CPCUs Consumed by Technology
November 2000
The CPCU Society's 56th Annual Meeting confirms
that the technology transformation has hit the insurance industry. Technological
advances will enable insurers, agents, brokers, third-party administrators,
and other service providers to offer better services to their customers at less
cost. Learn what today’s insurance experts had to say about tomorrow’s state
of technology, its interrelationship with society, the resulting risks, and
the changing roles of insurance agents and brokers.
by Jack P. Gibson
IRMI
There is a technology-driven sea change sweeping the insurance industry and
risk management profession. I drew this conclusion last May during my annual
pilgrimage to the national Risk and Insurance Management Society, Inc. (RIMS),
conference (see "The Dot Com RIMS Conference," and
it was confirmed at the CPCU Society's 56th Annual Meeting and Seminars in October.
Not only did the CPCUs devote 1 of their 4 learning tracks (and with it 4 of
their 19 seminars) to Techno 2000 topics, but technology became a focal point
of many other seminars and panel discussions as well. The president's panel
was one of these, and it, incidentally, was broadcast live over the Internet.
And then, of course, there is the exhibit hall—while not as expansive as
the show at RIMS, it is still a good barometer of what's hot. Of some 51 exhibitors
listed in the Expo Guide, 27 (53 percent) were either technology companies or
emphasized technology in their exhibit booths or corporate descriptions. Some
were the types of companies you might expect, like NetCommerce and Insurity Solutions who are helping agents, brokers and insurers establish
a presence on the Web and like ClaimResolver.com, a new entrant into the online
claims settlement business. Others were a bit more of a surprise, like The
CEI Group, which was touting its auto direct repair program, featuring Internet-based
claims administration, and Global Atmospherics,
Inc., with its national lightning detection network.
The following are reports on four of the sessions I attended.
You'll see a definite technology focus in the first three while the last
explores issues related to agents and brokers providing value-added services.
Each year, the CPCU Society's president moderates a panel of distinguished
industry leaders who discuss current issues. The panelists were:
- Walter R. Bateman, chairman, president and CEO of Harleysville Insurance
Company
- Dominic J. Frederico, president and COO of ACE Limited
- William F. Hofmann III, partner, executive vice president, and treasurer
of Provider Insurance Group and president-elect of the Independent Insurance
Agents of America (IIAA)
- Donald E. Martin, co-founder, chairman, and CEO of Epolicy.com Insurance
Services, Inc.
- The Honorable Therese M. Vaughan, Commissioner of Insurance for the
State of Iowa
- Henry Viccellio Jr., president of USAA Group
While CPCU Society President Marsha Egan started the program by asking each
panelist to list what he or she considers the main trends in the industry, technology
consumed the conversation once they had done so.
Industry trends. One of the most commonly cited
trends was the continuing consolidation of the industry. As Mr. Frederico put
it, "The big will keep getting bigger, and the small will get bigger too."
While most panelists seemed to think the consolidation will continue, there
were some different takes on the implications. Mr. Hofmann, representing the
agent's perspective, expressed concern with the mergers in the reinsurance industry
and how this may affect capacity in the years to come. Mr. Martin predicted
that, "There will be fewer national markets and fewer national brokers, with
stronger regional brokers and stronger regional insurers."
Another recurring theme was that insurers must become more disciplined in
what they write and how much they charge for it. Several panelists mentioned
the need for insurers to stay financially strong in order to maintain the confidence
of their customers as well as the importance of paying more attention to the
bottom line. The insurance company executives appeared to be committed to bringing
underwriting discipline back to their companies.
Several panelists also mentioned deregulation as a trend to watch. Mr. Bateman
pointed out that this "is a time of regulatory uncertainty with the passing
of Gramm-Leach-Bliley as well as de facto regulations being imposed on insurers
through the courts." Changes in the industry as well as Gramm-Leach-Bliley require
us to think about how regulation works, according to Judge Vaughan.
And, of course, every panelist included the increasing importance of technology
as a major trend driving change in the business. In fact, Mr. Martin believes
that this is "going to be a period of the greatest change the insurance industry
has ever seen."
Technology. The panel quickly focused on technology
as a change driver and spent most of their time on this topic. According to
Mr. Frederico, the insurance "industry has been one of the worst users of technology
of any of the major industries. The industry has lagged behind and needs to
catch up." Mr. Viccellio believes that the Internet has the potential of greatly
simplifying and automating many processes, such as claims, resulting in better
service for the customer and reduced expenses for the insurer.
Agents need a presence on a Web page, according to Mr. Hofmann, "We won't
sell a lot of insurance there, but people will find us that way." He also stressed
the continuing need of agents to have the ability to communicate with multiple
insurers with a single interface in the same manner as travel agents communicate
with airlines.
Technology will play a big role in regulation as well, according to Judge
Vaughan. She described the National Producer Licensing System currently being
Beta tested by the National Association of Insurance Commissioners (NAIC) as
an example. Using this system, an agent will access a Web page to complete a
single application, select the states in which he or she needs nonresident agent
licenses, and enter credit card information to pay the fees. The application
is then reviewed by a central processing facility (which contains data on 2.7
million agents in the United States) and, assuming no red flags arise, the agent
will be e-mailed a notification that the licenses have been issued within 24
hours of beginning the process.
Mr. Martin had a succinct answer to Ms. Egan's question regarding exactly
what lines of insurance business will be written on the Web: "Any that are subject
to matrix underwriting and matrix pricing." He gave as examples business owners
insurance, physicians professional liability, and accountants professional liability.
But Mr. Martin went on to emphasize that to be successful, a Web-based insurance
market must also have a very good call center. Insureds are going to call in
with questions and problems, and they'll need to speak with helpful people.
One of the obstacles to this is that the call center staff must be licensed
in every state.
Futurist John Naisbitt discussed the interplay between technology and humanity
in his keynote address. He began by postulating that the Internet is not about
technology, but rather is a social phenomenon. The Internet is only the enabler.
He asserts the most successful companies of the future will be those that
successfully combine high tech with what he calls high touch, where high touch
represents those things that make us human. Mr. Naisbitt explained the principal
of high tech/high touch as, "technology's interrelationship with live society
and the environment. Technology is an integral part of our culture — it is the
creative product of our imagination. The desire to create new technology is
instinctive, but art, family, and play should be equal partners — they provide
the balance."
The Volkswagen Beetle and Apple Imac computer were among the products he
cited as examples high tech/high touch because they combine excellent technology
with design features that appeal to our emotions. On the other hand, he denigrated
automated phone systems as being just the opposite: "Your call is important
to us; please hold while we ignore it," he taunted.
"When everyone has the same technology, how do you stand out?" Mr. Naisbitt
asked. "The only thing you have to differentiate yourself is high touch."
This panel discussion lived up to its creative moniker with a discussion
of the differences in the risks presented by e-commerce activities and issues
that should be considered by agents and underwriters in insuring them. The session
moderator, Stephen J. Paris, J.D., CPCU, CLU, with Lexington Insurance Company,
set the stage when he reminded the audience that, "There was no such thing as
automobile insurance before the advent of the automobile, and likewise there
was no need for Internet insurance before Mr. Gore invented the World Wide Web."1
Jurisdiction and choice of law. Richard K.
Traub, J.D., with the New Jersey law firm of Traub Elgin Lieberman Strauss,
proposed three areas where differences in the loss exposures presented by e-commerce
arise: anonymity, technical risks, and legal risks. "E-commerce risks differ
primarily in the area of anonymity. Neither the vendor nor the purchaser knows
with certainty whom or what entity they are dealing with. Unlike opening a physical
outlet in a foreign country, for example, the vendor may not study the customs
and practices of the jurisdictions in which it sells through electronic commerce.
That will increase its exposure," he said.
One of the particularly interesting problem areas Mr. Traub identified was
that of legal jurisdiction and choice of law. He explained, "Generally a business
operating out of a physical location can only be sued in the jurisdiction in
which it resides or does significant business. But when that brick and mortar
business reaches deep into the ether by way of a Web page, it increases the
likelihood that additional jurisdictions will be appropriate for suit."
Mr. Traub offered several general rules on this issue.
- How courts will treat jurisdictional issues will evolve and remain uncertain
for some time to come.
- The more a company uses the Internet to reach into a given state to
do business, the more likely the court will find jurisdiction appropriate
in that state.
- A Web site that is noninteractive — one in which a consumer cannot order
but is merely used to advertise — will not likely be enough to confer jurisdiction.
Internet presence alone is not likely to be enough to confer jurisdiction.
Simply gaining access to a business through a Web site is not sufficient
to result in jurisdiction. Actual business conducted through a Web site
may be sufficient.
- The more non-Internet contact that exists within a particular jurisdiction,
the more likely jurisdiction will be conferred. For example, toll free numbers,
catalogs mailed to the state and advertising generally will increase the
likelihood of jurisdiction.
Agent and broker issues. Michael Zeldes, executive
director of e-commerce at Kaye Insurance Associates in New York, discussed some
of the issues agents and brokers should consider when writing insurance for
dot-coms. Important differences from the brick and mortar world lay with the
insurance buyers themselves and the corporate cultures of these companies. The
decision-makers tend to be new to insurance buying, their organizations face
emerging loss exposures, and they have little awareness of coverage options.
Job functions are often not clearly defined, and these people face many conflicting
priorities.
For example the chief financial officer (CFO) is often involved in many technology
meetings. For this reason, many of these companies have little or no insurance.
Perhaps the most important point Mr. Zeldes made was that, due to the low priority
on insurance among dot-com managements, agents and brokers must be prepared
to take on a very active consultative role with these accounts.
"We experience a 90 percent hit ratio on these accounts," explained Mr. Zeldes.
But because the decision-makers wear so many hats, there is often a 3-, 4-,
or even 5-month lag time from delivery of a proposal until coverage is bound.
Mr. Zeldes places e-business exposures and coverages in six categorizes:
- Cyber liability
- Traditional professional liability
- Property
- General liability
- Directors and officers liability
- Employment practices liability
The cyber liability category includes such insurance alternatives as electronic
errors and omissions (E&O), multimedia liability, and network security/computer
breach. Essentially these coverages protect against liability arising from a
failure of the technology to deliver the product or service (electronic E&O);
various intentional torts, such as copyright and trademark infringement (multimedia);
and transmission of virus and disclosure of private information (third-party
network security).
After buying electronic E&O insurance, many businesses that provide professional
services do not realize they also need traditional professional liability insurance.
However, the electronic E&O policy covers only liability arising from failure
of the technology. Online mortgage brokers, medical advisors, and other such
e-businesses are also exposed to potential liability from giving improper advice
or providing erroneous services, and they need to purchase traditional E&O insurance
to cover these exposures.
The main challenges presented in the property insurance area involve the
high values of equipment and the difficulty in establishing these values. Of
course these businesses face substantial business interruption and extra expense
exposures, which must also be addressed.
General liability exposures are typically minimal, often limited to only
a premises liability exposure. However, e-tailers may have significant products
liability exposures, and there are many gray areas with respect to personal
injury coverage for Internet activities (thus the need for multi-media liability
insurance).
Directors and officers liability insurance is often purchased by both private
and publicly held e-businesses. Many private companies are on an "IPO (initial
public offering) track," which brings increased exposures over time. In addition,
investors or outside board members may require them to have it.
Finally, the need for employment practices liability insurance should not
be overlooked. E-businesses grow rapidly and often have unstructured work environments
with poor record-keeping, few formal employee manuals or policies, high turnover,
and a young workforce working late hours in a casual atmosphere. "This is a
big exposure area, and this is as critical as the other coverages," said Mr.
Zeledes.
In concluding, Mr. Zeldes said that this "emerging class of technology and
Internet-related business demands a high level of service from insurance agents
and brokers. It is time-intensive and requires a lot of hand-holding. Make sure
you understand the business and the insurance products." Initially, the premiums
for these accounts are not substantial, but the goal is to grow with the company.
My recent IRMI
Update editorial — advocating contract reviews for insurance implications
despite the increased E&O exposure — drew such an overwhelming response that
I was anxious to hear what this panel had to say about providing a broad range
of risk management services. The panel of agents, brokers, attorneys, and risk
managers was composed of the following members.
- Donald E. Dresback, principal and executive vice president of The Beacon
Insurance Group
- Charles Dwyer, division vice president of the Denver Division of Safeco
- David E. Kalafarski, vice president — risk management services of AON
Risk Services of RI
- Gregory LeJune, account executive with Cato and Cato in San Antonio
- Stanley L. Lipshultz, of Lipshultz & Hone Chtd.
- Kevin Messenger, director of risk management for H.E. Butt Grocery Company
The panelists seemed to all agree that agents and brokers need to provide
value-added services beyond providing access to insurers. Some of the services
mentioned were reviewing contract provisions, helping to analyze loss data,
and bringing a variety of other firms in to help solve specific risk management
problems (e.g., environmental consultants or other loss control specialists).
The E&O exposures from these activities should be handled with risk management
and insurance. For example, Messrs. Lipshultz and Dresback recommended sending
copies of the contracts reviewed to the underwriter for discussion.
About the only point of debate with respect to whether agents and brokers
should provide such services was whether the entire risk management function
could be effectively outsourced to an agent or broker. Mr. Kalafarski made an
effective argument that the skill sets of risk managers and agents/brokers are
essentially the same by showing recruiting advertisements for both types of
positions — they were virtually identical. Mr. Messenger, on the other hand,
argued that agents define risk management more myopically than risk managers.
"For most risk managers, insurance procurement is a very minor part of the job.
Also, is there a conflict of interest?" he asked.
Another problem with totally outsourcing the function is that the agent/broker
typically will not have knowledge of the corporate culture and how to get things
done in the organization. This will be a great hindrance when trying to implement
risk control programs.
Mr. Dwyer reviewed the NAIC model legislation for commercial deregulation,
and Mr. Dresback reviewed the individual state regulations that have been passed
subsequent to the NAIC "White" paper. The March 14, 2000, draft of the NAIC
Property and Casualty Rate and Policy Form Model Regulation outlines criteria
for an entity becoming an "exempt commercial policyholder" or ECP. Under the
regulation, a qualified ECP's insurer is not required to use filed rates/forms
or adhere to any statutorily mandated policy language. The purpose is to give
insurers the utmost flexibility when working with large accounts under the theory
that they are knowledgeable buyers who are harmed more than helped by stringent
regulatory protection.
To qualify as an ECP under the model regulation, the organization must meet
any two of seven criteria. Six of these relate to the size of the organization
as indicated by assets, sales, number of employees, annual budget (for nonprofits),
or population (for municipalities). The other criterion is that the organization
"procures its insurance through the use of a risk manager, employed or retained."
Some 22 states and the District of Columbia have enacted statues and regulations
based on the model. Of course, each state enacts its own version of the model
law and regulation, resulting in substantial variations in the criteria. However,
most are including some version of the risk manager requirement, which begs
the question, "Can the agent serve as this risk manager to enable a company
to meet the requirement and, if so, how does it change the agent's E&O exposure?"
Mr. Lipshultz believes that this response to deregulation will change the legal
landscape dramatically by introducing new exposures.
"In general, the duty of an insurance agent is to act in good faith and follow
the client's requests to procure the best available insurance for the most commercially
reasonable price," Mr. Lipshultz explained. There is no legal duty to provide
consultative advice unless there exists a special circumstance or special relationship.
While agents/brokers have long provided additional services, nothing was typically
done to create the special circumstances or special relationship that would
create a duty to provide other services. For example, if an agent is not being
paid any additional compensation for risk management work, he or she is unlikely
to be held legally liable for not giving advice on risk management issues.
This deregulation of commercial insurance lines will change the nature of
the relationship between an agent and insured, and will supply the special circumstances
needed to add the duty to advise to the relationship between an agent and insured,
Mr. Lipshultz postulated. "The problem comes when you agree to act as the risk
manager. When it is unsaid, you are probably okay. Deregulation offers new opportunities
to agents, but they must recognize that by trying to fit into that niche, they
are taking away the best shield they have against a suit."
The panel advised agents to carefully examine their E&O policies to ensure
that the policies provide coverage for "wrongful acts" they commit while acting
as risk managers. Messrs. Lipshultz and Kalafarski believe that the definitions
of "professional services" in many agents E&O policies are ambiguous on this
point and should be clarified. Mr. Dresback also suggested that agents document
the services they are going to provide in a standard agreement with their clients.
The agreement can be attached their E&O insurance application with a request
that coverage be at least broad enough to apply to errors and omissions committed
in performing the enumerated services.
The consensus, then, was that the successful agents of the future will provide
additional value-added (i.e., "high touch") services. These services may indeed
increase their exposure to E&O claims, and they must carefully implement their
own risk management programs to combat this risk.
Conclusion
While the most obvious examples of the technology transformation in the insurance
industry may be the start-up dot-com insurance marketplaces, this is not where
the real revolution will be. Instead, it will be the increasing efficiency that
the Internet and other technological innovations bring to brick and mortar companies.
Technological advances will enable insurers, agents, brokers, third-party administrators,
and other service providers to offer better services to their customers at less
cost. They may also allow regulators to streamline and better coordinate their
activities to reduce the costs and inefficiencies of our regulatory system.
And, John Naisbitt is probably right — the companies that give us personalized
human service along with this technology are the most likely to prosper in the
future.
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.