2000 GENERAL INSURANCE CONVENTION 25-28 OCTOBER

DISTRIBUTION CHANNELS OF THE 21ST CENTURY WORKING PARTY

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Distribution Channels Of The 21St Century

A GlRO working party report by:

Ade Akinlaja Shamit Biswas Dick Cheesman Michael Eves Stephen Patfield Michael Tripp Chairman) David Westcott

Summary

The aim of this report is to stimulate discussion and thought. Et is seen not so much as a learned paper, but a series of thoughts to help actuaries (and others) improve their awareness of the fundamental changes taking place in what we currently call the insurance market.

Perhaps the biggest conclusion is that no one knows what our industry will look like in 5 years (let alone 20). The speed at which customers adopt the new technologies, the speed with which current insurance providers adapt and experiment, the imagination that they and other (new) players employ in designing products that truly meet customers’ needs and creatively use customer information are imponderable. Likely scenarios include greater automation, lower expense bases, greater competition brought about by price transparency, further changes to the role of ‘middlemen', globalisation, virtualisation and mobilisation.

Ail of this will impact on the way that actuaries work in general insurance. Let us open-mindedly seize the opportunities that are being created by this electronic revolution.

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Contents

Title

Section 1: Introduction

Section 2: What are the distribution channels of the 21st century?

Section 3: The E-Consumer

Section 4: Accessing The Customer

Section 5: Expenses

Section 6: Underwriting

Section 7: Value Chain

Section 8: Globalisation

Section 9: Other Internal Change

Section 10: Externalities

Section 11: Regulation In Cyberspace

Section 12: Companies’ Strategies

Section 13: Likely Actuarial Involvement

Section 14: “20/20 Vision”

Section 15: Synthesis And Conclusions

Appendix 1: Examples Of Internet Marketing

Appendix 2: More On Regulation

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"It is not the strongest species that nor he most intelligent but the ones most responsive to change -Charles Darwin

1. Introduction

Would you describe yourself as an avid surfer - or do you see yourself more at risk fromdrowning? Do you believe that all the talk about how the Internet, Interactive Digital TV,WAP phones and so on is exaggerated hype - or that it’s a reality in the making?

Whichever camp you fall into, as an actuary we hope you see yourself as helping to shapethe world around you, and will find something in this document to interest you, or at worstto stimulate a thought or two. We’ve written it as a series of views and observations - notas a learned paper based on intellectual research, but as the summary of a number ofbrainstorm sessions. Given that the majority of our thinking was completed by early June2000, it’ll be interesting to see how far the world has moved on by the time we meet inBirmingham.

Actuaries are very often among the more technology literate, which coupled with theirgeneral analytic approach suggests they have a wide contribution to make. It has been saidwe’re in the middle of a SO-year revolution -one that started in the late 1970’s with thebirth of the micro-processor. Do you see yourself as a leader, or a follower? Even if youfeel too remote from big business decisions, how well versed are you in the issues andhow much have you thought about the consequences for your own work? What willchange? What will remain broadly the same?

Although this working party was challenged to consider all aspects of ‘Distribution intothe 2Ist Century’, we’ve tended to focus on the technology driven components. This is notto say other aspects are of less importance, far from it, rather that in the time available wefelt it better to concentrate on one aspect. Our time horizon has been 5 years into thefuture, although in the final section we have attempted a glimpse beyond that. We see thewhole subject as one rich in opportunity for actuaries -there is insufficient analytic workon this subject and we feel sure that commercially minded actuaries have a contribution tomake. We would like to believe that we can derive a sound analytic framework anddevelop improved understanding of the dynamics of successful distribution strategies.

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One framework for analysing change could be :

A revolution in the making?

To this framework we have added comment on globalisation, other ‘external’ forces,regulations, some comment on what companies are doing and above all initial ideas onwhat it might mean for typical actuarial work.

Perhaps the biggest area for exercising imagination is how new technology will enablefulfilment of customer needs in new ways -how established value and supply chains canbe turned on their heads as sequential links vital in the physical world becomeunnecessary in the context of the digital world. The section on value chains hints at this.The challenge is to foresee how changes in personal lifestyles will impact on the insuranceindustry. Perhaps we could have spent more time investigating progress in USA?

Products are likely to become more transparent - the information ‘superhighway’ enablesinformation about any product anywhere in the world to be presented through one screenon one desk (or in the future one hand held ‘one mobile portal’?) It's easier to compare oneproduct with another, and to assess suitability to customer needs. Customer profiles can bebuilt and enable better one-to-one marketing. What will this do to our traditional insuranceproducts - is the very basis of insurance being challenged? Perhaps we are so wound up inour industry that we forget the core customer needs we are trying to meet -financial‘smoothing’, help, restoring things back to how they were. Can these needs be met in

different ways? After all it’s about giving customers a proposition that (allowing for their

time and cost of use) gives them greater value than the price charged.

Will a new ‘net economy’ emerge? If so, what will the currency be (have you had your

‘Beenz’? How large is your virtual wallet?) How long will it take for national barriers to come tumbling down -or will they stay forever?

Read on. We believe there is more we can do -to educate ourselves, and to inform the

people we work with. Next steps could include further research, development of a more

robust analytic framework, expense analyses, product and pricing design issues. We look

forward to your comments, be they supportive or challenging. Happy reading and active

discussion!

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2. What Are The Distribution Channels Of The 21st Century?

There are numerous ways in which insurance business can be sold. The sales outlets at the turn of the millennium include independent agents, company staff, direct tele-sales, the Lloyds market, tied agents (e.g. banks, building societies, supermarkets & post offices) and affinity partners. These outlets are continually developing and new methods of sale are constantly being devised. Currently, most insurers are spending significant sums of money to enable the selling of business through the Internet, mobile phones, interactive (or digital) TV and other, as yet unknown, emerging channels.

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Current Methods Of Sale

Over the period 1994-1998, the share of independent agents and company staff in the personal lines market reduced as shown in the diagram below constructed from ABI data. The growth of tied agents in the form of bancassurers and direct telesales appears to be the main reason for this rather than the growth in Internet business, which accounted for less than 1% of all insurance sales over the period Because of the slow rate of growth in pure Internet business to date, these current methods of sale might just reduce in size to make way for the new technology based methods of sale rather than die out completely.

Market Share Of Distribution Channels In Personal Lines Market, 1994-8

Independent Agents company staff Tied Agents Direct Telesales Other

1994 1995 1996 1997 1998 60.0% 56.0% 53.5% 53.2% 54.0% 13.4% 13.0% 11.7% 11.5% 10.0% 8.0% 9.2% 10.1% 10.2% 13.0%

15.8% 18.7% 21.0% 21.3% 22.0% 2.8% 3.1% 3.7% 3.8% 1.0%

100.0% 100.0% 100.0% 100.0% 100.0%

(Note :the telephone is the most common physical mechanism used for insurance according to a recent Datamonitor report 88%of motor insurance was sold this way in 1999)

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The Internet

The Internet is likely to be the most important of the new forms of distribution as the government and EU are encouraging its use by providing incentives. It is already apparent that customers are using the new Internet technology in other business fields (e.g. bookselling). However, insurers have been slow to get to this market. For example, the worldwide property and casualty market is estimated to be worth $l50bn but less than 1% of these insurance transactions are currently being conducted online. (It is worth noting that Direct Line recently stated they were now issuing over 180,000 quotes a month on the Internet.)

This sluggishness is perhaps a little surprising as the simpler commoditised insurance products should sell quite well on the Internet. Arguably, other more tangible products such as clothing, furniture and sporting equipment may not sell so well because customers prefer to see them before making a purchase. A recent survey conducted by the ABI of its member companies states that they viewed the biggest barriers to using the Internet as product complexity (62%), followed by need for paper signatures and regulatory restrictions (both 38%), security risks (32%), and cost of online development and integrating legacy systems (both 29%). Factors affecting the propensity to purchase insurance on the ‘net’ are discussed more fully in Section 3.

The lead in selling insurance on the Internet appears to be coming from America, where start-up companies that cover the whole ‘quote-to-claim’ insurance process online now exist. For example, eCoverage.com is now writing motor business in 2 US states (backed by Japanese venture capital from Softbank) & GeneraLife.com is selling life assurance on the net. However European companies are following suit, such as ineas.com which has

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become the first European insurer to sell its products exclusively via the Internet, already

operating in the Netherlands, France, Belgium and Germany.

One way of analysing the new business models suggests there are currently three

emerging types of web site through which insurance business can be sold (see Appendix

One for examples):

(i)

(ii)

(iii)

“Shop Fronts" - These are the insurance companies own websites, e.g. Direct Line. They are likely to have a short-term prominence but are expected to

reduce in importance over time as customer requirements for price

comparisons increase (see below).

“Product Aggregators" - These are brokerages which offer a range of

comparable products. The website will aim to offer the best price/value

combination to consumers. Therefore, insurers quoting competitive premium

rates are likely to acquire most business through this channel. Product

Aggregators are expected to increase in importance in the long term because of

the speed at which the consumer can get comparative quotes and the costs of advertising shop fronts.

“Portals” - These are websites that host content from multiple websites. They

package content from third party providers, organise it to suit their target

audience, and make their money via advertisement or commission On such a

web site, an insurer may have to compete against other companies if it is not

the only one advertising insurance. To get round this, portals may be developed

by the larger insurers (e.g. Zurich, AXA) with brand and customer ownership

as the major drivers. Overall, portals are expected to grow rapidly for the same

reasons as product aggregators.

In reality combinations and variations of the above three types of site exist.

In the B2B segment, e-business solutions providing support for policy administration and

claims settlement on extranets seem likely to dominate.

Software supporting HTML has been key to the Internet technology developments. This is

now being replaced by ADSL which is intended to download text and images quicker.

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Mobile Phone

In 1999 before the explosion in the prepaid package and reduction in tariffs, over 43% of the population owned a mobile phone. David Edmonds, Director of General Telecommunications said recently: “Today’s survey shows that a significant and growing number of people prefer to use a mobile phone in preference to a fixed line telephone. People find a mobile phone more convenient and flexible, and are able to control their usage through prepaid vouchers. Over 97% of the UK population have access to either a fixed or mobile phone. 2.3m people live in homes without a fixed phone and of the members of the public without a fixed line, 55% use a mobile phone.”

Since they have such a widespread use, mobile phones should be taken seriously as a new method of selling insurance. Indeed, some goods and services have already been purchased using them. They enable the effective delivery of electronic commerce into the consumer’s hand, anywhere, using wireless technology such as Microsoft MME®

At the forefront in Europe is the Wireless Application Protocol (WAP). WAP is the new gateway to mobile data enabling users to easy access to Web-based interactive information services & applications from the screen of their mobile phone. It has been available since March 2000 in only a text based form. Dial up can take up to thirty seconds and then any large messages will take time to download. All the time call (and sometimes other) charges are accruing.

The development of WAP is primarily through WAP Forum, a European company directed by Nokia and Motorola. Nokia and Visa are introducing a standardised means of making secure payments using a mobile phone, meeting different market requirements for security, risk management and dispute resolution. There is already talk of technology to supersede WAP e.g. MexE (mobile execution environment) and GPRS (General Packet Radio System).

GPRS is a packet based wireless communication service that, when available later in 2000, promises faster data transfer rates and continuous connection to the Internet for mobile phone and computer users. The higher data transfer rates will allow users to take

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part in video conferences and interact with multimedia Web sites and similar applications using mobile handheld devices as well as notebook computers.

The following points regarding WAP & GPRS should be considered:

• Insurers will need to be able to cope with large volumes of calls. Therefore, size of insurer may be a barrier to entry.

• The mobile Internet will arrive quicker than the PC Internet because the force behind it is the cash-rich telecommunications industry which requires an excuse for people to change phones. In addition, the mobile Internet will be able to draw from the large existing stock of Internet material

• Security is more of an issue with mobile phones as they are easier to steal than PCs and Digital TVs

?? Currently, because of their small screens, it is hard to use mobile phones as information channels. Therefore, in the short term, they seem best suited for direct sales

?? Currently, the keyboard on mobile phones is awkward to use and this places them at a disadvantage to other sales media.

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Interactive Digital TV

Interactive Digital TV is increasing in popularity with an expected 13m to 15m households having the service by 2003. It should be an ideal medium for branded insurance products. Household & Pet insurance is currently on offer by FirstQuote on Telewest Digital TV with Screentrade expected to launch on Cable&Wireless and later on Telewest AXA is leading the insurance companies in the IDTV race, HSBC and Barclays in banking

Interactive Digital TV uses an API (application programming interface) platform as a base, which is linked to various Internet service providers at the moment. However, access to the web is currently still limited. Increasingly the TV and PC forms are converging - even though how consumers use the two is somewhat uncertain.

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3. The E-Consumer

The Attributes Of The Personal Lines E-Consumer

In our opinion, a prime attribute by which we will be able to categorise the new Personal

Lines E-Consumers is age. The 25-40 year olds that are believed to have the highest IT literacy are expected to be major buyers from the mobile phone and Internet. They are also

expected to be more confident with buying cross border. The higher premium ‘silver

surfers’ are expected to prefer interactive TV. The proportion of older users continues to

increase with one in ten over 55s now online (Source: ‘Which’ online survey July 2000).

Of course over the next few years, changes in behaviour as current teenagers become part

of the insurance buying public cannot be ignored.

Over the last few years Swiss Re UK has carried out market surveys into the buying habits of consumers and corporates and published their findings in annual “Insurance Reports”

and made this available to clients and others. This year’s report was released on July 12

and one question asked of consumers was “did you buy your last insurance policy over the

Internet?“. Surprisingly, the answer is virtually unchanged from the previous year at 1.5%, compared to 13% by post, 30% face-to-face-and 48% by telephone. Willingness to buy is

not particularly encouraging as only 29% would even consider buying an insurance policy via the Internet.

The survey also asked some general questions about attitudes to the Internet. 44% of

respondents were not interested in trying the Internet compared to 21% who would be. Not surprisingly the percentage not interested rose with age to over 80% for the 65-74

year age bracket. Of those that do use the Internet, most use it for e-mail (80%). A third

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use it for purchases of products and services which is up on the previous year’s figure of 24%.

By 2005, Swiss Re (Sigma No. 5/2000) suggest that only 3-5% of personal lines sales in Europe will be over the Internet.

The Factors Considered When Purchasing Insurance

We believe all e-consumers, whether corporate entities or individuals, will continue to select insurance based on the following four criteria:

“Price” - This is usually the foremost consideration and is the principal driver behind shopping around.

“Trust” - Here there are two elements. 1. Is it ‘secure’ to buy on the web / a particular website and 2. Buying from a “trusted” name may mean customers are happy

not to research alternatives.

“Convenience” - Although the customer retains his power to choose who to buy from, the pressures of the modem world will mean convenience buying becomes a threat to a “value” offering. i.e. a company’s “spend protection” product may be better and cheaper but if the customer can’t buy it from, say, Tesco on-line, when he makes his shopping order, then it won’t sell.

“Service” - Service is particularly important when a product is purchased and when a claim is made.

There is evidence from research performed by Forrester in the US (April 2000) that of these four criteria, price is predominant. According to their research, price has approximately 77% more impact on consumers’ insurance purchase decisions than brand. Price overshadowed all other purchasing criteria, including physical presence. (Trust and Brand are strongly linked. Brand draws people to the ‘shop front’ and can be a proxy for confidence in a given site.)

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4. Accessing The Customer

To access this new e-consumer, insurers will have to promote their business and target advertising in different ways

Promotion

To date, in the current world, the majority of the promotion of insurance has been through TV, newspapers, bill boards and radio. In the new world, we are moving away from this broadcast promotion towards one-to-one (‘narrowcast’ in the jargon of the advertising world) and requested promotion

“One-to-one” promotion is where insurance companies target their advertising at given individuals. Technology such as Broadvision now exists, such that an insurer’s web site may have a number of different versions of a web page, and dependent on the viewer’s characteristics, he will only be shown the page most relevant to him. This contrasts with the current ‘snail mail’ mailshots which many perceive as “one-to-many”. We now see the advent of mail shot by e-mail where customers are sent a whole lot of advertising first thing in the morning when they log on or at specific times of the day, perhaps bundled in with a service that they already subscribe to eg ft.com. “Requested” promotion refers to advertising requested by the consumer. Examples are portals and search engine searches for insurance, where as well as being able to provide quotations as requested, the insurers sitting on the panel also gain useful personal information for use in future e-mail resolicitations.

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Targeting

In the new electronic environment, Customer data is being collected by everyone, “register now !” sign in now!” and so on. Insurers to determine which customer “ segments are best to sell to can use this data. Two aspects are essential to deciding which segments to target: the likely risk profile and the sales potential.

A segment has an unacceptable risk profile if either the claims experience or policy renewal rates are expected to be particularly poor. It has unacceptable sales potential if quotation conversion rates are below a certain target level or the number of quotations requested is too low.

Segmentation can be used to offer the most profitable combination of products to the right sort of customer at the right time (ie when they call in or visit your web site - sell to them now when you have their attention rather than by a mailshot in 3 months time). In addition, insurers may aim to target and attract specific customers through appropriate design of their web sites.

The finer aspects of this target marketing involve examining how customer needs can be met and fulfilled, particularly with respect to the four main customer drivers: price, trust, convenience and service.

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When we talk about “price”, we are actually referring to the total cost of purchasing insurance. This can be split into two components: costs of using the new electronic distribution outlets and insurance premiums.

The costs of using the new distribution outlets may mean that the target market is restricted. For example, in the case of the Internet, even the recent introduction of several “free” tariffs by various Internet Service Providers has not made a viable shopping option - surfing time is still too expensive. With BT open world, the use of its latest ADSL technology involves an installation charge of £l50 followed by payments of £39.99 a month (as at July 2000). In our opinion costs of access will continue to reduce, however she latest technology is always likely to command a premium.

The new distribution media do, however, help to reduce the insurance premiums. Lower expenses (see below) are expected to be passed onto the customer in the form of lower prices. Also, customers can request & compare quotations from different insurers with

are competitive.

A possible result of this “Price Transparency" is that companies will try to differentiate their products from those of their competitors so they are not so easy to compare. In the new market place, this could be achieved by the introduction of short and punchy “Brand Names". In many respects, this branding may be more important than process.

In developing brands, companies will need to consider how much it will cost to catch the imagination, The speed at which a brand can be grown (and much lost) can be estimated by looking at examples of growing brands in the UK financial services sector such as Egg and Smile. Also, the credibility of current brands will need to be assessed. They have scale and trust -will this be sufficient to keep out new brands?

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Reducing The Cost Of Insurance

Pressure from consumers for lower prices, will also lead to a change in “Purchase Models”. Examples of new purchase models introduced by e-commerce are:

“letsbuyit.com” - where consumers act as a group to secure discounts from manufacturers.

“qxl.com” - on line auction site where you can bid for any items that a party wishes to sell such as a TV, beanie baby or holiday. (Reverse auctions where an entity or individual flags a need and a price - seeking a supplier - are also emerging.)

Developing Trust

To become long term players in the new market place, companies will have to build trust with the consumer and with investors. This takes time although E-coverage has achieved this trust with investors already by appointing ex CEOs from American Express and Bank of America on its Board.

Offering Convenience

Under the new channels, the process of buying insurance should be a lot quicker because of greater automation and advances in the speed of technology. For example directline corn has made this speed the main feature of its television advertising campaign. Also, increased competition forced by price transparency will mean that insurers make their products simpler to understand.

However, consumers may be put off initially because in the UK there is currently a lack of straight through processing -quotes may be available online but not policy documents. This should improve in the next couple of years with full on-line purchasing facilities being made available, as already used by eCoverage in the US and ineas in Europe. In the

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longer term, software is being developed which will bring up data entered by the customer on previous occasions thus aiding data input and helping to avoid too many data errors.

5 Star Service

Customer care may improve; for example once the initial sale has been completed, companies may increasingly deal direct with the public rather than through intermediaries, Electronic linking of accounts will assist with building customer relationships that develop over time. One could predict a “mega-corp” company that acts to service all aspects of your life- food, banking. utilities, insurance, clothing, childcare, schooling - from cradle to grave (i.e. All Finance)

The global nature of the new distribution channels such as the Internet will allow customers to communicate with anyone in the world 24 hours a day, 7 days a week, compared to the current more traditional 9 to 5, Monday to Friday, servicing hours,

Customer Relationship Management (CRM) Databases.

Currently CRM databases held by insurers are being adapted so that they can be used more effectively in managing customer relationships. A well structured CRM database is essential for the targeting of marketing activity and in the service provided to the customer when they make contact with the company.

The true value of CRM is in transforming strategy, product branding and operational processes in order to retain customers and to increase loyalty and profitability.

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As already discussed, marketing activity can be targeted by assessing sales potential and risk profiling. Sales potential can be gauged from customer data such as:

Unique Customer ID - Can be used in the electronic linking of accounts so that we can tell what cover a customer already has.

Life Stage Data - This data includes date of birth, postcode, marital status, number & ages of children, gender etc. It may be used to assess the timing of trigger events such as birthdays, marriage, births & retirements, when the customer may recognise the need for further insurance.

Purchasing Patterns - Different customers may respond better to different methods of sale. For example, some people may have a higher propensity to purchase by phone than by mail. Purchasing patterns may be discovered by recording past responses to mailshots, number of quotes requested, the customer’s satisfaction rating etc.

Risk Profiling can be performed using the Life Stage data as well as other lifestyle information such as occupation, employment status, home ownership & income. Information provided by external organisations such as credit agencies and county courts can also be very useful in assessing the risk of fraudulent claims. Some of this data is already available on existing databases but much of it is new. The new lifestyle based data can help actuaries with their risk modelling (see Section 13).

5 Star Customer Service must be provided when the customer makes contact with the company Therefore, any CRM database must hold data which is appropriate to dealing individually with each customer when they make contact. Such data includes contact history, mailing history, satisfaction rating and details of complaints.

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5. Expenses

Automation & Expense Savings

A major advantage to the insurer of selling through the new electronic channels is the scope for greater automation. Under the new channels, it is the customer who enters personal details directly onto the ‘web’, through computer, mobile phone or digital TV to obtain a quotation. If the customer accepts it, his data will be fed automatically to the insurer’s mainframe - using an updated version of the process called “Electronic Data Interchange (EDI)”. All administration such as sending out policy documents and setting up direct debits can then be processed electronically. As data is entered only once (and by the customer) there is a huge potential for reducing initial administration expenses

Expense savings will arise not just at the front end but also throughout the life of each policy and particularly when a claim is made. The level of savings will be dependent on the degree of each customer’s appetite for electronic fulfillment. Savings and improvements in service will also follow from B2B initiatives as insurers increasingly e- empower distributors with end-to-end web enabled communication and processes.

Commission is also expected to reduce through the use of B2B applications for commoditised products and move from being premium based to transaction and/or service based.

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Examples of the comparative level of savings expected are illustrated below:

Estimated Policy Origination Cost

50 40

30

20

10

0

Broker Call Centre Internet

Estimated Policy Administration Cost

50

40

30

20

10

0 Broker Call center Internet

Source: Meridien Research

But it won’t all be savings . . . .

There will undoubtedly be areas of significant extra costs - largely in development (see below) and marketing. The marketing costs will be in getting customers to make the electronic choice to go with a provider’s brand and products. This will incur additional advertising (to promote brand and website awareness) and commission / fees paid to other websites and e-introducers supporting the provider’s products. The case for the efficiency of reaching the customer using this form of marketing has still to be proved although on

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the face of it some organisations may achieve marginal cost advantages by making sales on the back of other (non-insurance) products or other forms of customer contact.

A further paint is the increased potential for shopping around, leading to lower conversion rates and higher levels of lapses.

Further significant costs arise in the IT developments necessary to support the e- distribution routes chosen and in delivering the connectivity between host applications and the ‘web’. There will not only be a wide variety of web sites to connect with but also a wide variety of emerging technologies to support. Selection and the continuing support and upgrading of appropriate hardware, software and standards relative to the pace of change and to Moore’s Law’ will severely challenge a provider’s ability to contain costs given the additional need to maintain service standards and appropriate levels of customer satisfaction.

Undoubtedly there will be winners and losers. With a mature market in the UK and with relatively flat consumer demand, customers are more likely to be moving between different forms of distribution and fulfilment than increasing demand. Those who add e- distribution to their infrastructure without cutting off what become the less used (legacy) forms of distribution will be the losers. Those that generate higher demand and/or anticipate and act on the new flows of business by appropriate ‘pruning’ of their distribution infrastructure will be the likely winners. The key will be in developing and maintaining a better understanding of customer needs and behaviours, and adapting current infrastructures and products to efficiently face and meet these needs.

Much will also depend on whether business goals are appropriately aligned with incentive schemes for staff and managers to ensure internal resource is suitably motivated to match the demands of the changing infrastructure and to deliver on the evolving customer facing requirements. Providers will also need to be flexible in delivering the right balance of services and needs based solutions through each channel it supports.

With new e-channels emerging at a much higher frequency, the use and integration of existing technologies within each new development will need to be fully considered in designing the new ‘end to end’ process in order to ensure costs bases do not run out of control. A current example is the combined use of website and ‘phone based applications’ by Direct Line in its current Internet offering to customers. If a customer has an enquiry or wants to fulfil over the phone rather than on the ‘web’, he/she phones a dedicated number provided on the website armed with a reference number provided following data entry. The Direct Line tele-operator is able to access the customer input data (having been

Well known empirical LAW devised by Gordon Moore of Intel which predicted the doubling of semiconductor performance every 18 months and which proved remarkably accurate.

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given the reference number) and seamlessly complete the transaction with the customer over the ‘phone.

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6. Underwriting

At the front end, the ease with which quotes from different insurers can be compared may

mean greater ‘selection against’ Also, short proposal forms produced for marketing

reasons may restrict the information available for underwriting However, the

development of CRM databases may provide the underwriters with more lifestyle based

data helping them to assess risk more accurately.

Further, a customer’s personal ‘databank’, containing all relevant details can be sent to a

quote engine at the touch of a button, enabling a tailored quote to be calculated without

input of every data item.

At the back end, the automation introduced by an electronic market place may increase the potential for fraudulent claims It is too early to say whether customers purchasing over

the Internet will have a higher or lower propensity to claim - or indeed whether the act of

using the Internet will prove to be a rating factor.

Another underwriting tool may emerge as a result of monitoring customers (or prospects)

online shopping behaviour. Dynamic algorithms, reflecting the order of screen access and

data input, could become common place. (Think, for example, is a prospect who carefully

studies terms and conditions a ‘better’ risk given their caution -or a ‘poorer’ risk as they want to know all the loopholes in advance!)

Further what are possible new risks Radiation and stress arising from over exposure to ? PC screens and constant communication bombardment are already being discussed. What

could be next? E-commerce frauds, tax evasion, money laundering.........?

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7. Value Chain

The effect of these new 21st Century distribution channels on the traditional insurance value chain is two-fold:

a) On an individual party’s value chain, deploying new technologies will achieve transparency and visibility, so creating a new value proposition.

b) These new technologies will also allow the connection of the value chains between and across businesses, as well as between businesses and consumers.

The result should be: ?? Improved service ?? Reduced costs ?? The creation of new distribution channels

On the left hand side of the diagram below, we show the value chain for a typical insurer In the UK most of these links in the chain are currently handled by the insurance company itself. However the advent of new technologies may mean that the insurer improves the performance of individual functions in the value chain so leading the new value proposition in a) above. Possible improvements to the value chain are described in the right hand side of the diagram.

But in the 21st Century, e-business has led to better communication and better information. This allows the potential for the specialist third party providers to provide their services seamlessly. For example, policy administration, claims management or asset management could all be outsourced. As communications improve and with insurers increasingly offering products across national boundaries, so tasks requiring labour could be moved to low wage environments. As companies increasingly strive to achieve returns on capital that are acceptable to shareholders, so they will review the status quo position of conducting all stages of the value chain in house.

The result is the break-up of the single value chain. An insurance company will concentrate on those links in the chain where it enjoys a competitive advantage, i.e. it will focus on specific core competencies within the value chain and will outsource the rest, leading to the interconnection of various parties’ value chains as in b) above.

Taken to its natural conclusion there is nothing to stop the existence of an insurance provider where all the links in the value chain are outsourced, ie a virtual insurer. (See Section 10 for more details).

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Value Chain Link Possible lmprovement

Greater Customer Needs awareness (e.g. through) CRM) increased Third-party e information Easier customer feedback and survey Simpler products suitable for the e-customer

New promotion/visibility space Messages tailored to the individual eg using Broadvision Local market information Links to other sites

One to one marketing initiatives Needs-based, not product-based, offerings New business submission/status Broader risk marketing/market access (by brokers) Availability of lead generation/‘hit’ statistics Affinity group linkages Comparison of offers (‘shopping around’) Customer interface for quotation and sales Quote(re) solicitation and management Individual Risk auction.? Products sold through Internet enabled financial advisers

??Market/risk/segmentation and product differentiation according to customer profile and lifetime profitability Information gathering from third-patties Rapid, real-time or on-site decisions Access to warehouse of risk-supposing documents 8 Underwriting guide online

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Direct policyholder service Consolidated presentation of all customer’sproducts Billing and collection direct from customer’s e-bank account

Policy document retention/distribution e-reminders on renewal e-mails on products of interest

Producer interface for policy inquiry andchange

Policies guidelines and procedures manualonline

Producer/agent sales reporting andcompensation

Industry news (e.g. legal, competitive) Forms distribution Licensing and registration

Real time information More frequent portfolio performance reviews Access to wider range of assets

Online access (real time) to current status ofclaim settlement

Claims submission/ first notice of loss bycustomer

Claim (individual or history) inquiry,publication and update Caller location immediately available viaglobal positioning

Library of regulations Information gathering to evaluate, adjudicateand settle

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Reinsurance submission Payment electronically

Third-party collaboration (eg, for litigation/negotiation)

Provider directory eg garages, loss adjusters Provider referral/approval Electronic claim Payment direct to claimant Provider reporting and payment electronically Electronic procurement/ alliance management Auction claims support services’? Claims information sharing for detecting fraud

Claim (individual or history inquirypublication and update

For example, consider a motor policy in the future. The product itself may have beendesigned for a target market such as the technologically aware affluent professional agedunder 40 who has a high rating group car, and who lives in an urban area and so does littlemileage, except for frequent social trips to Europe, for which fully comprehensive cover isprovided Its premium will be low as new technology has led to automation of systemsresulting in lower expenses. It may have been purchased via a mobile phone and paid forelectronically at the same time. All of these changes to the current position add value.

Again, at the claims management stage, both value and improved service can be created.Online claims input could include digital photographs - accessible to all parties; trackingdevices such as currently used by UPS could help customers follow their claim online;claims payments can be made electronically. In addition, the scope for process changeallowed by ‘bluetooth’ technology (mobile, wireless communications) referred in section14 is dramatic

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8. Globalisation

In the new electronic market place, consumers will be able to purchase insurance from foreign insurers without moving from their armchairs. As the Internet is now available in most countries of the world, insurers are being forced to manage their capital/assets on a global basis. There are many long-term issues arising from this “Globalisation”.

Consolidation Through Mergers & Acquisitions

For a start, globalisation is forcing the development of ever-larger multinational insurers through mergers and acquisitions. The sheer size of these new organisations means that internal competition can flourish between the subsidiary companies of the group. Such internal competition can be seen as a good thing as well as the ability of these large global organisations to use the world as a ‘hot-house’. Information and lessons can be shared between company staff working in many different countries leading to larger mindsets.

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Economies Of Scale

Globalisation gives rise to economies of scale, particularly in technology terms. For example, policy administration can, in theory, be conducted on one computer system held in one country for business sold throughout the world. In reality different country cultures, legal systems, languages and current market practices are probable brakes on rapid change.

“Follow The Sun” Resourcing

Customers who require call centre assistance in the early hours of the morning can be serviced by someone on the other side of the globe. As well as avoiding the need to man individual call centres 24 hours a day, this also means that companies can take advantage of cheaper labour pools overseas.

Access to the global market place opens up the opportunity to introduce global processes (potentially with local variations). For example, one pricing model could be adopted for all motor business wherever it is written. The pricing assumptions would be allowed to vary from one country to another but the technical specification would remain the same.

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Global Processs

The Risks

Although, globalisation offers many longer-term benefits, there are extensive problems that need to be overcome. Examples of the potential difficulties are:

?? Variation in licensing and sales regulations - even in Europe!

?? Language differences -especially where different scripts (eg Japan)

?? Fiscal and legal issues

?? Political situation

• Cultural variation

?? Different practice and attitudes

?? Variation in products / pricing / claims costs

?? Local claims handling /supply controls

?? Consumers will be wary about buying insurance from foreign companies

In addition, branding becomes much more of a complicated exercise. The key question is “What is needed for a Global Brand?’ Does it need to be the same everywhere or could there be barriers to this such as names meaning different things in different countries? Is the key the use of words that are easily found by search engines?

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9 Other Internal Change

As well as globalisation, the advent of the new e-world is forcing companies to make other more fundamental changes to their internal structure.

All Finance

The ideal is a web site that can deal with all of an individual’s/company’s financial needs. e.g. banking, insurance, investment etc. This together with increasing pressure from shareholders for higher returns means that barriers to diversifying into other areas of finance are starting to break down As X can now do Y and Y can now do X, competition is increasing and commercial advantage is shorter. Examples of this process are seen with banks buying insurance companies (e.g. Credit Suisse with Winterthur) as well as insurance companies starting their own banking and savings operations (e.g. Direct Line, Prudential). Banking/Insurance conglomerates can touch the affairs of an individual consumer upon many levels, for example, Fortis has a ‘relationship’ with 7 out of 10 Belgians.

Removal Of Internet Divisions

The focus will be on satisfying customer needs and developing & selling as many ‘value creating’ products/services as possible to each customer. Therefore, companies which have previously been “divisionalised” in terms of products, distribution channels or both will be forced to begin to think as one seamless company relative to the customer.

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Some argue the key to achieving this seamless approach will ensure that there is a common definition of customer value across the business. Both the business and supporting systems must know who is a valued customer and who is unprofitable.

Many companies will undergo a structural, cultural and behavioural shift to customer facing cultures with co-ordinated customer processes across all distribution channels. Some will go further and leverage off these customer-facing platforms to introduce CRM based technologies and strategies that are designed to optimise profitability, revenue and customer satisfaction. Others may try to adopt CRM techniques before the structure, culture and co-ordinated processes are in place. These are expected to be less successful.

New technologies enable new (flexible) working styles. Will company cultures change further as ‘e-HR’ techniques become more common?

Capital Requirements

Pressure from shareholders for higher returns has led to companies managing their capital more efficiently. Most companies now determine their capital requirements using a Risk Based Capital approach (supplementing regulatory requirements) and are increasingly returning any excess capital back to their shareholders. The impact of the changing technology based environment on risk based capital is yet to emerge. The impact of less risk based data but more lifestyle data has already been discussed. Other technical risks (e.g. viruses, hackers), operational and liability risks (e.g. from wider outsourcing), may also cause a strain on capital.

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10. Externalities

As well as internal change, insurers will notice changes externally as new players try to enter the market and people come up with radically different ways of doing things.

The Virtual Insurer

Large venture capitalists and affinity groups may try to get a stake in the insurance business by setting up virtual insurers. A “Virtual Insurer” is an insurance company set up

from scratch, which may only sell business through electronic media such as the Internet,

mobile phones and digital TV. The risk-carrying vehicle could be set up as a ‘captive’ of

the parent company and the capital provided by either the parent or through securitisation. Sometimes, several companies may set up a virtual insurer together so they can build up

critical mass quickly.

The virtual insurer outsources all its functions, eg

Function’

– Marketing

– Pricing and Rating

– Underwriting and Product Development

– Policy Administration

– Data Storage

– Claims processing

– Claims settlement

– Asset Management

Outsourced to:

Marketing agencies, financial service

providers

Actuarial Firms

Actuarial Firms

Policy administrators

IT companies

Professional claims managers, repair companies

Fund managers, banks

This outsourcing will create extra work for external agencies such as marketing companies and actuarial consultancies, thus enabling them to expand. The quality of service delivered

by each of these partner members will have to be of the highest standard if a virtual

insurer is to succeed.

The virtual insurer has an advantage over an existing insurer in that it doesn’t have to deal

with legacy systems and channel cannibalisation. Also, it can invest and develop the

newest technology. However, it may have to overcome the barriers to entry created by the

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existing insurers such as high development spend, increased customer knowledge, significant brand building & cross selling. Some entrants (affinity or brand insurers’) may already have brand, customer contact service mechanisms, customer information, IT/data management and an aggressive marketing attitude, giving them a head start.

Barriers To Entry

There may be increasingly significant barriers to entry (or change for existing players) with some of these new distribution channels, the most important being the expenses incurred in the early years and restructuring costs for existing players. It is expensive to build up a (robust, reliable and secure) Internet capability-new software and hardware needs to be developed as well suitable products. As an illustration in January 2000, the financial press – Reuters (Internal News Feed) – quoted the following development and restructuring spends for some of the major financial providers:

• Abbey National £100 million ?? Halifax £650 million ?? Nat West £400 million ?? Virgin £235 million

As well as the initial development spend, losses are expected to be made in the early years as it takes time to built up an ‘electronic’ customer base. In other fields, Internet companies such as Boo.com have gone bust because they couldn’t find enough capital to cover the “cash-bum” in the early years.

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A potential barrier to entry for existing insurers may be legacy technology, particularly if existing systems cannot cope with EDI. Leading edge technology is crucial for a successful player-customers will not put up with poor service.

Many companies will have to build brands from scratch requiring significant amounts of marketing expenditure. For any new product, expenses in the first 3-S years are likely to be dominated by advertising. In addition to this, insurance products are complex with complicated pricing structures Therefore, outside players entering the market will need assistance with policy wordings and the production of accurate quotation engines.

The existing setup could also in itself be a barrier to entry. At the same time as developing new distribution channels, insurers will need to continue selling business through their existing agents. Conflicts with agents could arise if clients that they introduced to the insurer are now buying insurance direct. The situation could ultimately get worse if some of the existing channels are “cannibalised” by the new ones.

Death of The Middleman?

All this does beg the question whether the traditional middleman will die out in the new e- world. For commoditised products, customers will soon be able to compare quotes from different insurers quickly and with ease using the Internet. They may also find that dealing directly with insurers rather than through a third party leads to better service.

However, it can be argued that for the average man in the street, cyberspace is a jungle and a trustworthy guide is required to lead him through it. Middlemen can select insurers on the basis of quality of service and financial security in addition to price.

Generally, the quality of service provided by insurers and their financial strength is more important for commercial lines of business where large, contentious claims are likely to be made. In personal lines of business, individuals often just take out the insurance cover because they have to. For example, motor insurance is compulsory under the Road Traffic Act of 1988 and most building societies require buildings insurance to be taken out with a

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mortgage. Therefore, in personal lines, people tend to make comparisons based more on price than on service or financial strength.

This increasing commoditisation leaves intermediaries with less scope to ‘add value’ than with Commercial/SME related business. Here the provision of value added services will continue to thrive. We must not be too pessimistic about the prospects for brokers in personal lines though. Already on the Internet, Product Aggregators and Portals have profited by selling third party insurers’ business on the basis of price only. But we will watch developments with interest!

A recent ABI survey adds weigh to these arguments:

Of its members responding who transact personal lines insurance 44% are currently writing business online and a further 32% expect to do so within the next 12 months. All of the remained expect to be writing personal lines business online in the next 3 years.

For commercial lines, only 11% are online at present, with a further 22% are expecting to do so in the next 12 months. More than 40% do not believe that they will ever transact commercial business online.

Radical Thinking

The speed of change and the vast increase in corporate business activity in recent years has changed peoples’ mindsets. People are getting used to the concept of taking ideas from one industry and applying them in another. All this is an encouragement for more radical thinking and the challenging of the existing “rules”.

Changes in how we do business are a threat to everyone. At one time you can have a rapidly growing business with great prospects for future growth and then another player enters your market but carries out their business in a very different way, Amazon.com did

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just this with book sales; who is to say that other just as radical players will not think of how to conduct insurance or reassurance in a way that has not been previously thought. Conducting business has often been likened to a game but in today’s environment are we sure what game we are playing?

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11. Regulation In Cyberspace

Regulation Of E-Commerce

The regulation of e-commerce is covered in more detail in Appendix Two. Here, we give abrief summary.

Essentially, the selling of insurance business on the Internet is governed by EU legislationwithin the EU. The country where the insurer’s head office is located is responsible forregulating that insurer and not the country where the Internet server is located. The extentof legal jurisdiction outside of the EU is not yet that clear. In America, there have beentwo conflicting legal cases: one where legal jurisdiction applied cross-border and onewhere it didn’t.

In the EU, insurers must give basic information on their web pages concerning theiractivities. This basic information must include the company’s name, its geographicaladdress, its e-mail address, its trade register number and its VAT number

In the UK the present government have been keen to accelerate the development of e-commerce, as witnessed by the recently passed ‘Electronic Communications Act 2000’.This represents a mixture of enabling and controlling powers.

Under the UK Data Protection Act of 1998, it is the insurer’s responsibility to avoidunauthorised access to customers’ data. This can be done by having secure servers,password protection, credit card protection and employing reliable staff to processpersonal details.

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Credit card protection is being assisted by companies such as Marbles which areintroducing special credit cards that can be safely used on the web. These credit cards usethe latest encryption technology (128 bit) which means that a third party has more chanceof winning the lottery than getting hold of a customer’s credit card number. In additionmarbles offers a “‘Safe Shopping Promise” where account losses from Internet fraud areinsured.

Egg and Earthport who recently introduced a ‘virtual wallet’ provide another example ofpremium payment protection. This will allow customers to buy goods over the Internetwithout a credit card. The e-wallet allows customers to download money from their cashor credit card account and use it like a real wallet without the security risk incurredcarrying real cash.

Although Egg have been introducing new security measures, they have been the target ofcyber crime themselves. In August 2000, three men in their 30s were arrested for hackinginto Egg accounts. At the time, predicted losses from this Internet “Bank Robbery”amounted to hundreds of thousands of pounds.

Companies should place a notice on their websites explaining that data sent to themthrough the Internet can be intercepted by third parties. When collecting customerinformation, they should make it clear:

Who is collecting the informationWhat information is being collectedThe purpose for which the information wilt be used.

Customers should be aware that the EU has passed a directive guaranteeing the security ofelectronic signatures. Electronic signatures are now as legally valid as a hand writtensignature and can be used as evidence in legal proceedings.

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Libel Action Against ISPs (and other Internet organisations)

Claims relating to material published on the Internet are reported to be increasingdramatically. As a result of settlement of a major libel action in England in May this year,Internet service providers (ISPs) operating in the UK must now treat this issue extremelyseriously if they, or their insurers, are not to face substantial bills for damages or legalcosts.

Up until this judgement, ISPs believed they might be able to rely on a defence of‘innocent dissemination’ under current UK libel legislation. However, in a recent case theHigh Court ruled that the ISP (Demon) had failed to remove defamatory material (inrelation to postings on newsgroups to which Demon offered access) after an initialcomplaint to the ISP. The ruling therefore appears to remove an ISP’s ability to rely onthe defence of innocent dissemination once an initial complaint has been made. Demonnow faces a bill of £500,000, being El 5,000 for damages, the balance legal costs

This is in stark contrast to the position in the US where the First Amendment, whichprovides for freedom of expression, gives ISPs immunity from anything published on theirsites.

ISPs in the UK are now reported to be shutting down routinely as soon as they receive acomplaint.

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12.Companies'Strategies

General Press Releases

Not a day seems to pass without a statement or comment from a Financial Services company that it has developed, or will develop, something that will enhance the growth of

the company via the Internet. Often this will only be a comment that a quote for motor

insurance can now be obtained on-line. In other instances the announcement will discuss

the company’s future strategy towards e-business.

The nature of the statements will reflect the intended target audience. Often they are aimed

towards the general public or brokers to get them to visit a website to buy their insurance.

At other times, particularly when future strategy is the main message, it is the investment

world who is the target.

Although we are still at an early stage in the development of e-commerce it is expected

that companies will have a strategy to take advantage of new opportunities that this technology brings to their business Those who have a strategy which can be believed and

which is seen as realistic will be viewed favourably by the investment community What

they seem to be looking for is a company willing to spend money but also spending it in a

sensible way. Earlier, in section 10 some start up costs were illustrated but these amounts of money will not produce adequate returns unless they are backed by a realistic strategy.

Strategies vary between companies but are often dependent on whether the company is

doing “Business To Consumer (B2C)” or “Business To Business (B2B)“. In the SIAS

paper ‘e-Actuaries’, four strategies were described.

?? Pile them high

• Specialist manufacturer

?? Niche player

?? Infomediary

(Readers are advised to refer to the original paper for further detail)

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Examples of the B2C type include:

Prudential, wants to communicate with its customers as detailed in their press release of 3 April 2000.

“ A new Financial Service for Mobile Phone users”

“Prudential today becomes the first UK insurer to launch a listing of its services on a mobile phone net work.......Prudential Retail’s E-Commerce division plans to expand significantly in 2000 and our main objective is to continue to be a multi-channel financialprovider. At least 1.5 million of our existing customers own mobile phone, and initiatives like this will provide people with more choice in how they communicate with us.”

Direct Line shows their e-strategy in a series of announcements

?? Launches fastest quote and buy Internet services, enabling customers to purchase motor, home and breakdown insurance in under 2 minutes, for 365 days of the year (Sep 1999).

?? Appoints their first ever Managing Director of e-commerce and invests £?2 million in a campaign for directline. com (Dee 1999).

?? A new logo is unveiled for all e-commerce activities (Jan 2000). ?? Cars will be sold online via a new Internet site (Feb 2000). ?? First ever life assurance policy online launched (Feb 2000).

Zurich Group details a “Blueprint for success in the New Economy”:

“Zurich Group is transforming itself into a new economy high-touch and technology driven company. The opportunities offered by the Internet will enable Zurich to develop entirely new business models involving the formation of a network of partnerships and alliances. These will provide access to numbers of customers far in excess of the present 35 million.”

In commenting on the Blueprint Morgan Stanley Dean Witter have elaborated that:-

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In the UK, the Group is in the process of launching a personal financial portal Zurichbank.co.uk that will provide transactional banking with highly personalised content.

The second phase of the project will be to introduce an on-line credit card along with

personal loan features within the portal, integrated with the banking services. Longer- term share dealing, mutual funds and insurance services will be added along with related

services such as home and car purchases. Zurich’s aim is to create an offering that

provides all of a customer’s financial needs.

In the US, Farmers is focusing on “leveraging the local agent” through the creation of the

Agency Dashboard. Currently, Farmers works with 15,000 agents and has recognised that 70% of Americans will cite face-to-face contact as critical. Therefore, Zurich has designed

a web system to offer support through product explanations, on-line training, quotes and

analysis through agent-personalised web sites.

Credit Suisse has divided its Financial Services operations into five businesses including

one entitled Credit Suisse e-Business. Its strategy is to build one of the premier European financial services e-business franchises. Its current statements are still at a high level but

show direction by stating that the unit will “drive and support Credit Suisse Financial

services to e-enable its products and services, launch a range of Luxembourg based e-

investment products and expand and accelerate B2B and B2C initiatives”,

News From The Reinsurance World

In the reinsurance world where B2B processes are most relevant the messages are directed

towards investors and the business world. The focus is often towards existing customers

and existing processes and whilst reinsurers have new ideas for e-commerce none are saying that these will have significant impact in the short term. Instead the focus is more

on the medium term and to show that the opportunities offered by the Internet are known

but that the business model does not change overnight. However it is important for

companies to get flexibility, to try different initiatives and not get caught by the speed of the competition.

Munich Re who will spend between E100m and E200m annually on its e-commerce

activities say that “we want to use e-commerce on the one hand in our traditional business models, which means in expanding our individual customer partnership and in support of

our original reinsurance business, but also in developing innovative service offers and products, to create new business models together with our clients.” It goes on to say that ”

In reinsurance, only slowly the structures and the needs of e-business users will become visible”.

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ERC Frankona has gone further and launched facilities for its clients. Firstly, FARAO,the Facultative Reinsurance Application Online Service was started as a pilot project in1999 and this was followed in January 2.000 by RIO (reinsurance online) for thedistribution of original loss warranties for several business lines. This latter applicationwas claimed by ERC to be the first true reinsurance e-business offer.

In its May 2000 presentation to analysts Swiss Re detailed how they saw the developmentof e-business. This was described as a journey, first of all in “leading the game” by e-enabling its current business processes and extending this into the products and servicesthat are offered to clients. Secondly they seek to “redefine the game” by using e-commerceto offer new products and services not existing today and to attack some of the currentways of doing business in the risk industry from both within and outside the company.

in late 1999 the Company launched ELRiX (electronic exchange of standardised risks)which auctions catastrophe capacity in earthquake and windstorm risk and followed thisup with a new service, offering weather derivatives -put and call options aimed at powerutilities, as distribution companies and others that need to protect their sales againstfluctuating temperatures.

The Common Theme

These have been only a few examples of companies’ approaches to the opportunitiesoffered by e-commerce. The common theme is the message that the Internet is now afundamental part of strategy. The focus has two edges, firstly to reduce process costs andsecondly to offer better and more timely products and services to the client. Manyhundreds of millions of pounds are now being spent in developing this area and althoughno company expects a transformation to their business overnight there is the expectationthat the new business models will emerge profitably over time.

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13. Likely Actuarial Involvement --

Underwriting / Pricing / product Design

in the new market place. actuaries with their core statistical, modelling and financial skills are expected to have a greater involvement in general insurance underwriting. They will need to be flexible enough to cope with expansion into new markets, changes in risks, an ever growing need for simplicity and greater competitive pressures.

Insurance businesses will employ an ever widening range of distribution media and will expand geographically. Therefore, actuaries will have to develop multiple pricing models that can deal with variations in distribution outlets and geographical locations. Perhaps, it will be possible to use a global process model with local variations.

This expansion will mean that new types of insurance risk are being taken on for which actuaries and underwriters have little experience or data. This implies a transitional period of higher risk taking until an adequate amount of data has been collected for the new risks. More generally the data coIlection methods employed in relation to e-business will differ from those adopted in the past because of an increasing need for simplicity and the deveIopment of Customer Relationship Management databases.

Simpler and slicker quotation processes will be required because of the transparency of e- commerce. A slow quotation engine requiring large quantities of data input will be avoided by most consumers. Also, portals and product aggregators may have strict marketing requirements that disallow the use of such quotation engines on their sites. The impact on underwriting of this may be the adoption of “80/20” rules (or equivalent) for dean underwriting with more complex processes for the 20% that need to be priced in more detail Actuaries will be required to advise in this area.

The heightening levels of competition will force actuaries to adopt more sophisticated pricing methodologies, “Game theory” may be more in evidence as brokers, product

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aggregators and portals move to maximising the use of ED1 and companies vie to get to the ‘top of the screen’ for chosen segments. Retention will also become a critical issue. Renewal processes will become increasingly customer segment / customer value oriented and actuaries will need to develop algorithms reflecting this focus in the price offered at renewal More sophisticated expense analyses will be required.

In addition to underwriting and pricing, actuarial assistance will be required in product design. As already mentioned, simpler (potentially more tailored) products will need to match the simpler processes. In addition innovative design will be required to differentiate a company’s brands from those of its competitors.

Profitability

The focus will be on total customer value. This value will have to be considered across all the divisions within the entity and the third party providers. A common pricing basis will need to be adopted across each division.

Appraisal value concepts, where the profitability of future business as well as existing business is considered, will need to be used to a greater extent in general insurance. There will be a greater emphasis in understanding and forecasting future business levels and the main drivers of these levels. There will also be a greater need to understand the relative profitability of different distribution channels and components of the supply chain for tactical and strategic decision making

Given this scenario, it would appear that actuaries would be well placed to comment on and develop suitable valuation techniques / profitability measures. The techniques that will be adopted are likely to be an extension of those already used in Mergers & Acquisitions for whole entities but they will now need to be used at a business or customer segment level.

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Reserving

E-commerce will give rise to a greater variety of data because of the wider range ofdistribution. Data available from one distribution outlet may not be available from anotherand this will have an impact on reserving methodology. For example, the need for shortproposal forms on the Internet may mean that reserving Calculations cannot be assophisticated as they would be for traditional outlets. Also. where CRM databases aredeveloping, reserving actuaries may learn to use less risk based data points and morelifestyle based data points.

With the advent of ‘virtual’ companies, actuaries will need to ensure ManagementInformation is properly gathered and available. If it isn’t then the results of any actuarialcalculations or projections will be less reliable and consequently, advice will be harder togive and ultimately the insurer’s use of capital may be less efficient.

Process changes may prove another source of consideration. Claims may be reported andsettled faster (electronically), electronic settlement methods may be used (reducing thenumber of cases going to court and hence incurring legal expenses) and there could be abetter awareness of the ‘right’ settlement level based on global data. All of this will lead tochanges in assumption and possibly a weakening in bases for outstanding claims reserves.

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Data Base Research / Segmentation

Actuaries will need to be actively involved in suggesting what data should be captured in the development of CRM databases. As well as for pricing, the data will be used in selecting marketing strategies, in particular which customer segments to focus on. Target segments will be identified using data-mining techniques and selected taking into account, amongst other parameters, both profitability and propensity to purchase.

Profitability has been covered above. The propensity to purchase is investigated by analysing the factors that influence quotation conversion rates and renewal rates. If for example, it is found that professionals under 40 are more likely to renew their motor insurance then designing web pages appropriately can target this customer segment.

In addition to this, greater research will be required to understand what satisfies customer needs across the range of services and products offered, what additional services to offer and how to attract and retain the customer. In association with profitability techniques, data base application need to be developed to establish and identify which customer segments best fit the company’s strategic intentions and the company’s brand values. The aim should be to build an individual e-profile of each customer and respond to their needs with innovation i.e. with current and new needs based services and offers -but on a mass marketing basis.

Here it should be noted that the application of Moore’s Law implies vastly more processing power will be available to support these techniques in the next few years e.g. 16 times the power in 6 years, 128 times in just over 10 years and 1000 times in 15 years!

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Education

In response to the development of e-commerce, actuaries should make use of Intranet

based courses, marking and the latest technology in educational support For example,

multiple access to videos should over time radically improve efficiency of distribution and

quality of all course and support materials. Intranet applications could also open up better

communication and sharing of experiences within the profession.

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14. “20/20 Vision”

So far our time horizon has been limited to 5 years in the future. If we were to look in a crystal ball, how would things look in the year 2020? One approach is to consider the four areas of the insurance world that will be impacted under the headings of price of products, product design, promotion and the position/place of sale.

Price

We predict that the price of insurance products will be driven down in the long-term because of continued oversupply, increased competition and genuine reductions in costs.

The increased competition is a result of the transparency of the new distribution outlets The entry of new players into the market such as Virtual Insurers will only introduce further competitive pressures.

The genuine reductions in costs will arise primarily in the areas of administration and commission. With the exploitation of EDI and usage of cheaper labour pools overseas, administration costs will start to reduce. The greater efficiency of electronic intermediaries compared to human ones will mean that lower commission can be charged for selling insurance.

The overall impact on claims costs is harder to predict as we believe that claims frequencies will go up but claims severities will go down.

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Growing claims frequencies will arise from greater claims awareness. Claims awareness is being encouraged by the new claims companies who search for cases where an individual or company could make an insurance claim. They approach clients with the offer that the claims company will cover all legal costs unless the client wins the case in which situation, the claims company gets a cut of the damages.

Electronic (distanced) methods of claim submission wilt probably make the process of claiming easier.

Potential reductions in claims severities are being brought about by companies who encourage “Cyber settlement”. Cyber settlement is where the insurer and claimant settle a Personal Injury claim online. The insurer quotes the maximum that he is prepared to pay and the claimant quotes the minimum payment that he will accept. If the claimant’s quote is less than the insurer’s quote then the claim is settled at an amount equal to the average of the two limits In this case. both the insurer and the claimant will be winners. The claimant would have got more than he quoted and the insurer would have paid less than he quoted.

If the claimants quote is more than the insurers then the claimant is told that he must quote a lower minimum and the insurer is told that he must quote a higher maximum. Requotes are continually requested by the system until the claimant quotes a lower amount than the insurer in which case the claim can be settled.

Cyber settlement avoids protracted legal battles in court that cost insurers time & money. On the other hand, access to worldwide information about settlement levels may cause upward pressure

The new ‘Bluetooth’ technology may well serve to reduce both claim frequencies and severity through increased surveillance. The technology itself will allow electrical appliances to communicate with each other without the need for hard wiring. An application in motor insurance would be to have a small camera installed in a car which records accidents as they happen. This would enable insurers to ascertain which party is at fault, the extent of the damage and (with GPS) the location of the driver for emergency assistance.

Product

By the year 2020, the current stand-alone insurance products will no longer exist. insurance will be bundled into further reaching propositions and the value chan redefined to minimize the hassle and complexity of major purchases by the consumer. For example,

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motor insurance will be included in the price of a car and buildings insurance will be included in mortgage repayments.

Increasing flexibility will be brought about through the introduction of insurance pools where the client can buy units of risk whenever he or she likes. A typical structure of such a pool would be a unit-linked fund where the charges for all insurance contracts are made through monthly risk charges such as in unit-linked life assurance. This way, the client can turn insurance off and on whenever he wants like water flowing from a tap. The sum insured for any contract can also be changed at any time as can the risk charges.

Promotion

In promoting products, insurers will have to place more emphasis on the brand to deal with price transparency. Portals and special interest sites will be the predominant mediums through which insurance is sold as part of further reaching packages.

Advances in technology will have an impact on promotion. By the year 2020, we envisage that Video mobile phones with voice recognition will be available on the high street. People will be able to deal with a cyber broker on the screen of their phones who can give them verbal information regarding their finances. Artificial intelligence will have adapted, enabling PCs at home to make purchasing decisions for the consumer. i.e. the PC might be set up to search for better insurance deals 24 hours a day, switching the client from one insurer to another when it spots a lower premium and/or better contract terms,

Technological literacy will continue to develop and hence usage will become more and more commonplace.

The pace at which technology is developing and being adopted will get faster and faster as indicated by the bar graph below In this graph, the time spans from invention to mass consumption (i.e. utilization by 25% of the US population) are shown for some of the most important technological developments of the past. When the mobile phone was invented in 1983, it took 13 years before it had a widespread use unlike the World Wide Web which only took 7 years. If we project this forward, inventions in the year 2020 might be in widespread use after only one or two years.

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Position/Place

The place where insurance deals are made will evidently change. Insurance will be purchased at home on the TV or on the train to work with a Video mobile phone. More

and more applications wilt be connected to the Web which will be used as the

infrastructure of the information super highway.

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15. Synthesis And Conclusions

The new electronic market place will increase competition and hence force changes in the way that insurance business is conducted. The fact that consumers will be able to easily compare quotes from different companies will mean that insurers will have to differentiate their products and introduce brand names that capture the customer’s imagination.

The expense savings brought about through greater automation will be passed onto the consumer in the form of lower prices. However, consumers will not buy on price alone, they will also buy on convenience and from trusted names. Trust may be developed through the improving levels of service possible in the new e-world such as 24 hour call centre assistance.

Advances in data collection techniques such as data mining may mean better risk assessment and hence that less capital is required to back insurance companies. This could lead to the set up of virtual insurers by venture capitalists and affinity groups. Advances in data collection will also mean that actuarial modelling becomes increasingly sophisticated with it covering customer behaviour as well as profitability. Actuarial education will need to be more forward looking in light of these development.

Se which organisations will succeed? Will it be those who invest in the latest technology or those who build their own entry barriers for other players? Which will be more important, commercial intent and positioning or customer service and management attitude? For answers to these questions, we will need to wait and see.

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Appendix One - Examples Of Internet Marketing

shop Fronts

Virtual Insurers www.eCoverage.comwww.ineas.com

Buy Online Sites: www.directline.comwww.eaglestar.co.ukwww.intersure.co.ukwww.royalsunalliance.co.uk

Quote Online Sites: www.theaa.co.uk/insuranceandfinance/- -

Estimate Online Sites:www.churchill.co.uk

Quote Request Sites: www.cis.co.ukwww.aquote.co.ukwww.pru.co.uk

Other Sites: www.pearl.co.uk/Pearl/Pearl.nsfwww.westexe.co.uk

Product Aggregatrors

www.Screentrade .comwww.rapidinsure.co.ukwww.insweb.comwww.moneyextra-insurance.comwww.lstquole.co.uk

Portals

www.freeserve.comwww.sorecvcs.co.ukhtp://dir.yahoo.com/Biusiness and Economy/Shopping and Services/Financial Services/Insurance/Autom- -olivehttp://dir.lycos.com/Business/Insurance/Agents and Marketers/United States/Multi%2DState Companies/Auto Insurance/http:/ /dir .al tavista.com/Top/Business/Insurance/AgentsandmarketersUnited State Companies/Auto lnsurance/

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Appendix Two - More On Regulation

(note : this section is intended as a commentary on some more interesting topics concerned with regulation- it is not intended as a thorough review. Readers should, as always, obtain uppropriate advice accordingto their needs

EU: The Commission has adopted on 2 February 2000 a Communication which spellsout its interpretation of the concepts of freedom to provide services and general good asapplied to the insurance industry. By its Communication the Commission sets out toensure that the Insurance Directives are interpreted in such a way as to ensure a fullyintegrated Internal Market in insurance In particular, it specifies the exact scope of thefreedom to provide services and defines the legal framework within which a MemberState may invoke the general good in order to regulate insurance business in itsterritory by way of branching or by way of freedom to provide services by an insuranceundertaking duly authorised and established in another Member State Theinterpretative Communication does not, however, prejudge the position of the Court ofJustice, which has ultimate responsibility for interpreting the EC Treaty and secondarylegislation, on the matters it deals with The Communication’s adoption is one of thepriority objectives of the Financial Services Action Plan

Regulations exist concerning Cross-border insurance business carried on remotely,in particular via electronic commerce.

? This should be regarded as insurance business carried on under the freedom to provideservices. The Member State of establishment of the insurance undertaking with whicha policy is concluded in this way is the Member State of establishment of the insurerthat effectively carries on the insurance activity (head office or branch) and not theplace where the technological means used for providing the service are located (e.g.the place where the Internet server is installed).

. Given the concept of the freedom to provide services as set out in the InsuranceDirectives, cross-border insurance activities carried on via electronic commerce (e.g.the Internet) are subject to the provisions of the Insurance Directives relating to thefreedom to provide services. As indicated in the Action Plan, the Commission intendsto bring out a Green Paper to examine whether the existing provisions of theDirectives provide a regulatory framework that is appropriate to the development ofelectronic commerce in financial services while ensuring that the interests ofconsumers are fully protected.

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The members of the council of ministers in Europe reached common position for Electronic Commerce Directive on December 7. It defines the place of an establishment as the place where an operator actually pursues an economic activity through a fixed establishment, irrespective of where web-sites or servers are situated or where the operator may have a mailbox. This definition removes current legal uncertainty ensuring that operators cannot avoid supervision. Operators are also obliged to make available to customers and authorities in an easily accessible and permanent form basic information concerning their activities (name, address, e-mail address, trade register number, VAT number). This enables the customer to place the fixed address of the operator for any comebacks. The proposal ensures legal security by imposing minimum information requirements for conclusion of electronic contracts; this complements the directive on electronic signatures.

Electronic signatures allow someone receiving data over electronic networks, via the Internet for example, to determine the origin of the data and to check that that data has not been altered. The Directive is not designed to regulate everything in detail but defines the requirements for electronic signature certificates and certification services so as to ensure minimum levels of security and allow their free movement throughout the Internal Market.

Legal recognition: the Directive stipulates that an electronic signature cannot be legally discriminated against solely on the grounds that it is in electronic form. If a certificate and the service provider as well as the signature product used meet a set of specific requirements, there will be an automatic assumption that any resulting electronic signatures are as legally valid as a hand-written signature. Moreover, they can be used as evidence in legal proceedings.

EU Distance selling of Financial services directive:

This proposal covers all insurance contracts under organised distance sales schemes, where the contract is concluded between a supplier and an individual by means of electronic communication. It is intended to provide assistance in certain areas such as.

?? A description of the main characteristics of the insurance service

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.

.

Price/arrangement for payment Existence/duration of any rights to withdraw from the insurance contract Information cm cancelling the contract Any limitations of the period for which the duration provided is valid The existent of any of court complaint and redress mechanism. The Data Protection Act 1998 requires companies to take steps to ensure appropriate security for the protection of personal data held by them. The Internet is an insecure environment and the network itself cannot be retied upon to provide protection From unauthorised access to, or disclosure of, personal data. It is the responsibility of the company to ensure secure servers are provided, password protection, credit card details encryption, and the use of reliable staff when processing personal details. The Data Protection Commissioner’s office has expressed the view that a notice should be displayed on web sites, warning the user that the Internet is not a secure system and that any personal data transmitted in this way could be accessed by third parties.

An example from www.Screentrade.com -

“Security - We all take risks with our credit card details. Each time we read them aloud over the phone for example, even though most of us feel pretty comfortable doing it.

Using your credit card over the Internet needn’t be any more risky, and many believe it’s actually safer. For example, in a recent report by the Federal Trade Commission in the USA, they argued that it’s much safer to transmit your credit card number over the Internet than to give it to a waiter in a restaurant or read it aloud over a cordless phone.

We’ve developed Screentrade to protect customers against security risks: l We use the latest encryption technology (SSL, or Secure Socket Layer) to protect

your credit/debit card details, and all your personal information. . . “

l To fulfil their obligations to those who visit their sites, companies should make it clear: • who is collecting the information l what information is being obtained • the purposes for which that information will be used; and the identity of any third

parties to whom the information may be disclosed. • It is likely that as part of the new regime established under the 1998 Act,

statements will need to be more explicit and in certain circumstances express consent will need to be gained

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.

.

.

.

.

.

.

Again from www.screentrade.com

Data protection The information you provide to Screentrade will be passed on to our agent and the relevant insurance companies so that they can provide you with insurance cover. Screentrade and the relevant insurer may from time to time notify you of any further products and services which they offer

The data protection guidance notes for Internet users - business and consumers is in www.data protection.gov.uk

Jurisdiction in Cyberspace

The Internet is a global is a giant global network. Because the Internet transcends geographic borders commercial use of the Internet may be sufficient to confer nation-wide and even international jurisdiction.

There has been substantial litigation in the Us respecting the exercise of jurisdiction over non-resident defendants who have established Web sites and participated in other Internet activities. Different courts have reached different conclusions as to how far their jurisdiction extends in cases involving the Internet. Personal jurisdiction has been defined as the “the power of the court over the person of a defendant.”

Various websites within the UK have posted notices to supposedly avoid legal wrangles over personal jurisdiction e.g. Norwich Union website posts the notice “UK Only”‘. The Prudential website - “Applicable Law This website is established by Prudential plc in England. Any use of it shall at all times be governed by English law and, in the event of any dispute, the relevant parties shall irrevocably submit to the exclusive jurisdiction of the English Courts, “

Conducting electronic commerce transactions over the Internet is likely to subject the Internet merchant to personal jurisdiction wherever their customers are located.

In Bensusan Restaurant Corp, v. King, U.S. District Judge Sidney Stein dismissed a trademark infringement lawsuit filed in New York by the operator of the famous Blue Note jazz club of New York City against a Columbia, MO, music club of the same name.

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The issue in the pre-trial ruling was whether the Missouri club’s World Wide Web site provided a basis for the New York club to sue in federal court in New York. The judge observed, “Creating a site, like placing a product into the stream of commerce, may be felt nationwide - or even worldwide - but, without more, it is not an act purposefully directed toward” New York.

In Maritz v. CyberGold, Inc., the U.S. District Court for the Eastern District of Missouri held that a website operator in California is subject to personal jurisdiction in a Missouri lawsuit under the state long-arm provision on the commission of a tortious (wrongful) act outside the forum which has an effect within the forum. In a case of first impression between competing Internet advertising firms, the court also found that the defendant’s website amounts to promotional activity that satisfies the due process requirement of minimum contacts for personal jurisdiction over a non-resident corporation.

As yet there is no clear legal definition over Internet jurisdiction, the potential for personal jurisdiction is very likely and looking at the very different decisions the courts in US reached as to how far their jurisdiction reaches in cases invotving the Internet, harmonious worldwide jurisdiction would appealing to all.

Electronic Communications Act 2000

The UK Government wishes to facilitate elecronic commerce and has set various goals for the use of e-commerce by parts of the public sector. The main purpose of this recently adopted act is to build confidence in electronic commerce by creating a framework for cryptography services, legally recognising electronic signatures and removing obstacles to the use of electronic communication. It is consistent with various EU legislation (such as the EU Signatures Directive).

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