There has never been a time when the effective use of IT has been more crucial to the success of the insurance industry. The insurance markets are being revolutionised by technology at a high speed pace. IT and software solutions, allowing cross-border trade to become electronic and paperless, are increasingly on offer to importers, exporters, shipping companies and financial institutions.
1. Information Technology
The computing technology, networking technology and advanced electronics together make today’s I.T The convergence of electronics and telecommunications created by devices like fax, telex which the business world-wide has been using extensively over last three decades. The convergence of computers and telecommunication has generated various computer network making the business data transfer feasible. The computers with advanced electronics has provided the multimedia facilities i.e. apart from the data in electronic format the voice (audio) and image (video) also can be a controlling input to and output from a computing device.
1.1 Hardware:
Developments in Information Technology have been characterised by miniaturisation and reducing cost with improved performance and better reliability combined with shortened product development cycles, due to advances in chip technology.
The early use of huge computers during World War II was for military purpose. The computer technology went hand in hand with the advances in electronics. The computers for commercial use in 1960s, made use of transistors instead of vacuum tubes in the earlier computers. The integrated circuit (IC) technology of 1970s forms the backbone of latest computers. With the feasibility of circuits having large scale integration (LSI) and very large scale integration (VLSI) powerful computers came to the table tops (Micro computers) and then to laptops and now to palmtops.
1.2 Software:
Like the hardware, the computer languages (software) have also undergone change. The software transitions from very hard to use machine level language (MLL) through Symbolic / Assembly Level Language (ALL), High Level Language (HLL like Cobol, Basis etc.), fourth generation (4GLs like relational databases) have today reached to expert systems. This has brought the computer closer to business managers who may not be necessarily computer professionals. With complicated operating systems for mainframes and mini computers the personal computers came handly with operating systems like DOS, UNIX. This changed the concept of huge data processing centre into decentralised data processing units. The recent additions of user friendly interfaces like Windows brought menu driven, user friendly computing to the society.
Word processing and spreadsheets made processes more efficient and one could edit documents or do calculations faster. But there was no sharing of information.
1.3 Computer Interface and Storage Devices:
The dialogue with computer which is through input and output devices has changed its form and medium. The first interface with computer was the punched card (Holerith Card). Today the typewriter like keyboard or pointing and clicking device like mouse are in common use. Digitisers have introduced the flexibility of translating maps and figures to computer memory. Scanners have added image capture facility to computers. The touch screen add-ons and touch panels would accept finger touches as if they were mouse clicks.
The storage devices have changed from bulky and sequential access magnetic disks and tapes to handy and flexible floppy disks, hard disks. Optical disks offer mass storage capabilities. Today’s compact disks with high storage capacity of 600 MB onwards are replacing concepts of publication of books/manuals and encyclopaedia or any other business information with relatively less cost.
1.4 Data Distribution and Networking:
Advancements in IT has provided connectivity amongst computers for electronic data interchange. This enabled the organisations and individuals to spread messages within and outside the organisations at a very low price on electronic mail. Electronic data transmission enables information sharing within specific sites on Local Area Networks (LAN) using coaxial or unshielded twisted pair (UTP) cables. Operating offices of a business house can be connected through leased telephone lines to form a Metro Area Network (MAN) allowing data transfer within different offices of a city. Electronic data transmission over long distances using satellite communication links or fibre optic cables forms WANs. The new client-server technology has provided an open systems environment with broad interoperability across diverse hardware platforms and connectivity between offices. The client-server computing also made distributed data possible, had workflow and office automation support as well as graphics user interface leading to customer-oriented information of text, picture, film and sound to any remote place.
2. Information Technology for Insurance
2.1 Database Management Systems:
The principles of tracking and measuring responses can pay off for the insurance industry. To find more clients, we need to consider many factors, including : lapsation, cash value, premium and competition. But the need to record and study the characteristics of persistency – the length of time we retain policies, customers and agents is most important for insurance companies.
A database with five to ten years history of households or clients, products and agents can help you follow the most profitable combinations of the three. Such historical retention was prohibitively expensive in the past. But clear advantages of new PC (Personal Computer) and RISC (Reduced Instruction Set Computing) technology gives companies power to keep tens of millions of policies on a device with thousands of bytes of data per policy/client/agent. Now such 10 year database analysis are cost effective. By reviewing the database one can see how many clients have actually migrated not just how many policies have lapsed or surrendered. Using database technology, companies can get a comprehensive view of their business and analyse the effects of competition, performance, loyalty and lost opportunity.
The insurance industry needs to provide a consistent, long term, systematic support of the processes that identify customer needs and desires. Database measurement and research can lead to fulfilment with a combination of winning products and services marketed by a well trained distribution force.
2.2 Data Warehousing:
Data warehousing technology is based on integrating a number of information systems into a ‘one stop shopping’ database to achieve vision of making company national in scope, but regional in focus. Traditionally the sales and the claims side have been separated. Data warehousing will allow managing by profit levels with an integrated approach rather than by limiting losses. A data warehouse basically is a depository that stores information in one database that had been stored in many sources. By housing the information in one database, information can be accessed more easily, efficiently and inexpensively for comparison and analysis.
The concept of make and sell is out. Insurers need to sense and respond. Dataware can be a source to analyse the customers and historical data, such as number of policies written, number of new policies, retention, premiums and losses. The data warehouse as a centerpiece of an information delivery system is going to be critical to insurer’s ability to effectively manage profitability and to achieve both growth and a level of operational excellence.
Data Mining [1] is the cornerstone of Customer Relationship Management. The Financial Services Industry has only begun to fully realise the potential of Data Mining as a means to control costs and increase revenue. The earnings are enormous for companies that utilise Data Mining effectively. Data Mining is the most effective means to acquire substantial competitive leads. This rapidly evolving field makes updating your knowledge of trends, developments and competitive intelligence more than a necessity, it is an absolute must.
2.3 Decision Support Systems:
The path of Business applications of computers encompasses many stages which are demonstrated in the figure above. The computer Based Information Systems (CBIS) path shows the very early applications like Transactions Processing Systems (TPS) followed by the Management Information Systems (MIS). The computer applications like Decision Support Systems (DSS), Expert Systems (ES) and Executive Information Systems (EIS) are still awaited in insurance business. Office Automation (OAS) happens to be a continuously ongoing, dynamic process for any business.
Insurance companies need to think, differently about information and technology. Insurers historically have been heavy users of technology but mainly for making administrative functions more efficient. They also had large quantities of data, but very little useful information. New opportunities are emerging as technology advances make the capture, access and management of information easier. Simultaneously the general ability to use information is becoming competitive weapon in delivering high quality, efficient service.
The comments in the Chapter on IT and insurance in Report of the Committee on Reforms in the Insurance Sector include,
“Computers are still being used for limited data processing – important though that is and indeed needs further extension- and not as instruments for developing Decision Support Systems.”
Companies need to utilise decision support systems by implementing data warehouses that pull information from existing legacy systems into a customer information database. Such decision support systems will equip the insurance managers with ability to allow for customised products and services that are more in line with what customers want.
Any need to analyse historical and demographic data quickly and easily to improve business profits warrants the need for a Decision Support System. The earlier databases were designed and built based on products and not customers. Before the recent advancements in decision support system tools, a product approach to storing data made it difficult and costly to obtain a horizontal view of vital customer information.
2.4 Group Linking Software:
Group linking software enables sharing of information and particularly suits document heavy insurance business. Tracking of policy application shows how information that is input and accessed from a number of locations can increase efficiency.
An application for coverage is entered into the groupware system from a forms generation package. Keyfields in the form are already linked to this software allowing a user to click on a field and view information regarding that area e.g. cost of coverage for similar risks. The user clicks again and taps into research information regarding such risks, underwriting guidelines or other documentation. If underwriting guidelines have been updated the changes are highlighted in red and marked with a start.
Users from other locations can view any information as soon as it is added to the file. As each user completes work on the file it is moved to the next station. The basic promise behind the groupware is to allow an unlimited number of users to collaborate on a project at any time, in real time, and to track the location an progress of the project. The ability to replicate information and to synchronise databases or applications no matter where where you are in the world is what made group linking software a breakthrough technology. Some of the group linking are Lotus notes, exchange, first class.
2.5 Imaging and Workflow Technologies:
The proposal forms may be scanned into an imaging system, data may be extracted for update to computer and for automated underwriting workflow may be implement. It is estimated that imaging and workflow enabled underwriting could reduce the time taken to issue a policy as much as 60%. Under the imaging system, every document – be it correspondence, forms, photocopies of cheques, faxes etc. are all maintained in a shareable electronic folder – neatly indexed, updated, and available simultaneously to all concerned.
The recent report of metlife insurance indicated the performance improvement attributed to imaging and workflow technology to the extent of 50,000 claims document – clearance in 8 hours in case of dental claims of health insurance services.
2.6 Mapping:
Mapping technology can be used by insurers to meet different needs, such as identifying loss prone areas or geographic claim analysis. It helps the insurer to analyse the extent of its network i.e. the insurer can determine whether it has too many or too few agency force in a particular area. Mapping is a very convenient way to layer disparate information from various databases to create pictures.
Maps can illustrate how many building are located in a flood plain, or whether two building covered by the same insurer’s fire policies are close by each other and thus present a potential double loss if fire breaks out in one of them.
2.7 Call Centre Technology:
Good customer service is a crucial element in gaining, maintaining and retaining profitable customer. Call Centre based on Interactive Voice Response Service (IVRS) is gaining importance in this aspect. The primitive concept of Call Centre was based on an enquiry system providing information services to customers through telephone line answered by employee/s. The totally automated Call Centre concept provides better service through automated computerised exchange but lacks in flexibility i.e. only predefined queries are serviced.
The insurance companies world-wide are accepting the auto manual Call Centres as one of the important strategies for Customer Relationship Management.
2.8 Video Linking:
A video linking facility between two remote units of an insurance company or between an insurer and a broker allows underwriters at one place and brokers at other unit to discuss risk face to face. The video link helps maintain the personal relationship between underwriters and brokers which is very valued for insurance business and in turn would help to draw business it would not have seen if people use telephone or fax alone for contacting.
2.9 Cat Models:
Catastrophic models use data from the recent spate of natural disasters which helps develop more predictions of insurers property exposures in future disasters. Using this data curious “What-if” scenarios of probable maximum loss (PML) using the best estimate available at an insurer’s exposures are tested. Finally an underwriting policy that limits the company’s exposure to catastrophic losses is implemented. Other information such as where the faults are, construction specifications, soil type, amount of ground motion likely to occur at a given site is also used in the models.
This new technology is helping insurance companies to better understand their exposure to mother nature’s perils with more accurate computer models providing precise information on catastrophic exposures. This helps insurers and reinsurers to better access their catastrophic exposure and as a result, raise rates in certain areas. Insurers will be in a position to better price and spread the risk. This could mean that fewer insurance companies would be seriously hurt or driven out of the market by a single catastrophic event and the buyer will benefit from a stronger insurance industry. The technology may show insurers that a given type of property or a specific area is so susceptible to catastrophes that they will refuse to underwrite such risks at all.
2.10 Intranet, Extranet, Internet:
Intranet is the network connecting different offices of the same business to permit the internal data transfer within the business.
Extranet is a network allowing the business to communicate with business partners like suppliers, vendors, banners, regulations etc. on the electronic channel.
Internet is a global network of many computer networks. Any user who would like to exchange some information with other user at a remote location, can log into the computer of internet provider via modem or an Internet Access CPU (IAC). All IACs have a registered address at a central computer station in US. IAC will look up for the address of the target computer and establishes a link using other computers as transmission stations. The linking process lasts only a few seconds.
The internet and online service providers are providing opportunities to create new forums which can be utilised by everyone world-wide. Insurers can browse through many useful sites on the internet.
Risk Web site provides an electronic discussion list of risk and insurance issues. Captive.com site offers business-to-business risk and insurance exchanges, answers to frequently asked questions. Some other sites provide information and statistics on occupational safety and health administration, weather & weather related events, disasters and catastrophes to make educated and timely decisions about mitigating risks.
2.11 Insurance and Electronic Commerce:
Enormous opportunities are being created by the Internet’s new connectivity such as improving customer service, reducing cycle time, becoming more cost effective, and selling goods, services, or information to an expanded global customer base. As entire industries are being reshaped and the rules for competition are changing, enterprises need to re-think the strategic fundamentals of their businesses in order to be successful. E-business is first about business, rather than technology. Technology, while important, is the less difficult part. The difficult part is managing the changes in business strategies and institutional processes that are needed for enterprises to take advantage of e-business, or to avoid losing out to competitors who do so.
2.11.1 E-Insurance Benefits:
E-Insurance will derive multiple benefits to the insurer like,
• Information collection will be better and cheaper
• Speed of Response: Issuance of Policy and settlement of claims will be faster
• New Ways of doing Business in a competitive market
• Flexible Pricing and Customised Service
• Global Accessibility i.e. Lapse of Physical Boundaries
• Increased Sales without additional sales force
• Immediate Premium Collection and Funds Transfer
• Reduced cost per transaction
• 24*7 Availability
• Improved Service
• Real Time Knowledge Base Building
2.11.2 E-Insurance Challenges:
Electronic Insurance will not only provide many benefits but will also pose business and technological challenges.
2.11.2.1 E-Insurance Business Challenges:
The following points have been detailed in a study on insurance and e-commerce done by Grace, Klein and Straub of the Centre for Risk Management and Insurance Research, Georgia State University.
Disintermediation Increase Business:
The study has shown that the cost of distribution decreases with the increased value of connection. Products with relatively high fixed costs and low value (such as travel, credit, or burial insurance) are relatively expensive to produce. Customers pay a high price per dollar of coverage 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 transactions cost of the exchange. Increased
Reorganisation of Companies-Virtual Companies:
Many insurers will be prompted by the opportunities presented by E-commerce to restructure the packaging of insurance services. Insurance companies using E-commerce may reengineer, outsource, and/or streamline their management functions, or marketing and distribution arms. To more efficiently deliver their services, some insurers will be able to reduce their significant investments in physical facilities and certain personnel. E-commerce will enable independent agency insurers to more easily adapt their distribution mechanisms to market competition and expedite their transactions with intermediaries.
As the study notes: “Virtual companies may emerge which rely heavily on information technology for many line functions while other insurers will use it to significantly increase the productivity of their human and physical resources. E-commerce could offer significant efficiencies and new market outlets for both large and small companies. Insurers will significantly utilise information service providers to facilitate their efficient application of this technology.
Insurance Customers: What do They Want? Customers could get different and better service though the Internet. It is possible to obtain quotes from a number of companies. In some cases, the Internet provides rating agencies’ evaluations of insurers. The Internet and outsourcing can provide additional cost savings to the consumer. Technology can bring the customer closer to the insurance contact, by removing layers of inefficiencies.
Consumers will also obtain price comparisons for relatively generic contracts, such as life insurance and rates for a standard set of auto insurance coverage for given vehicle and driver characteristics.
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 on hold, or finding a person who can give them the desired information efficiently.
ebix.com is an electronics insurance auction market permitting auction of risks to be insured. This covers the auto property and term life insurance i.e. catex.com is a electronics reinsurance market.
The Death of the Insurance Agent? One of the reasons why insurers have been slow to use electronic commerce could be the fear of swallowing up the agent’s business. The Internet does not necessarily imply the death of the agent. Many insurers are examining their agent’s role in the process and are also developing direct contacts with the insured through their Web presence. Agents could enhance their advisory role to consumers as their paper and money-processing functions diminish.”
2.11.2.2 Technological Challenges:
One of the most prominent challenges of e-commerce is Security. It is very evident that many users are reluctant to do business on the Internet due to security reasons. Issues of transmission security, host server security, confidentiality, authenticity and ways to counter these challenges are covered, in the following topics.
Security
Database Security:
The business database security is utmost important. This has to be monitored by security of the web server and web access.
Web Server Security: Security policies should be defined like- who is allowed access, nature of the access and who authorises such access? Who is responsible for security? what kinds of material are allowed on server pages?
Password sniffing: The most significant security risk on the Internet today is the use of plain text, reusable passwords that are sent over the internal and external networks. User names and passwords are the most common way of authenticating users on the Internet today. They are widely used by many Internet protocols, including remote log in, file transfer, remote e-mail reading, and web access. Protection against password sniffing is to avoid using plain text user names and reusable passwords.
Network Scanning Programmes:
Automated tools should be used to scan your network. These tools check for well-known security-related bugs in network programs such as send mail and ftpd. Computer are certainly being scanned by crackers interested in breaking into the systems, therefore, network scanning programs should be regularly run.
Physical Security: One can ensure physical security by having an alarm system that calls the police, having a key-lock on the computer power supply. There should be adequate protection against fire, smoke, explosions, humidity and dust.
Web Access Security: organisations run web servers because they are an easy way to distribute information to people on the Internet. But sometimes this information is not required to be distributed to everybody. Host-based restrictions can be implemented using a firewall to block incoming HTTP connections to a particular web server.
Transmission Security: Encryption is a key technology to ensure transaction security. various types of encryption technologies are:-
Single key cryptography/Symmetric or Private Key encryption:
A private key is generated and is sent to receiver through a secret channel. Every message is encrypted at the sending end and transmitted over the network. The receiver applies the private key to decrypt the message.
Public key cryptography:
A key pair, public key and a private key is generated. Sender sends the message using public key for encryption. The receive who is the only person having private key can receive the message.
VPN-Virtual Private Networks: The current firewall technology includes VPNs, a way to enable secures communication across Internet. VPN is a less expensive alternative and an interoperable standard. A VPN link is very flexible and works with any applications that uses TCP/IP, unlike SSL.
2.12 Privacy:
Privacy is likely to be a growing concern as Internet-based communications and commerce increase. Designers and operators of web sites who disregard the privacy of users do so at their own peril. Users who feel that their privacy has been violated may leave the web. Thus it is important to protent personal privacy on the Web. Every time a web browser views a page on the web, a record is kept in that web server’s log files.
Legislation:
Online businesses know a lot about their customers and they can learn a lot more. As with any business online service providers know the names, addresses, and frequently the credit card numbers of their subscribers. Internet service providers can learn a lot more about customers, because all information that an Internet user sees must first pass through the provider’s computers. Legislation can be passed to prevent the Internet service providers from parting with personal information of the clients. Whether or not such legislation passes in the future, web surfers should be aware that information about their activities may be collected by service providers, vendors, site administrators, and others on the electronic superhighway.
Proxy Server:
One approach to privacy is to use an anonymizing Web server. These are servers that are designed to act as proxies for users concerned with privacy. Using an anonymizer requires that you place faith in the person or organisation that is running the service, that’s because the anonymizer knows who has connected to it and what pages they have seen.
Authenticity:
Digital Signatures and Digital Certificates can be used to establish identity and assure the authenticity of information that is delivered over the web.
Digital Signatures:
Each user of a Digital Signature system creates a pair of keys: A private key used for signing one’s signature to a block of data, such as an HTML document, an email message, or a photograph. A public key used for verifying a signature after it has been signed.
Server Certificates:
Every Secure Socket Layer (SSL) server must have an SSL server certificate. When a browser connects to a web server using the SSL protocol, the server sends the browser its public key in an X.509 v3 certificate is used to authenticate the identity of the server and to distribute the server’s public key, which is used to encrypt the initial information that is sent to the server by the client.
Client Certificates:
Every client certificate is a digital certificate that is designed to certify the identity of an individual. As with certificates for web sites, client certificates bind a particular name to a particular secret key. Certification authorities issue them. Microsoft’s Internet Explorer, Netscape navigator and other SSL applications support client-side digital certificates.
Specialised Protocols:
Specialised protocols are used for sending information and payment card details over the Internet.
Secure Sockets Layer (SSL):
SSL is Secure Sockets Layer, a general-purpose protocol for sending encrypted information over the Internet. SSL is a layer that exists between the raw TCP/IP protocol and the application layer. While the standard TCP/IP protocol simply send an anonymous error-free stream of information between two computers, SSL adds numerous features to that stream including:
• Authentication and nonrepudiation of the server, using digital certificates
• Authentication and nonrepudiation of the client, using digital signatures
• Data confidentiality through the use of encryption
• Data integrity through the use of message authentication codes.
Secure Electronic Transaction (SET):
SET is the Secure Electronic Transaction protocol for sending payment card information over the Internet. SET was designed for encrypting specific kinds of payment-related messages. SET uses encryption to provide for the confidentiality of communications and uses digital signatures for authentication. Under SET, merchants are required to have digital certificates, issued by their acquiring banks. Consumers may optionally have digital certificates, issued by their banks.
3. Conclusion
The supporting technology requirements will be a real time, rather than batch; longitudinal rather than episodic; will require connectivity rather than be self contained; will be interactive; will rely on large relational databases.
Today’s consumers don’t like to wait. Insurance companies that are unable to react to their customers demands will lose market share to their competitors that can. The question now facing insurance companies is no longer if they should take advantage of the Internet, but how should they do it. Should you adapt your existing products or create Internet specific insurance products and brands? Do you focus your efforts on distribution or service?