Changing Information Technology (Part 2)
December 2002
In the second of two articles, Martin McGavin
examines how new risk management information technology will impact the business
of insurance.
by Martin
McGavin
As mentioned in Part 1 of this article, the
insurance industry is experiencing rapid technological changes that have been
and will continue to significantly impact the way insurance companies conduct
business. This article examines this impact and the effect on all involved.
How Changing Technology Will Impact the Insurance Business
The question for insurance professionals is how will the advances in information
technology change the insurance business? Although it can be risky to predict
where the next breakthroughs in information technology will lead us, let alone
how those changes will affect specific industries, signs are emerging that there
will be several significant changes in the insurance business. One is that regulation
of claim payments and policy administration could increase. Also, privacy concerns
could lead to increased restrictions on the sharing of information.
There will be many changes in the way insurers manage data and share it with
their customers. The changing economics of information will change how insurers
are compensated for information and the amount and quality of information available
to customers will increase significantly. Insurers will also increasingly automate
policy management and claim functions, and this will also improve the information
available to customers. Automation has changed the way some lines of coverage
are purchased and could change the way other lines are purchased in the future.
Ultimately, information technology will become a major consideration in the
insurance buying decision and insurers will leverage all the advancements in
technology with their version of a customer “portal.”
Increased Regulation
In 2001, there were 55,811 workers compensation claims filed with the Michigan
Bureau of Workers Compensation. 43,178 of these claims resulted in compensable
lost time and 19,985 were contested. All of these claims generated activity
that was subject to regulation, whether it was the payment of medical bills,
the payment of indemnity benefits, follow-up reporting to the state, or all
of these. Determining if all the deadlines and reporting requirements were met
would have required the state to hire an army of workers—or to develop an elaborate
computer system for that purpose. Some states are in the early stages of developing
systems that could some day be capable of such wide-ranging enforcement.
The first steps to more enforcement may be occurring in the highly regulated
workers compensation line where many states have stopped taking paper injury
reports and now require that all reporting be done electronically. Some states
have taken the next step and now require that all subsequent reports be filed
electronically as well. Some are even beginning to require electronic data on
all medical payments. States shifted to electronic reporting as a labor saving
measure in most cases, or to gather more data for policy making, but once the
states have the data and develop the capability to use it, they could use it
to enforce regulations.
For instance, the state’s computer system could compare the date a first
report was filed and the date the notice of commencement of compensation was
filed. If the later report was filed late, the system could generate a letter
to the insurer or claims administrator advising it that a late-reporting penalty
has been assessed and demanding payment. All penalties for a single insurer
or administrator could be batched and one penalty notice could be sent per day.
The state’s system could also compare the dates on which compensation payments
and medical payments were made and issue penalties if they were issued late.
The upshot is that technology will make it possible for states to increase
revenues while advancing public policy. This will create an incentive for states
to increase enforcement of regulations and to increase penalties for noncompliance.
Insurers might be forced to report even more data including policy administration
data. Regulators might use the data to identify employers who drop mandatory
workers compensation coverage, motorists who drop compulsory auto liability
insurance, and insurers who cancel policies without proper notice. Conceivably,
any law or regulation related to insurance that contains a time requirement
or other objectively quantifiable requirement could be made the object of automated
enforcement, automated penalties, and a source of revenue for a state. Given
this, it is hard to imagine enforcement of regulations will not increase.
Privacy Concerns
Privacy advocates are already concerned about the amount of individual private
data that is available without the specific authorization of the person it belongs
to. This will certainly be a growing concern for insurers as policy makers seek
to balance the insurer’s need for information about claimants against the claimant’s
right to keep information confidential that is not relevant to their claim.
This will be a very difficult balance to maintain given the ease with which
information moves around the globe.
With today’s technology, an employee can provide private information to his
or her employer for it to use in managing its human resource policies and the
information can end up in the hands of a third party without any human intervention.
Consider the following scenario. John Smith provides information to his employer,
Western Manufacturing. Western adds the information to its human resource management
system. Smith is injured in a work-related car accident. Western files a claim
with its workers compensation carrier, ABC Insurance. Personal information about
Smith, such as his phone number, address, and social security number, is automatically
pulled from Western’s human resource database by ABC’s computer when the workers
compensation claim is filed. Upon receipt of the claim, ABC automatically files
a claim with a claim indexing organization. Smith’s personal information is
submitted with the claim. Meanwhile, the driver of the other car has filed a
claim with its insurer, XYZ Insurance. XYZ belongs to the same claim indexing
facility and sends a report on Smith’s claim. The Index Bureau matches the claim
to the claim filed by ABC and sends a report to XYZ. The report to XYZ contains
some of the information that Smith initially gave to his employer several transactions
earlier.
In this specific instance, neither insurance company is likely to end up
with any information that it would not otherwise have received or that it should
not have received. However, it does illustrate how personal information can
quickly move about.
Can Insurance Information Remain a Profit Center Despite the Changing Economics
of Information?
Many insurers and third-party claims administrators offer access to their
claim information systems to users for a fee. Customers are willing to pay the
fees because it gives them easier access to critical information such as financial
summaries and adjuster claim notes. In all likelihood, insurers and claims administrators
will eventually be forced to offer access to those systems at no cost to customers.
If so, the quality of systems, not the price, will become a competitive issue
apart from insurance prices and other service.
If insurers begin providing free access to information it would not be revolutionary;
rather it would simply follow a growing trend. Many people in the information
trade that previously sold information now give it away in order to generate
other economic activity. A good example of this is the local daily newspaper,
which may not be a newspaper at all to many who have not seen a print version
in weeks or months. Most newspapers have built elaborate Web sites to give away
the daily news, weather, and sports—the product they once sold. They must give
it away because if they do not, someone else will. Instead of relying on selling
subscriptions to Web readers, most papers now rely on selling advertising space
on the pages perused by Web visitors.
Consider the economics that could face ABC Insurance in the future. Assume
that ABC charged hefty fees of $2,500 per user for its mainframe computer system.
After investing a large sum to develop a Web-based system, ABC continues collecting
the same per-user fee. This might seem justified and it may even seem like a
good deal for ABC’s customers because the new Web-based system provides much
more functionality for the same price.
The problem for ABC is that it does not increase its cost by $2,500 when
it adds a user to its system. In fact, it is probably cost-efficient for ABC
to provide broad access to customers. There is only a nominal cost to grant
a user access, but every time a user is granted access, it reduces the number
of routine inquiries ABC’s employees must handle. This increases efficiency.
The same economics apply to ABC’s competitors. Suppose XYZ insurance wants
to increase its business. XYZ decides to offer the same information services
for $1,500 per user. XYZ will still make a marginal profit on every user it
adds to its system; at the same time it will increase employee efficiency by
giving customers direct access to information. XYZ can increase its profits
by adding customers under these terms. All other things being equal, ABC’s customers
can save money by moving to XYZ.
This example illustrates how it may be difficult for insurers and third-party
administrators to keep information systems as profit centers in the long run.
Indeed, some vendors have already stopped charging per-user fees for system
access.
Automated Policy and Claim Services
Many insurers are automating services to make their agents and claims handlers
more efficient. In many cases, automation now allows agents to make direct inquiries
to the insurer’s database to determine policy status and payment history. This
allows the agent to respond to many customer inquiries immediately rather than
first talking to one of the insurer’s customer service representatives. Eventually
all policy services are likely to be online, including obtaining proof of insurance,
making payments, and filing claims.
Most insurers automated many claim management functions years ago. Adjuster
diaries are now kept electronically and indemnity payment systems are fully
automated. Medical bill payments have also been automated so that bills are
repriced, discounts are taken based on state fee schedules or negotiated discounts,
and explanation letters are generated to providers all without any action required
from adjusting staff.
In the future, claim systems may be able to automatically fulfill some client-specific
service instructions improving service quality and increasing the amount of
customized service that insurers are willing to promise insureds. For instance,
an insurer may currently be reluctant to agree to notify a customer every time
a reserve is changed by more than $10,000. The insurer would be hesitant to
agree out of concern that adjusters might forget to provide the notice and fail
to meet the customer requirement. Moreover, even if adjusters always remembered
to give the notice, it would take time and diminish adjuster productivity. In
the future, an insurer could provide this service by programming its system
to automatically send an e-mail to the insured whenever a reserve increase occurred.
Adjusting systems will also make more use of imaging, a system where paper
documents are reduced to electronic copies and stored in a computer. This is
more cost-effective because computer memory prices have fallen to where it is
less expensive to store copies electronically than it is to build the space
to store file cabinets. In addition, it is more efficient because documents
that must be shared with other parties, such as lawyers and insureds, can be
attached to an e-mail rather than copied and faxed or mailed.
How Technology Will Change Insurance Purchasing
Internet purchasing is already becoming a factor in personal lines insurance.
Internet facilities already exist for purchasing virtually every line of personal
insurance. Consumers needing insurance—or simply wanting to see if the price
they are paying is reasonable—can obtain an instant quote from one of these
facilities. They need only enter typical underwriting data, such as information
about their vehicles and driving record for car insurance, and a quote is automatically
processed. If the consumer chooses to purchase the coverage a policy can usually
be bound directly from the site.
The Internet works well for personal lines because the buying decision for
most consumers is made as if insurance were a commodity. Auction-style buying
is fine for a commodity where price is the main driver and differences in quality
are immaterial.
Personal lines insurers may argue that personal lines insurance is not a
commodity and that there are vast differences in the quality of service and
the financial strength of insurers. But individuals purchasing personal lines
insurance probably have little understanding of these differences and even less
ability to measure them. This leaves consumers with price as the only basis
for making purchasing decisions, just as it would be if purchasing a commodity.
At this point, facilities for purchasing business insurance on the Internet
are rare and those that do exist usually serve only to direct purchasers to
an agent or broker. This is understandable because business insurance purchasers
are more sophisticated and recognize that there are more differences between
insurance companies than price. A smart business consumer may not necessarily
want to buy from the insurer that provides the lowest price because it may not
be the best partner given the insured’s overall needs. Moreover, business insurance
policies are usually more complicated and sometimes include custom forms and
endorsements, premium agreements, sublimits, or other differences that are difficult
to quantify. There are also a limited number of insurers interested in writing
certain types of risk and they may not be accessible through the Internet.
There is also a credibility factor earned by insurance brokers and agents.
An insurance underwriter may know little about ABC Mechanical Contracting, a
potential insured, but it may be very familiar with the A&A Agency that submitted
ABC’s application for coverage. The underwriter may have no confidence in the
data if it was submitted over the Internet by ABC, but may know from long history
that any information submitted by A&A is thorough and reliable. This could result
in a better quote for ABC.
All this is not to say that the day will not arrive when most insurance is
purchased over the Internet. There is too much to gain by reducing selling costs
and increasing the competition between sellers to predict this will never happen.
Still, there are many barriers to purchasing business insurance over the Internet
that need to be resolved and there are too many interests that are totally vested
in the current situation to expect much to change quickly.
The Customer Portal: Meeting All the Insured’s Information Needs
As mentioned above, a good case can be made that information will become
a service that insurers are expected to provide rather than a costly add-on
and internal profit center for the carrier. The quality of such systems could
be come a key decision-making point in the insurance buying process and quality
systems may entice customers to stay even if lower insurance rates are available
from a competitor.
All service insurers are likely to offer is the customer “portal.” A portal
is an Internet page that provides easy access to all the information available
to a user on a system or a group of systems. A user can customize a portal page
so that links appear to the systems, pages, or features the user uses most.
Portals also enable users to develop personal notifications so that they are
alerted when specific situations occur.
Figure 1 below is a rudimentary picture of how an insurance portal might
look. The portal references several functions such as claims, reports, policy
information, etc. These are the general categories of information an insured
might need from a carrier’s systems. Traditionally, the insured would call the
appropriate department within the insurance company with questions regarding
these topics and an insurance company employee would gather the information
and send it back. The portal is much more efficient because it allows the insured
to obtain the data directly. An insured might need access to several of an insurer’s
systems to answer the range of routine questions. A portal will provide seamless
access to all the necessary systems and the user will not even be aware of the
various systems being accessed.
| Claims |
Click here
to see a summary of claims meeting the criteria you set or to see the
detail for a selected claim Click here to report a new claim
|
| Reports |
Click here
to request a report from the report library |
| Policy
Information |
Click here to see a summary of your
ABC insurance policies Click here to obtain proof of insurance
|
| Billing
Information |
Click here to see the status of your
premium payments and next billing information for all your ABC policies |
| Loss
Control Reports |
Click here to see safety and fire
inspection reports for your facilities |
| Preferences |
Click here to set the preferences
for your ABC Insurance home page |
| Alerts |
New claims
have been reported since your last visit! Claim values have
changed by more than the limit you specified!
A premium is due on your general liability policy in the next 30
days!
A new safety or fire inspection report has been posted.
|
The notification section makes the portal even more useful. It attempts to
answer the most common questions the user will have when visiting the portal.
For example, users may frequently visit the insurer’s system to determine if
there have been any significant reserve increases on the user’s claims. Rather
than simply giving the user access to the claim database to figure this out,
the portal designer would anticipate that this was a common user question and
provide specific information to the user when he or she logged in to the portal.
A well-designed portal would be able to answer most routine inquiries for
the user as soon as he or she logged in. It would provide links to the systems
a user would visit to manage any exceptions that were identified.
A user entering the portal in Figure 1 would see that there are several notices
listed in the notice section. Just by logging in the user would know that new
claims have been reported, reserves have been changed on some claims, a premium
payment is due, and a fire or safety inspection report has recently been completed.
The insured could easily get to any of the underlying information. If the insured
wanted to know about the reserve increases, he or she could click on the link
to see a list of changes. If one in particular was of interest, the user could
click on the claim in the list and be taken to the individual claim in the adjusting
system where the adjuster’s latest electronic diary notes could be seen. Conversely,
the insured might see no notices and know that there is nothing that needs to
be done or reviewed. In either case, it would be a powerful service for the
insured.
Although the insurance portal is designed with the insured in mind, it may
be as much of a benefit to the insurer. Portals can make insurers more efficient
by handling some of the routine inquiries and requests that would otherwise
be handled by the insurer’s employees. More importantly, a portal can help develop
customer loyalty because the more policies written by the insurer and the longer
the relationship with the insurer, the more valuable the portal becomes. An
employer that uses six different insurance companies to write its basic casualty
program would need to use six portals to manage its policies and claims. An
insured that changes insurers every year would also need access to several portals
to administer historical policies and follow all its claims. By comparison,
an insured that wrote all its casualty coverage with one insurer, and stayed
with that insurer for several years, could review all its crucial insurance
information with one daily visit to the insurer’s portal. The bottom line is
that a portal can make insurance management much easier, but only if an insured
stays loyal to one or a few insurers.
Information technology is changing rapidly and business processes are changing
along with it. These changes are certain to affect the insurance business because
of its dependence on information. Technology will benefit everyone involved
in the insurance transaction because information will be more accessible and
less expansive to store and manage. Although this could lead to more regulations
and some concerns about individual privacy, it will make it easier for insured’s
to manage their insurance affairs at the same time it makes insurers more efficient.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.