e Insurance Project

INTRODUCTION TO E-INSURANCE

E-insurance can be broadly defined as the application of Internet and related information technologies (IT) to the production and distribution of insurance services. In a narrower sense, it can be defined as the provision of an insurance cover whereby an insurance policy is solicited, offered, negotiated and contracted online. While payment, policy delivery and claims processing may all be done do ne online as well, technical and regulatory constraints may not allow these elements to be subjected to full e-commerce application in certain countries. However, insurance legislation worldwide is being continuously modified to accommodate online payment and policy delivery, and outside the discussion of einsurance metrics, these elements should be included in the narrow definition. The anticipated efficiency effect of e-insurance is twofold:•

E-insurance should reduce internal administration and management costs by automating business processes, permitting real-time networking of company departments, and improving management information.

•

It should reduce the commissions paid to intermediaries since it can be sold directly to clients. For insurance sold to individuals, agents typically receive a commission of 10 to 15 percent for non-life policy sales and renewals and from 35 to 100 percent for life insurance policies in the first policy year, but much less on renewal.

However, some of the income gained in commissions that are not paid to intermediaries must be spent on online customer acquisition and marketing. Assuming cost savings do materialize in a competitive market, they would be passed on to consumers thereby allowing them to buy more insurance, or other products or services. Since insurance penetration (Premiums as a percentage p ercentage of GDP) in developing countries c ountries is only of that in developed countries, the efficiency gains created by e-insurance may contribute substantially to growth in insurance spending and thus intensify its indisputable role in promoting trade and development. Of the $2.5 trillion worth of global insurance premiums, about 1 percent could qualify as e-insurance, according to the broad definition. Little, if any of the premiums earned in developing countries, could be described as e-insurance according to the

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narrow definition. In stark contrast, the majority of the $100 billion global reinsurance business is traded using some form of electronic medium. Considered along with initial reports indicating that online premium rates are more competitive, this could point to acceleration in online distribution of insurance covers measured by the overall value of insured assets. Considered along with initial reports indicating that online p remium rates are more competitive, this could point to acceleration in online distribution of insurance covers measured by the overall value of insured assets. During the height of the dot.com euphoria, expectations for e-insurance growth were very strong, and many insurance and reinsurance companies and intermediaries have continued to invest in their e-commerce capabilities. Swiss Re’s research arm SIGMA estimates that by 2007 e-insurance will have 5 to 10 percent market share in standardized personal lines insurance Figure 1 indicates forecasts that 7 percent of global premiums will qualify as e-insurance by 2007.

Figure 1.















NEED OF E-INSURANCE:-

Recent developments in information technology (IT) and web-enabled systems have made it easier for insurers to run global operations in a way that would not have been possible even two years ago. Insurers are already reaping advantages from IT improvements in internal efficiencies in areas as diverse as u nderwriting, claims, policy administration, financial reporting and human resources. But efficiencies go beyond these internal ones. In the coming years, the internet will have at least two major effects on the insurance industry: cost efficiencies and broader distribution. These efficiencies will come as insurers experience a greater availability of data from the internet and the transfer of business processes from manual-related or computer-related systems to newer communication related systems. Such internet-style technology will reduce cost, reduce the level of effort and improve accessibility to large-scale data. Data accumulation becomes much easier under the internet approach and thus affects costs and value of insurance. The internet will bring insurers to a whole new audience, and will allow them to sample new markets that would have been too expensive to enter. Making information available to potential customers and the ability to market products to the new audience will have a tremendous impact. THE WEBSITE:-COMPARISON OF INSURANCE INDUSTRIES OFFERING V/S CUSTOMER EXPECTATION

Today’s customers have certain basic expectations abou t their insurer’s website without which they will turn to other more interactive sites. As the website is a touch point for consumers and insurers; it should have the following basic features: • Functionality:

Many insurers have made plans to add capabilities to their sites such as problem resolution. But such functions as claims handling, self-administration of policies, online billing and bill payment may have not yet been executed to the satisfaction of the site visitor.















• Timely response:

Today’s sophisticated web surfers do not complain when they get a lack of response from an insurer’s website – they just take their business someplace else. The Customer Respect Group discovered this gaffe in its “Summer 2004 Online Customer Respect Study”. 27% of carriers surveyed do not reply at all to online inquiries

and another 25% answer only o nly about half of their inquiries. As a result online users will abandon a visit to a site and go to a competitor’s site to make a purchase if they have a less than satisfying experience. Response time should therefore be addressed more seriously.

• Financial products and services features:

Customers will visit an insurance site more often if it has a wider breadth of financial products and service features. For example, Nationwide, Usaa and Prudential insurance companies (all of which offer an extensive ex tensive array of products that can be bought online) average three visits per customer each month, as opposed to one monthly visit per user to sites with narrower offerings. Moreover, in another survey supporting this point of view, it appeared that 45% of consumers are less likely to use their insurance sites if products and services such as financial aggregation are provided elsewhere.

• Connectivity and easy site navigation:

Insurers need to ensure that the consumer’s con sumer’s online experience is as convenient as possible. In “ Policyholder Policyholder Self Self Service” report by Gomez Inc. it was established that currently the average visit to insurance sites lasts about 10 minutes, which means that insurers have a very short time in which to impress the consumer with the value of their site before they move on. In that same report it was also found that more than half of those who were unsuccessful at performing self service say that they are unlikely to try again, while successful self service will likely draw people back (74.7%)















ADOPTION OF E-COMMERCE TO INSURANCE:-

Certain industries, such as travel, banking, and retail, have embraced the emerging technologies that make electronic commerce possible. Some firms have gone as far as completely revamping their business processes. The insurance industry has made real progress in implementing some of the technologies o f e-commerce, but the industry has been slow to adopt others. This is because insurers must carefully select which applications to implement, weighing the costs and benefits. Some applications of ecommerce used in other industries do not n ot easily fit the business of insurance. Many others, however, present insurers with interesting possibilities . A typical e-commerce transaction can be divided into the following five phases 1. Search 2. Valuation 3. Logistics 4. Transaction 5. After-sales services The first four stages of e-commerce described above directly lend themselves to analogous steps for purchasing an insurance product online. Consumers search from different insurance companies for products that they are willing to purchase. They evaluate the products from different companies to determine the one which best suits their needs. The insurance company co mpany then conveys the terms of the insurance policy to the customer and the customer responds with details d etails including a description of the entity being insured, the terms and the duration of the insurance policy. When both the customer and insurance company agree to go ahead with the transaction, the buyer pays the initial premium to the insurance company and the policy certificate is sent to the buyer. The after sales phase of e-insurance is however considerably different from e-commerce. In e-commerce, human intervention is required for activities in the post-sales phase such















insurer, the insurance company and possibly legal and judicial authorities and, in an automated environment, requires close interactions between humans and automated agents. This phase is therefore the most difficult to implement ove r the Internet and online insurance sites mostly rely on human intervention for this phase. Insurance companies offering proper services through Internet can be classified into the following categories: •

Web Sites: Almost every insurance company has homepage providing

information about the company and products. p roducts. However, these homepages are little more than passive online versions of the company’s brochures. •

Product Portals : Portals are sites that provide a collection of links to sites of

interest. •

Point-of-Sale Portals : Unlike most other commodities, the sale of insurance

products is initiated by the sellers. Certain sits exploit this approach by offering insurance products while selling insurable goods such as cars or while providing information on health or college education. •

Intermediate Brokers : Brokers are intermediate sites that do not sell insurance

products directly but assist clients in matching their requirements with the policies offered by insurance companies. •

Reverse Auction : In this case, the client is usually an organization interested in

group insurance. The client announces announ ces its requirements and selects the best offer made by an insurance company. •

Aggregators : Aggregators are sites that compare quotes from different insurance

companies. The service is often supplemented with general information on products as well.

















THE INTERNET AND INSURANCE: IMPACT AND IMPLICATIONS :The Internet and life insurance: impact and implications Current position of Internet usage by life insurance companies

Stages of incorporation of Internet into existing businesses can be broadly categorized into four main stages. •

Web Presence Stage

To obtain on-line quotes on a contract that they may be interested in and the activities of the company are largely targeted activities. However there is no processing of the information past this stage and a customer must obtain an application form to process the transaction any further. •

Interaction Stage

This is where a company uses web pages to provide information about their products and services i.e. corporate information, to include financial statements and balance sheets. This stage is very basic and apart from raising brand awareness, there is no real significant impact and incorporation into existing businesses. •

Transaction stage

This is where the company has enhanced information technology and may even have facilities for customers to place orders and transactions •

Enaction stage

Here the company has used the net and IT, to redefine their business and are known as

















expected to grow to $11.1 billion in premiums ($7 billion net-influenced sales and $4.1 billion online sales) by 2003.”

Implications for life companies Survival of the fittest

One possible impact of the Internet in the future will be the position whereby only a small number of companies shall exist owing to economies of scale in commoditization. Having established a strong brand, their support services for their products will be diverse and be innovative and technological. Inclusion a mutichannel distribution strategy along with bundling a variety of secondary related products will help them to provide insurance products for both the long and a nd the short term. These companies will be the result of the merger and acquisition of several existing financial companies and may be a global venture. Profit margins although deliberately kept low will exist and the emphasis shall be on high volume, minimum unit cost sales, with heavy investment of capital in advanced adv anced technology. The target sector will be the average person who has relatively simple insurance needs. Customers may find that loyalty discounts exists and they shall be quite happy to purchase other products from these big market players. Specialisation

Here each company will choose to concentrate on their core business competencies outsourcing non-critical components and leaving the distribution of their products to independent firms, such as supermarkets, who have a wider consumer base. There shall

















The resulting effects will be the demise of many small and medium sized companies and a reduction in the number of Independent Financial Advisors. Team as well as self-education support in the form of information available to the customer on the Internet. As innovative products and quality of service become overriding issues, administration becomes complex and expensive and indeed customers may choose to forms C2C alliances to sell second hand endowments, for example. A Niche scenario

As the number of people surfing on-line increases every day and wealthier and more educated customers display sophistication about them a niche market might develop in the future to meet the complex financial requirements of such customers, who have complex financial needs. These needs will include continual personal expert advice through channels such as Independent Financial Advisors or a Direct Sales Force Team as well as self-education support in the form of information available to the customer on the Internet. As innovative products and quality of service become overriding issues, administration becomes complex and expensive and indeed customers may choose to forms C2C alliances to sell second hand endowments, for example.

The Internet and other markets: impact and implications Impact on insurance brokers

The market in which insurance brokers operate is very diverse. Consequently, the potential of e-commerce is also diverse. An investment broker will advise on which type of investment product or investment fund matches a customer’s risk tolerances and

















Moreover, the position of the smaller retail insurance broker is very different to their larger competitors. By a combination of web-based marketing sites and the facility of transmission of data between systems using a standard interchange facility may facilitate low cost electronic trading for brokers which may be paramount to the survival of the smaller broker. Webenabled TVs would increase the potential market and thus provide even greater savings. Also Internet usage allows an alternative to the traditional manned claims desk by allowing free exchange of information on claims procedures. All, however, face the threat of disintermediation and broker commission rates are under threat. This has been partially due to the Internet, as customers “go direct” with the underwriters. Brokers have responded to this by increasing the range of risk management services that they offer. However, this still does not deal with the issue of the Internet being responsible for edging them out of the market altogether, as the development of a Universal Electronic Data Interchange allows communication between customers and insurers that is more direct. Not all is bad news. Indeed the Internet can be advantageous for the broker in terms of providing them with a faster more cost efficient method of transferring information globally and hence enabling them to pass on the savings to their customers and hence attract more business. The Internet is also changing the role of the broker from an intermediary to an “infomediary” who conveys information to the customer. As markets become increasingly dependent on standardised information such as the FTSE indices, the

















sharing allows customers accounts to be continually monitored by reinsurers. It will also mean that they are up to date, thus making renewal simpler. Moreover, this data is easily manipulated and stored thus decreasing administrative costs. Within the London market this advantage is readily apparent with organisations such as Lloyd’s enjoying the increased efficiency gain. However, the Internet facilitates competitors in the reinsurance industry such as the Bermuda reinsurance centre. These centers have benefited greatly g reatly from the impact of the Internet as distance and location has been a traditional barrier to entry. Furthermore, such centres are in anideal situation to postulate legislation for newer forms of e-commerce that would complement their existing tax position and hence h ence generate even further business. bu siness. These competitors have undoubtedly affected the traditional market share that Lloyd’s enjoys and thus it is imperative that such points should be considered.



















POTENTIAL EFFECT OF E-INSURANCE ON INSURANCE INSDUSTRY

Insurance and the broader area of financial services are industries where electronic commerce will play a significant role. These information-intensive industries are fertile ground for the play of forces that have spawned e-commerce. The evolution of the use of ecommerce by insurance companies and intermediaries raises a number of issues with respect to the impact of this technology on the industry and its regulation. Any discussion of the impact of e-commerce on insurance must address some of the issues affecting the major players in the insurance electronic marketplace1: Insurance company (Insurers), Consumers, Insurance agents, Other service providers, and Government /Society (through the supervisory authority).

















sale of policies. But the growing number of those who have embraced the technology is most encouraging . There are some factors, which make the online selling of insurance products difficult:1. The complexity of some products, produ cts, e.g., tax-efficient life insurance policies, increases the consumer’s need for specific advice. It has not yet been possible to automate au tomate the provision of information; although it can be assumed that continuing advances in technology will create new opportunities for automated solutions. The complexity of many insurance products can often be reduced by design modifications. 2. In many cases, it is difficult to standardize claims settlement for example, as this involves a large amount of investigation and decision-making. This process often involves people and companies who are not in a contractual relation with the insurer. 3. The Internet is particularly suitable for products where con tact with the company is more frequent. Insurance is usually taken out infrequently, every couple of years or even once in a lifetime. Once a policy has been concluded, with some types of insurance the insurer and the policyholder have barely any contact, unless an insured event occurs. Also, existing insurance policies can often only be cancelled with a certain amount of

















competitors. Now the Internet provides new companies with instant access to the insurance market at an affordable cost. Market transparency is improving, since product and price information is more readily available through the Internet. Lower market entry barriers and higher market transparency are combining to intensify competition and force prices down. This also makes it increasingly difficult for insurers to pass the comparatively high costs of traditional distribution onto the prices it charges for its products. In life insurance especially, online distribution may change the nature of the competition. Acquisition costs traditionally play a key role here. They often c ome to more than 100% of the new premiums, and are only amortized over the course of a long policy term. For new entrants to the market, such a big cost burden at the start of the insurance contract is a major barrier to entry, en try, as they are unable to draw on a constant premium flow to finance new clients’ acquisition costs. If Internet insurers manage to reduce these acquisition costs significantly, it would become far easier for them to break into the market. On the other hand, Internet insurers need to attract clients through advertising, and this entails substantial costs as well. Furthermore, a certain amount of

















names. Successful alliances for Internet insurers are feasible with online ban ks or online brokers, as well as with quality portals such as AOL, Yahoo or Microsoft. E-commerce enables established companies in other sectors to cross over into insurance. Lateral entrants from other sectors can break into the insurance business with the help of the Internet. The most likely candidates are companies who already have a well-known brand name and strong customer loyalty. These companies, such as banks or internet providers, could set up new, efficient e-commerce systems, without the burden of legacy systems or conflicts with other distribution channels. They could also transfer their brand name to the insurance industry and utilize existing sources of finance.

Benefits for Insurance Companies

















payments. For example, better data analysis an alysis may improve risk selection, while the detection of insurance fraud and tighter control by partner companies can help to reduce claims costs. In life insurance, claims costs are much less than in non-life insurance, because of the high savings component. Distribution costs represent the biggest cost block, which means that the bulk of the cost savings can be achieved in distribution. However, many life insurance products require a lot of advice, ad vice, and are therefore only partly suited to pure p ure Internet distribution. For traditional insurers, the need to adapt to the new e-commerce opportunities not only entails direct cost, in the form of substantial investments in the ne w information and communication technologies, but also the indirect costs of having to change their existing business models. Companies have to revamp their business processes and corporate structures, which leads to many different internal conflicts. Internet marketing threatens traditional distribution channels and therefore tends to meet with strong resistance within the company. Many insurers avoid this problem in the short term by not passing on to the customer the efficiency gains created by electronic distribution. In some cases, the



















Figure shows the costs of traditional vs. online purchasing processes.

















distribution. Products with relatively high fixed costs and low value (such as travel, credit, or burial insurance) are relatively expensive to produce. Those customers pay a high price per dollar of coverage c overage for these products. The Internet allows the disintermediation of this relatively high overhead for these low face-value products. This means that prices can be lowered and more insurance sold by reducing the transaction costs of the exchange. Increased access through e-commerce also may prompt some consumers to purchase broader, high-value insurance products to manage their risk Top Obstacles And Concerns For Insurance Companies

In view of trends concerning the growth of e-commerce in the general economy, it is interesting to consider what the impact has been and is likely to be for the insurance

















However, insurers cite as top obstacles factors such as resistance to change, threat of agent/broker/company disintermediation, lack of technology infrastructure, regulatory hindrances, and lack of industry vendor solutions. Insurance Products Suitable For E-Commerce

Not all insurance products are equally suited to Internet distribution. Their suitability depends chiefly on how much advice is required. The more complex the product and the bigger its financial scale or transaction volume, the greater the client’s willingness to pay for advice. Products that are particularly suitable for marketing on the Internet are those that can be described and rated using a small number of parameters, such as motor, private liability, homeowners, household contents and term life insurance. These types of

















when choosing a private health hea lth insurer, but is prepared to use online facilities to process and settle doctors’ bills. •

Brokers can use e-commerce solutions to bundle together the needs of a large number of clients, handle the administration themselves, and then forward the data to the insurer.

•

Modern communication technologies allow more personalized products, faster response times, greater flexibility in covers and better support for risk management.

However, there are ongoing debates about the suitability of individual insurance product

















New Value Creation for Insurers

The use of Internet technologies in the insurance industry is not just limited to distribution, but also has a fundamental impact on almost all other production areas. The integration of all business processes in a unified information flow significantly reduces the cost of gathering and analyzing information. Since the efficient processing of information is a key factor for insurers in the creation of value, the use of new information and communication technologies enables them to revamp and rationalize key links in the value chain.



















































by the same agent, often do not match. To clarify these differences and enable crosscomparisons is perhaps the most important role of the agent. Outsourcing of Insurance Functions

































Consumers also could have access to internal records to see where their claims are in terms of payment, when their next annuity payment is due, and how their mutual fund is performing. This can be done without calling a burdensome voice-mail system, being put























































































































































e Insurance Project

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