, claims management or asset management
could all be outsourced. As communications improve and with insurers increasingly
offering products across national boundaries, so tasks requiring labour could be moved to
low wage environments. As companies increasingly strive to achieve returns on capital
that are acceptable to shareholders, so they will review the status quo position of
conducting all stages of the value chain in house.
The result is the break-up of the single value chain. An insurance company will
concentrate on those links in the chain where it enjoys a competitive advantage, i.e. it will
focus on specific core competencies within the value chain and will outsource the rest,
leading to the interconnection of various parties’ value chains as in b) above.
Taken to its natural conclusion there is nothing to stop the existence of an insurance
provider where all the links in the value chain are outsourced, ie a virtual insurer. (See
Section 10 for more details).
29
Value Chain Link
Possible lmprovement
Greater Customer Needs awareness (e.g. through)
CRM)
increased Third-party e information
Easier customer feedback and survey
Simpler products suitable for the e-customer
New promotion/visibility space
Messages tailored to the individual eg using
Broadvision
Local market information
Links to other sites
One to one marketing initiatives
Needs-based, not product-based, offerings
New business submission/status
Broader risk marketing/market access (by
brokers)
Availability of lead generation/‘hit’ statistics
Affinity group linkages
Comparison of offers (‘shopping around’)
Customer interface for quotation and sales
Quote(re) solicitationand management
Individual Risk auction.?
Products sold through Internet enabled
financial advisers
??Market/risk/segmentation and product
differentiation according to customer profile
and lifetime profitability
Information gathering from third-patties
Rapid, real-time or on-site decisions
Access to warehouse of risk-supposing
documents
8 Underwriting guide online
30
Direct policyholder service
Consolidated presentation of all customer’s
products
Billing and collection direct from customer’s ebank account
Policy document retention/distribution
e-reminders on renewal
e-mails on products of interest
Producer interface for policy inquiry and
change
Policies guidelines and procedures manual
online
Producer/agent sales reporting and
compensation
Industry news (e.g. legal, competitive)
Forms distribution
Licensing and registration
Real time information
More frequent portfolio performance reviews
Access to wider range of assets
Online access (real time) to current status of
claim settlement
Claims submission/ first notice of loss by
customer
Claim (individual or history) inquiry,
publication and update
Caller location immediately available via
global positioning
Library of regulations
Information gathering to evaluate, adjudicate
and settle
31
Third-party collaboration (eg, for litigation/
negotiation)
Provider directory eg garages, loss adjusters
Provider referral/approval
Electronic claim Payment direct to claimant
Provider reporting and payment electronically
Electronic procurement/ alliance management
Auction claims support services’?
Claims information sharing for detecting fraud
Reinsurance submission
Payment electronically
Claim (individual or history inquiry
publication and update
For example, consider a motor policy in the future. The product itself may have been
designed for a target market such as the technologically aware affluent professional aged
under 40 who has a high rating group car, and who lives in an urban area and so does little
mileage, except for frequent social trips to Europe, for which fully comprehensive cover is
provided Its premium will be low as new technology has led to automation of systems
resulting in lower expenses. It may have been purchased via a mobile phone and paid for
electronically at the same time. All of these changes to the current position add value.
Again, at the claims management stage, both value and improved service can be created.
Online claims input could include digital photographs - accessible to all parties; tracking
devices such as currently used by UPS could help customers follow their claim online;
claims payments can be made electronically. In addition, the scope for process change
allowed by ‘bluetooth’ technology (mobile, wireless communications) referred in section
14 is dramatic
32
8. Globalisation
In the new electronic market place, consumers will be able to purchase insurance from
foreign insurers without moving from their armchairs. As the Internet is now available in
most countries of the world, insurers are being forced to manage their capital/assets on a
global basis. There are many long-term issues arising from this “Globalisation”.
Consolidation Through Mergers & Acquisitions
For a start, globalisation is forcing the development of ever-larger multinational insurers
through mergers and acquisitions. The sheer size of these new organisations means that
internal competition can flourish between the subsidiary companies of the group. Such
internal competition can be seen as a good thing as well as the ability of these large global
organisations to use the world as a ‘hot-house’. Information and lessons can be shared
between company staff working in many different countries leading to larger mindsets.
33
Economies Of Scale
Globalisation gives rise to economies of scale, particularly in technology terms. For
example, policy administration can, in theory, be conducted on one computer system held
in one country for business sold throughout the world. In reality different country cultures,
legal systems, languages and current market practices are probable brakes on rapid
change.
“Follow The Sun” Resourcing
Customers who require call centre assistance in the early hours of the morning can be
serviced by someone on the other side of the globe. As well as avoiding the need to man
individual call centres 24 hours a day, this also means that companies can take advantage
of cheaper labour pools overseas.
Global Processs
Access to the global market place opens up the opportunity to introduce global processes
(potentially with local variations). For example, one pricing model could be adopted for
all motor business wherever it is written. The pricing assumptions would be allowed to
vary from one country to another but the technical specification would remain the same.
34
The Risks
Although, globalisation offers many longer-term benefits, there are extensive problems
that need to be overcome. Examples of the potential difficulties are:
??
Variation in licensing and sales regulations - even in Europe!
??
Language differences -especially
??
Fiscal and legal issues
??
Political situation
•
Cultural variation
??
Different practice and attitudes
where different scripts (eg Japan)
??
Variation in products / pricing / claims costs
??
Local claims handling /supply controls
??
Consumers will be wary about buying insurance from foreign companies
In addition, branding becomes much more of a complicated exercise. The key question is
“What is needed for a Global Brand?’ Does it need to be the same everywhere or could
there be barriers to this such as names meaning different things in different countries? Is
the key the use of words that are easily found by search engines?
35
9 Other
Internal
Change
As well as globalisation,
other more fundamental
the advent of the new e-world is forcing
changes to their internal structure.
companies
to make
All Finance
The ideal is a web site that can deal with all of an individual’s/company’s
financial needs.
e.g. banking, insurance, investment etc. This together with increasing pressure from
shareholders for higher returns means that barriers to diversifying
into other areas of
finance are starting to break down As X can now do Y and Y can now do X, competition
is increasing and commercial advantage is shorter. Examples of this process are seen with
banks buying insurance companies (e.g. Credit Suisse with Winterthur) as well as
insurance companies starting their own banking and savings operations (e.g. Direct Line,
Prudential). Banking/Insurance
conglomerates
can touch the affairs of an individual
consumer upon many levels, for example, Fortis has a ‘relationship’ with 7 out of 10
Belgians.
Removal
Of Internet
Divisions
The focus will be on satisfying customer needs
creating’ products/services
as possible to each
have previously been “divisionalised”
in terms
will be forced to begin to think as one seamless
36
and developing & selling as many ‘value
customer. Therefore, companies which
of products, distribution channels or both
company relative to the customer.
Some argue the key to achieving this seamless approach will ensure that there is a
common definition of customer value across the business. Both the business and
supporting systems must know who is a valued customer and who is unprofitable.
Many companies will undergo a structural, cultural and behavioural shift to customer
facing cultures with co-ordinated customer processes across all distribution channels.
Some will go further and leverage off these customer-facing platforms to introduce CRM
based technologies and strategies that are designed to optimise profitability, revenue and
customer satisfaction. Others may try to adopt CRM techniques before the structure,
culture and co-ordinated processes are in place. These are expected to be less successful.
New technologies enable new (flexible) working styles. Will company cultures change
further as ‘e-HR’ techniques become more common?
Capital
Requirements
Pressure from shareholders for higher returns has led to companies managing their capital
more efficiently. Most companies now determine their capital requirements using a Risk
Based Capital approach (supplementing regulatory requirements) and are increasingly
returning any excess capital back to their shareholders. The impact of the changing
technology based environment on risk based capital is yet to emerge. The impact of less
risk based data but more lifestyle data has already been discussed. Other technical risks
(e.g. viruses, hackers), operational and liability risks (e.g. from wider outsourcing), may
also cause a strain on capital.
37
10. Externalities
As well as internal
change,
insurers
will
notice changes externally
as new players try to
different ways of doing things.
enter the market and people come up with radically
The Virtual Insurer
Large venture capitalists and affinity groups may try to get a stake in the insurance
business by setting up virtual insurers. A “Virtual
Insurer” is an insurance company
from
scratch, which
mobile
may only
phones and digital
sell business
through
TV. The risk-carrying
electronic
vehicle
set up
media such as the Internet,
could be set up as a ‘captive’
of
the parent company and the capital provided by either the parent or through securitisation.
Sometimes, several companies may set up a virtual insurer together so they can build up
critical
mass quickly.
The virtual
insurer
outsources
all its functions,
eg
Function’
Outsourced
– Marketing
Marketing
to:
agencies,
financial
service
managers,
repair
providers
– Pricing
–
and Rating
Underwriting
Actuarial
and
Product
Firms
Actuarial
Development
Firms
– Policy Administration
Policy
– Data Storage
IT companies
– Claims
processing
– Claims
settlement
Professional
companies
– Asset Management
administrators
claims
Fund managers,
banks
This outsourcing
will create extra work for external agencies such as marketing
companies
and actuarial consultancies,
thus enabling them to expand. The quality of service delivered
by each of these partner
insurer
The virtual
with
members
will
have to be of the highest
standard
if a virtual
is to succeed.
insurer
legacy systems
newest technology.
has an advantage
and channel
However,
over an existing
cannibalisation.
it may have to overcome
38
insurer
Also,
in that it doesn’t
it can invest
the barriers
have to deal
and develop
the
to entry created by the
existing insurers such as high development spend, increased customer knowledge,
significant brand building & cross selling. Some entrants (affinity or brand insurers’) may
already have brand, customer contact service mechanisms, customer information, IT/data
management and an aggressive marketing attitude, giving them a head start.
Barriers To Entry
There may be increasingly significant barriers to entry (or change for existing players)
with some of these new distribution channels, the most important being the expenses
incurred in the early years and restructuring costs for existing players. It is expensive to
build up a (robust, reliable and secure) Internet capability-new software and hardware
needs to be developed as well suitable products. As an illustration in January 2000, the
financial press – Reuters (Internal News Feed) – quoted the following development and
restructuring spends for some of the major financial providers:
•
??
??
??
Abbey National
Halifax
Nat West
Virgin
£100
£650
£400
£235
million
million
million
million
As well as the initial development spend, losses are expected to be made in the early years
as it takes time to built up an ‘electronic’ customer base. In other fields, Internet
companies such as Boo.com have gone bust because they couldn’t find enough capital to
cover the “cash-bum” in the early years.
39
A potential barrier to entry for existing insurers may be legacy technology,
particularly
existing systems cannot cope with EDI. Leading edge technology
is crucial for a
successful player-customers
will not put up with poor service.
if
Many companies will have to build brands from scratch requiring significant amounts of
marketing expenditure. For any new product, expenses in the first 3-S years are likely to
be dominated by advertising. In addition to this, insurance products are complex with
complicated pricing structures
Therefore, outside players entering the market will need
assistance with policy wordings and the production of accurate quotation engines.
The existing setup could also in itself be a barrier to entry. At the same time as developing
new distribution channels, insurers will need to continue selling business through their
existing agents. Conflicts with agents could arise if clients that they introduced to the
insurer are now buying insurance direct. The situation could ultimately get worse if some
of the existing channels are “cannibalised”
by the new ones.
Death of The Middleman?
All this does beg the question whether the traditional middleman will die out in the new eworld. For commoditised
products, customers will soon be able to compare quotes from
different insurers quickly and with ease using the Internet. They may also find that dealing
directly with insurers rather than through a third party leads to better service.
However, it can be argued that for the average man in the street, cyberspace
is a jungle
and a trustworthy guide is required to lead him through it. Middlemen can select insurers
on the basis of quality of service and financial security in addition to price.
Generally, the quality of service provided by insurers and their financial strength is more
important for commercial lines of business where large, contentious
claims are likely to be
made. In personal lines of business, individuals often just take out the insurance cover
because they have to. For example, motor insurance is compulsory
under the Road Traffic
Act of 1988 and most building societies require buildings insurance to be taken out with a
40
mortgage. Therefore, in personal lines, people tend to make comparisons based more on
price than on service or financial strength.
This increasing commoditisation leaves intermediaries with less scope to ‘add value’ than
with Commercial/SME related business. Here the provision of value added services will
continue to thrive. We must not be too pessimistic about the prospects for brokers in
personal lines though. Already on the Internet, Product Aggregators and Portals have
profited by selling third party insurers’ business on the basis of price only. But we will
watch developments with interest!
A recent ABI survey adds weigh to these arguments:
Of its members responding who transact personal lines insurance 44% are currently
writing business online and a further 32% expect to do so within the next 12 months. All
of the remained expect to be writing personal lines business online in the next 3 years.
For commercial lines, only 11% are online at present, with a further 22% are expecting to
do so in the next 12 months. More than 40% do not believe that they will ever transact
commercial business online.
Radical Thinking
The speed of change and the vast increase in corporate business activity in recent years
has changed peoples’ mindsets. People are getting used to the concept of taking ideas
from one industry and applying them in another. All this is an encouragement for more
radical thinking and the challenging of the existing “rules”.
Changes in how we do business are a threat to everyone. At one time you can have a
rapidly growing business with great prospects for future growth and then another player
enters your market but carries out their business in a very different way, Amazon.com did
41
just this with book sales; who is to say that other just as radical players will not think of
how to conduct insurance or reassurance in a way that has not been previously thought.
Conducting business has often been likened to a game but in today’s environment
are we
sure what game we are playing?
42
11. Regulation In Cyberspace
Regulation Of E-Commerce
The regulation of e-commerce is covered in more detail in Appendix Two. Here, we give a
briefsummary.
Essentially, the selling of insurance business on the Internet is governed by EU legislation
within the EU. The country where the insurer’s head office is located is responsible for
regulating that insurer and not the country where the Internet server is located. The extent
of legal jurisdiction outside of the EU is not yet that clear. In America, there have been
two conflicting legal cases: one where legal jurisdiction applied cross-border and one
where it didn’t.
In the EU, insurers must give basic information on their web pages concerning their
activities. This basic information must include the company’s name, its geographical
address, its e-mail address, its trade register number and its VAT number
In the UK the present government have been keen to accelerate the development of ecommerce, as witnessed by the recently passed ‘Electronic Communications Act 2000’.
This represents a mixture of enabling and controlling powers.
Under the UK Data Protection Act of 1998, it is the insurer’s responsibility to avoid
unauthorised access to customers’ data. This can be done by having secure servers,
password protection, credit card protection and employing reliable staff to process
personaldetails.
43
Credit card protection is being assisted by companies such as Marbles which are
introducing special credit cards that can be safely used on the web. These credit cards use
the latest encryption technology (128 bit) which means that a third party has more chance
of winning the lottery than getting hold of a customer’s credit card number. In addition
marbles offers a “‘Safe Shopping Promise” where account losses from Internet fraud are
insured.
Egg and Earthport who recently introduced a ‘virtual wallet’ provide another example of
premium payment protection. This will allow customers to buy goods over the Internet
without a credit card. The e-wallet allows customers to download money from their cash
or credit card account and use it like a real wallet without the security risk incurred
carrying real cash.
Although Egg have been introducing new security measures, they have been the target of
cyber crime themselves. In August 2000, three men in their 30s were arrested for hacking
into Egg accounts. At the time, predicted losses from this Internet “Bank Robbery”
amounted to hundreds of thousands of pounds.
Companies should place a notice on their websites explaining that data sent to them
through the Internet can be intercepted by third parties. When collecting customer
information, they should make it clear:
Who is collecting the information
What information is being collected
The purpose for which the information wilt be used.
Customers should be aware that the EU has passed a directive guaranteeing the security of
electronic signatures. Electronic signatures are now as legally valid as a hand written
signature and can be used as evidence in legal proceedings.
44
Libel Action Against ISPs (and other Internet organisations)
Claims relating to material published on the Internet are reported to be increasing
dramatically. As a result of settlement of a major libel action in England in May this year,
Internet service providers (ISPs) operating in the UK must now treat this issue extremely
seriously if they, or their insurers, are not to face substantial bills for damages or legal
costs.
Up until this judgement, ISPs believed they might be able to rely on a defence of
‘innocent dissemination’ under current UK libel legislation. However, in a recent case the
High Court ruled that the ISP (Demon) had failed to remove defamatory material (in
relation to postings on newsgroups to which Demon offered access) after an initial
complaint to the ISP. The ruling therefore appears to remove an ISP’s ability to rely on
the defence of innocent dissemination once an initial complaint has been made. Demon
now faces a bill of £500,000, being El 5,000 for damages, the balance legal costs
This is in stark contrast to the position in the US where the First Amendment, which
provides for freedom of expression, gives ISPs immunity from anything published on their
sites.
ISPs in the UK are now reported to be shutting down routinely as soon as they receive a
complaint.
45
12.Companies'Strategies
General
Press Releases
Not a day seems to pass without a statement or comment from a Financial
Services
company that it has developed, or will develop, something that will enhance the growth
the company
insurance
via the Internet.
Often
can now be obtained
the company’s
future
strategy
The nature of the statements
towards
the general
public
on-line.
will
be a comment
of
that a quote for motor
the announcement
will
discuss
e-business.
reflect
the intended
target audience.
to get them to visit a website
when future
strategy
Often
they are aimed
to buy their insurance.
is the main message,
it is the investment
who is the target.
Although
we are still at an early stage in the development
that companies will have a strategy
technology
brings to their business
which
only
In other instances
towards
or brokers
At other times, particularly
world
this will
is seen as realistic
they seem to be looking
will
of e-commerce
it is expected
to take advantage of new opportunities
that this
Those who have a strategy which can be believed
be viewed
favourably
for is a company
willing
by the investment
to spend money
community
but also spending
and
What
it in a
sensible way. Earlier, in section 10 some start up costs were illustrated but these amounts
of money will not produce adequate returns unless they are backed by a realistic strategy.
Strategies
vary between
doing “Business
paper e-Actuaries’
‘
,
??
•
companies
To Consumer
but are often
(B2C)”
four strategies
dependent
or “Business
were described.
Pile them high
Specialist
manufacturer
??
Niche player
??
Infomediary
(Readers are advised to refer to the original paper for further detail)
46
on whether
To Business
(B2B)“.
the company
In the SIAS
is
Examples of the B2C type include:
Prudential, wants to communicate with its customers as detailed in their press release of
3 April 2000.
“ A new Financial Service for Mobile Phone users”
“Prudential today becomes the first UK insurer to launch a listing of its services on a
mobile phone net work.......Prudential Retail’s E-Commerce division plans to expand
significantly in 2000 and our main objective is to continue to be a multi-channel financial
provider. At least 1.5 million of our existing customers own mobile phone, and initiatives
like this will provide people with more choice in how they communicate with us.”
Direct Line shows their e-strategy in a series of announcements
??
??
??
??
??
Launches fastest quote and buy Internet services, enabling customers to purchase
motor, home and breakdown insurance in under 2 minutes, for 365 days of the year
(Sep 1999).
Appoints their first ever Managing Director of e-commerce and invests £?2 million in
a campaign for directline. com (Dee 1999).
A new logo is unveiled for all e-commerce activities (Jan 2000).
Cars will be sold online via a new Internet site (Feb 2000).
First ever life assurance policy online launched (Feb 2000).
Zurich Group details a “Blueprint for success in the New Economy”:
“Zurich Group is transforming itself into a new economy high-touch and technology
driven company. The opportunities offered by the Internet will enable Zurich to develop
entirely new business models involving the formation of a network of partnerships and
alliances. These will provide access to numbers of customers far in excess of the present
35 million.”
In commenting on the Blueprint Morgan Stanley Dean Witter have elaborated that:-
47
In the UK, the Group
Zurichbank.co.uk
is in the process of launching
that will
provide
The second phase of the project
personal
transactional
a personal
banking
be to introduce
will
financial
with
highly
an on-line
portal
personalised
credit card along
content.
with
loan features within the portal, integrated with the banking services.
Longermutual funds and insurance services will be added along with related
term share dealing,
services such as home and car purchases.
provides
all of a customer’s
financial
In the US, Farmers is focusing
on “leveraging
Agency Dashboard. Currently,
Farmers
70% of Americans
will cite face-to-face
a web system
analysis
to offer support
through
through
agent-personalised
Credit Suisse has divided
Zurich’s
aim is to create an offering
that
needs.
the local agent”
through
the creation
of the
works with 15,000 agents and has recognised that
contact as critical. Therefore, Zurich has designed
product
explanations,
on-line
training,
quotes
and
web sites.
its Financial
Services
operations
into five businesses
including
one entitled Credit Suisse e-Business. Its strategy is to build one of the premier European
financial services e-business franchises. Its current statements are still at a high level but
show direction
by stating
services to e-enable
investment
News From
that the unit will
its products
products
and expand
The Reinsurance
and support
launch
and accelerate
B2B
Credit
Suisse Financial
a range of Luxembourg
and B2C
based e-
initiatives”,
World
In the reinsurance
world
towards
and the business
investors
“drive
and services,
where B2B
processes are most relevant
world.
The focus
is often
the messages are directed
towards
existing
customers
and existing processes and whilst reinsurers have new ideas for e-commerce
none are
saying that these will have significant
impact in the short term. Instead the focus is more
on the medium
term and to show that the opportunities
but that the business
model
companies to get flexibility,
the competition.
offered
does not change overnight.
to try different
Munich Re who will spend between
initiatives
E100m
by the Internet
However
it is important
and not get caught
and E200m
annually
are known
for
by the speed of
on its e-commerce
activities say that “we want to use e-commerce on the one hand in our traditional
business
models, which means in expanding our individual
customer partnership
and in support of
our original reinsurance business, but also in developing innovative
products, to create new business models together with our clients.”
In reinsurance,
visible”.
only slowly
the structures
and the needs of e-business
48
service offers and
It goes on to say that ”
users will
become
ERC Frankona has gone further and launched facilities for its clients. Firstly, FARAO,
the Facultative Reinsurance Application Online Service was started as a pilot project in
1999 and this was followed in January 2.000 by RIO (reinsurance online) for the
distribution of original loss warranties for several business lines. This latter application
was claimed by ERC to be the first true reinsurance e-business offer.
In its May 2000 presentation to analysts Swiss Re detailed how they saw the development
of e-business. This was described as a journey, first of all in “leading the game” by eenabling its current business processes and extending this into the products and services
that are offered to clients. Secondly they seek to “redefine the game” by using e-commerce
to offer new products and services not existing today and to attack some of the current
ways of doing business in the risk industry from both within and outside the company.
in late 1999 the Company launched ELRiX (electronic exchange of standardised risks)
which auctions catastrophe capacity in earthquake and windstorm risk and followed this
up with a new service, offering weather derivatives -put and call options aimed at power
utilities, as distribution companies and others that need to protect their sales against
fluctuating temperatures.
The Common Theme
These have been only a few examples of companies’ approaches to the opportunities
offered by e-commerce. The common theme is the message that the Internet is now a
fundamental part of strategy. The focus has two edges, firstly to reduce process costs and
secondly to offer better and more timely products and services to the client. Many
hundreds of millions of pounds are now being spent in developing this area and although
no company expects a transformation to their business overnight there is the expectation
that the new business models will emerge profitably over time.
49
13. Likely Actuarial
Involvement
--
Underwriting / Pricing / product Design
in the new market place. actuaries with their core statistical, modelling and financial skills
are expected to have a greater involvement in general insurance underwriting. They will
need to be flexible enough to cope with expansion into new markets, changes in risks, an
ever growing need for simplicity and greater competitive pressures.
Insurance businesses will employ an ever widening range of distribution media and will
expand geographically. Therefore, actuaries will have to develop multiple pricing models
that can deal with variations in distribution outlets and geographical locations. Perhaps, it
will be possible to use a global process model with local variations.
This expansion will mean that new types of insurance risk are being taken on for which
actuaries and underwriters have little experience or data. This implies a transitional period
of higher risk taking until an adequate amount of data has been collected for the new risks.
More generally the data coIlection methods employed in relation to e-business will differ
from those adopted in the past because of an increasing need for simplicity and the
deveIopment of Customer Relationship Management databases.
Simpler and slicker quotation processes will be required because of the transparency of ecommerce. A slow quotation engine requiring large quantities of data input will be
avoided by most consumers. Also, portals and product aggregators may have strict
marketing requirements that disallow the use of such quotation engines on their sites.
The impact on underwriting of this may be the adoption of “80/20” rules (or equivalent)
for dean underwriting with more complex processes for the 20% that need to be priced in
more detail Actuaries will be required to advise in this area.
The heightening levels of competition will force actuaries to adopt more sophisticated
pricing methodologies, “Game theory” may be more in evidence as brokers, product
50
aggregators and portals move to maximising the use of ED1 and companies vie to get to
the ‘top of the screen’ for chosen segments. Retention will also become a critical issue.
Renewal processes will become increasingly customer segment / customer value oriented
and actuaries will need to develop algorithms reflecting this focus in the price offered at
renewal More sophisticated expense analyses will be required.
In addition to underwriting and pricing, actuarial assistance will be required in product
design. As already mentioned, simpler (potentially more tailored) products will need to
match the simpler processes. In addition innovative design will be required to differentiate
a company’s brands from those of its competitors.
Profitability
The focus will be on total customer value. This value will have to be considered across all
the divisions within the entity and the third party providers. A common pricing basis will
need to be adopted across each division.
Appraisal value concepts, where the profitability of future business as well as existing
business is considered, will need to be used to a greater extent in general insurance. There
will be a greater emphasis in understanding and forecasting future business levels and the
main drivers of these levels. There will also be a greater need to understand the relative
profitability of different distribution channels and components of the supply chain for
tactical and strategic decision making
Given this scenario, it would appear that actuaries would be well placed to comment on
and develop suitable valuation techniques / profitability measures. The techniques that
will be adopted are likely to be an extension of those already used in Mergers &
Acquisitions for whole entities but they will now need to be used at a business or customer
segment level.
51
Reserving
E-commerce will give rise to a greater variety of data because of the wider range of
distribution. Data available from one distribution outlet may not be available from another
and this will have an impact on reserving methodology. For example, the need for short
proposal forms on the Internet may mean that reserving Calculations cannot be as
sophisticated as they would be for traditional outlets. Also. where CRM databases are
developing, reserving actuaries may learn to use less risk based data points and more
lifestyle based data points.
With the advent of ‘virtual’ companies, actuaries will need to ensure Management
Information is properly gathered and available. If it isn’t then the results of any actuarial
calculations or projections will be less reliable and consequently, advice will be harder to
give and ultimately the insurer’s use of capital may be less efficient.
Process changes may prove another source of consideration. Claims may be reported and
settled faster (electronically), electronic settlement methods may be used (reducing the
number of cases going to court and hence incurring legal expenses) and there could be a
better awareness of the ‘right’ settlement level based on global data. All of this will lead to
changes in assumption and possibly a weakening in bases for outstanding claims reserves.
52
Data Base Research /Segmentation
Actuaries will need to be actively involved in suggesting what data should be captured in
the development of CRM databases. As well as for pricing, the data will be used in
selecting marketing strategies, in particular which customer segments to focus on. Target
segments will be identified using data-mining techniques and selected taking into account,
amongst other parameters, both profitability and propensity to purchase.
Profitability has been covered above. The propensity to purchase is investigated by
analysing the factors that influence quotation conversion rates and renewal rates. If for
example, it is found that professionals under 40 are more likely to renew their motor
insurance then designing web pages appropriately can target this customer segment.
In addition to this, greater research will be required to understand what satisfies customer
needs across the range of services and products offered, what additional services to offer
and how to attract and retain the customer. In association with profitability techniques,
data base application need to be developed to establish and identify which customer
segments best fit the company’s strategic intentions and the company’s brand values. The
aim should be to build an individual e-profile of each customer and respond to their needs
with innovation i.e. with current and new needs based services and offers -but on a mass
marketing basis.
Here it should be noted that the application of Moore’s Law implies vastly more
processing power will be available to support these techniques in the next few years e.g.
16 times the power in 6 years, 128 times in just over 10 years and 1000 times in 15 years!
53
Education
In response to the development
based courses,
multiple
quality
marking
access to videos
should
of all course and support
communication
of e-commerce,
actuaries
and the latest technology
and sharing
over time radically
materials.
of experiences
should
in educational
improve
efficiency
Intranet
applications
within
the profession.
54
make use of Intranet
support
could
For example,
of distribution
and
also open up better
14. “20/20 Vision”
So far our time horizon has been limited to 5 years in the future. If we were to look in a
crystal ball, how would things look in the year 2020? One approach is to consider the four
areas of the insurance world that will be impacted under the headings of price of products,
product design, promotion and the position/place of sale.
Price
We predict that the price of insurance products will be driven down in the long-term
because of continued oversupply, increased competition and genuine reductions in costs.
The increased competition is a result of the transparency of the new distribution outlets
The entry of new players into the market such as Virtual Insurers will only introduce
further competitive pressures.
The genuine reductions in costs will arise primarily in the areas of administration and
commission. With the exploitation of EDI and usage of cheaper labour pools overseas,
administration costs will start to reduce. The greater efficiency of electronic intermediaries
compared to human ones will mean that lower commission can be charged for selling
insurance.
The overall impact on claims costs is harder to predict as we believe that claims
frequencies will go up but claims severities will go down.
55
Growing claims frequencies will arise from greater claims awareness. Claims awareness is
being encouraged by the new claims companies who search for cases where an individual
or company could make an insurance claim. They approach clients with the offer that the
claims company will cover all legal costs unless the client wins the case in which
situation, the claims company gets a cut of the damages.
Electronic (distanced) methods of claim submission wilt probably make the process of
claiming easier.
Potential reductions in claims severities are being brought about by companies who
encourage “Cyber settlement”. Cyber settlement is where the insurer and claimant settle a
Personal Injury claim online. The insurer quotes the maximum that he is prepared to pay
and the claimant quotes the minimum payment that he will accept. If the claimant’s quote
is less than the insurer’s quote then the claim is settled at an amount equal to the average
of the two limits In this case. both the insurer and the claimant will be winners. The
claimant would have got more than he quoted and the insurer would have paid less than he
quoted.
If the claimants quote is more than the insurers then the claimant is told that he must quote
a lower minimum and the insurer is told that he must quote a higher maximum. Requotes
are continually requested by the system until the claimant quotes a lower amount than the
insurer in which case the claim can be settled.
Cyber settlement avoids protracted legal battles in court that cost insurers time & money.
On the other hand, access to worldwide information about settlement levels may cause
upward pressure
The new Bluetooth’
‘
technology may well serve to reduce both claim frequencies and
severity through increased surveillance. The technology itself will allow electrical
appliances to communicate with each other without the need for hard wiring. An
application in motor insurance would be to have a small camera installed in a car which
records accidents as they happen. This would enable insurers to ascertain which party is at
fault, the extent of the damage and (with GPS) the location of the driver for emergency
assistance.
Product
By the year 2020, the current stand-alone insurance products will no longer exist.
insurance will be bundled into further reaching propositions and the value chan redefined
to minimize the hassle and complexity of major purchases by the consumer. For example,
56
motor insurance will be included in the price of a car and buildings insurance will be
included in mortgage repayments.
Increasing flexibility will be brought about through the introduction of insurance pools
where the client can buy units of risk whenever he or she likes. A typical structure of such
a pool would be a unit-linked fund where the charges for all insurance contracts are made
through monthly risk charges such as in unit-linked life assurance. This way, the client can
turn insurance off and on whenever he wants like water flowing from a tap. The sum
insured for any contract can also be changed at any time as can the risk charges.
Promotion
In promoting products, insurers will have to place more emphasis on the brand to deal
with price transparency. Portals and special interest sites will be the predominant mediums
through which insurance is sold as part of further reaching packages.
Advances in technology will have an impact on promotion. By the year 2020, we envisage
that Video mobile phones with voice recognition will be available on the high street.
People will be able to deal with a cyber broker on the screen of their phones who can give
them verbal information regarding their finances. Artificial intelligence will have adapted,
enabling PCs at home to make purchasing decisions for the consumer. i.e. the PC might be
set up to search for better insurance deals 24 hours a day, switching the client from one
insurer to another when it spots a lower premium and/or better contract terms,
Technological literacy will continue to develop and hence usage will become more and
more commonplace.
The pace at which technology is developing and being adopted will get faster and faster as
indicated by the bar graph below In this graph, the time spans from invention to mass
consumption (i.e. utilization by 25% of the US population) are shown for some of the
most important technological developments of the past. When the mobile phone was
invented in 1983, it took 13 years before it had a widespread use unlike the World Wide
Web which only took 7 years. If we project this forward, inventions in the year 2020
might be in widespread use after only one or two years.
57
Position/Place
The place where insurance deals are made will evidently
change. Insurance will be
purchased at home on the TV or on the train to work with a Video mobile phone. More
and more applications
infrastructure
wilt be connected
of the information
to the Web which
super highway.
58
will
be used as the
15. Synthesis And Conclusions
The new electronic market place will increase competition and hence force changes in the
way that insurance business is conducted. The fact that consumers will be able to easily
compare quotes from different companies will mean that insurers will have to differentiate
their products and introduce brand names that capture the customer’s imagination.
The expense savings brought about through greater automation will be passed onto the
consumer in the form of lower prices. However, consumers will not buy on price alone,
they will also buy on convenience and from trusted names. Trust may be developed
through the improving levels of service possible in the new e-world such as 24 hour call
centre assistance.
Advances in data collection techniques such as data mining may mean better risk
assessment and hence that less capital is required to back insurance companies. This could
lead to the set up of virtual insurers by venture capitalists and affinity groups. Advances in
data collection will also mean that actuarial modelling becomes increasingly sophisticated
with it covering customer behaviour as well as profitability. Actuarial education will need
to be more forward looking in light of these development.
Se which organisations will succeed? Will it be those who invest in the latest technology
or those who build their own entry barriers for other players? Which will be more
important, commercial intent and positioning or customer service and management
attitude? For answers to these questions, we will need to wait and see.
59
Appendix One - Examples Of Internet Marketing
shop Fronts
Virtual Insurers
www.eCoverage.com
www.ineas.com
Buy Online Sites:
www.directline.com
www.eaglestar.co.uk
www.intersure.co.uk
www.royalsunalliance.co.uk
Quote Online Sites:
www.theaa.co.uk/insuranceandfinance/
-
Estimate Online Sites:www.churchill.co.uk
Quote Request Sites: www.cis.co.uk
www.aquote.co.uk
www.pru.co.uk
Other Sites:
www.pearl.co.uk/Pearl/Pearl.nsf
www.westexe.co.uk
Product Aggregatrors
www.Screentrade .com
www.rapidinsure.co.uk
www.insweb.com
www.moneyextra-insurance.com
www.lstquole.co.uk
Portals
www.freeserve.com
www.sorecvcs.co.uk
htp://dir.yahoo.com/Biusiness and Economy/Shopping and Services/Financial
Services/Insurance/Autom
olive
http://dir.lycos.com/Business/Insurance/Agents and Marketers/United States/Multi%2DState Companies/
Auto Insurance/
http://dir.altavista.com/Top/Business/Insurance/Agentsandmarketers
United State Companies/Auto lnsurance/
60
Appendix Two - More On Regulation
(note : this section is intended as a commentary on some more interesting topics concerned with regulation
- it is not intended as a thorough review. Readers should, as always, obtain uppropriate advice according
to their needs
EU: The Commission has adopted on 2 February 2000 a Communication which spells
out its interpretation of the concepts of freedom to provide services and general good as
applied to the insurance industry. By its Communication the Commission sets out to
ensure that the Insurance Directives are interpreted in such a way as to ensure a fully
integrated Internal Market in insurance In particular, it specifies the exact scope of the
freedom to provide services and defines the legal framework within which a Member
State may invoke the general good in order to regulate insurance business in its
territory by way of branching or by way of freedom to provide services by an insurance
undertaking duly authorised and established in another Member State The
interpretative Communication does not, however, prejudge the position of the Court of
Justice, which has ultimate responsibility for interpreting the EC Treaty and secondary
legislation, on the matters it deals with The Communication’s adoption is one of the
priority objectives of the Financial Services Action Plan
Regulations exist concerning Cross-border insurance business carried on remotely,
in particular via electronic commerce.
?
This should be regarded as insurance business carried on under the freedom to provide
services. The Member State of establishment of the insurance undertaking with which
a policy is concluded in this way is the Member State of establishment of the insurer
that effectively carries on the insurance activity (head office or branch) and not the
place where the technological means used for providing the service are located (e.g.
the place where the Internet server is installed).
. Given the concept of the freedom to provide services as set out in the Insurance
Directives, cross-border insurance activities carried on via electronic commerce (e.g.
the Internet) are subject to the provisions of the Insurance Directives relating to the
freedom to provide services. As indicated in the Action Plan, the Commission intends
to bring out a Green Paper to examine whether the existing provisions of the
Directives provide a regulatory framework that is appropriate to the development of
electronic commerce in financial services while ensuring that the interests of
consumers are fully protected.
61
.
The members of the council of ministers in Europe reached common position for
Electronic Commerce Directive on December 7. It defines the place of an
establishment
as the place where an operator actually pursues an economic activity
through a fixed establishment,
irrespective of where web-sites or servers are situated
or where the operator may have a mailbox. This definition removes current legal
uncertainty ensuring that operators cannot avoid supervision.
Operators are also
obliged to make available to customers and authorities in an easily accessible and
permanent form basic information concerning their activities (name, address, e-mail
address, trade register number, VAT number). This enables the customer to place the
fixed address of the operator for any comebacks. The proposal ensures legal security
by imposing minimum information requirements
for conclusion of electronic
contracts; this complements
the directive on electronic signatures.
.
Electronic signatures allow someone receiving data over electronic networks, via the
Internet for example, to determine the origin of the data and to check that that data has
not been altered. The Directive is not designed to regulate everything in detail but
defines the requirements for electronic signature certificates and certification
services
so as to ensure minimum levels of security and allow their free movement throughout
the Internal Market.
Legal recognition:
the Directive stipulates that an electronic signature cannot be legally
discriminated
against solely on the grounds that it is in electronic form. If a certificate and
the service provider as well as the signature product used meet a set of specific
requirements, there will be an automatic assumption that any resulting electronic
signatures are as legally valid as a hand-written
signature. Moreover, they can be used as
evidence in legal proceedings.
EU Distance
selling
of Financial
services
directive:
This proposal covers all insurance contracts under organised distance sales schemes,
where the contract is concluded between a supplier and an individual by means of
electronic communication.
It is intended to provide assistance in certain areas such as.
??
A description
of the main characteristics
of the insurance
62
service
.
.
.
.
.
.
.
Price/arrangement for payment
Existence/duration of any rights to withdraw from the insurance contract
Information cm cancelling the contract
Any limitations of the period for which the duration provided is valid
The existent of any of court complaint and redress mechanism.
The Data Protection Act 1998 requires companies to take steps to ensure appropriate
security for the protection of personal data held by them. The Internet is an insecure
environment and the network itself cannot be retied upon to provide protection From
unauthorised access to, or disclosure of, personal data. It is the responsibility of the
company to ensure secure servers are provided, password protection, credit card
details encryption, and the use of reliable staff when processing personal details.
The Data Protection Commissioner’s office has expressed the view that a notice
should be displayed on web sites, warning the user that the Internet is not a secure
system and that any personal data transmitted in this way could be accessed by third
parties.
An example from www.Screentrade.com “Security - We all take risks with our credit card details. Each time we read them aloud
over the phone for example, even though most of us feel pretty comfortable doing it.
Using your credit card over the Internet needn’t be any more risky, and many believe it’s
actually safer. For example, in a recent report by the Federal Trade Commission in the
USA, they argued that it’s much safer to transmit your credit card number over the Internet
than to give it to a waiter in a restaurant or read it aloud over a cordless phone.
We’ve developed Screentrade to protect customers against security risks:
l We use the latest encryption technology (SSL, or Secure Socket Layer) to protect
your credit/debit card details, and all your personal information. .. “
l
To fulfil their obligations to those who visit their sites, companies should make it
clear:
• who is collecting the information
l what information is being obtained
• the purposes for which that information will be used; and the identity of any third
parties to whom the information may be disclosed.
• It is likely that as part of the new regime established under the 1998 Act,
statements will need to be more explicit and in certain circumstances express
consent will need to be gained
63
Again from www.screentrade.com
Data protection
The information you provide to Screentrade will be passed on to our agent and the
relevant insurance companies so that they can provide you with insurance cover.
Screentrade and the relevant insurer may from time to time notify you of any further
products and services which they offer
The data protection guidance notes for Internet users - business and consumers is in
www.data protection.gov.uk
Jurisdiction in Cyberspace
The Internet is a global is a giant global network. Because the Internet transcends
geographic borders commercial use of the Internet may be sufficient to confer nation-wide
and even international jurisdiction.
There has been substantial litigation in the Us respecting the exercise of jurisdiction over
non-resident defendants who have established Web sites and participated in other Internet
activities. Different courts have reached different conclusions as to how far their
jurisdiction extends in cases involving the Internet.
Personal jurisdiction has been defined as the “the power of the court over the person of a
defendant.”
Various websites within the UK have posted notices to supposedly avoid legal wrangles
over personal jurisdiction e.g. Norwich Union website posts the notice “UK Only”‘. The
Prudential website -
“Applicable Law
This website is established by Prudential plc in England. Any use of it shall at all times be
governed by English law and, in the event of any dispute, the relevant parties shall
irrevocably submit to the exclusive jurisdiction of the English Courts, “
Conducting electronic commerce transactions over the Internet is likely to subject the
Internet merchant to personal jurisdiction wherever their customers are located.
In Bensusan Restaurant Corp, v. King, U.S. District Judge Sidney Stein dismissed a
trademark infringement lawsuit filed in New York by the operator of the famous Blue
Note jazz club of New York City against a Columbia, MO, music club of the same name.
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The issue in the pre-trial ruling was whether the Missouri club’s World Wide Web site
provided a basis for the New York club to sue in federal court in New York. The judge
observed, “Creating a site, like placing a product into the stream of commerce, may be felt
nationwide - or even worldwide - but, without more, it is not an act purposefully directed
toward” New York.
In Maritz v. CyberGold, Inc., the U.S. District Court for the Eastern District of Missouri
held that a website operator in California is subject to personal jurisdiction in a Missouri
lawsuit under the state long-arm provision on the commission of a tortious (wrongful) act
outside the forum which has an effect within the forum. In a case of first impression
between competing Internet advertising firms, the court also found that the defendant’s
website amounts to promotional activity that satisfies the due process requirement of
minimum contacts for personal jurisdiction over a non-resident corporation.
As yet there is no clear legal definition over Internet jurisdiction, the potential for personal
jurisdiction is very likely and looking at the very different decisions the courts in US
reached as to how far their jurisdiction reaches in cases invotving the Internet, harmonious
worldwide jurisdiction would appealing to all.
Electronic
Communications
Act
2000
The UK Government wishes to facilitate elecronic commerce and has set various goals
for the use of e-commerce by parts of the public sector. The main purpose of this recently
adopted act is to build confidence in electronic commerce by creating a framework for
cryptography services, legally recognising electronic signatures and removing obstacles to
the use of electronic communication. It is consistent with various EU legislation (such as
the EU Signatures Directive).
65