Expert Commentary

Changing Information Technology (Part 2)

In the second of two articles, Martin McGavin examines how new risk management information technology will impact the business of insurance.

Workers Compensation Issues
December 2002

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 websites 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.

Figure 1

Welcome Martin McGavin to Your ABC Insurance Home Page

Your last visit was August 4, 2002

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. Expert Commentary articles and other IRMI Online content do 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.

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