Sigma, no.5 2000

sigma: The impact of e-business on the insurance industry: Pressure to adapt change to reinvent.

The effects of e-business are the subject of intense debate in the insurance industry, although actual translation into solutions is still in its infancy. Various e-business models are emerging and compete with traditional insurers. Newly established internet insurers are in the process of implementing the new possibilities provided by technology and testing innovative business models. Many established insurers have also begun to restructure their business systems and set up additional online sales channels. However, re-engineering traditional business processes is expensive and often meets with considerable opposition from within the company itself. This edition of sigma analyses various approaches to e-business in the insurance industry and reaches the following conclusions.

Online insurers will gain substantial market share.

The suitability for online distribution varies by line of business. In standardised personal lines insurance, sigma expects online channels to have gained a market share of 5-10% in the US and 3-5% in Europe by 2005. Most life and pension products, health insurance and many types of commercial insurance have only a limited suitability for sale via the internet; however, these areas still offer enormous potential for improvements in quality and service levels.
e-business facilitates better tailored products, shorter response times, greater flexibility in cover structures and better risk management support.

e-business increases efficiency

sigma estimates that, in the long term, US personal lines insurers will decrease their expenditure on sales, administration, claims settlement and claims payments by up to USD 15 billion, or 12%. Given the high level of advisory services and tailor-made products in commercial insurance, the potential cost cuts are USD 11 billion, or 9% of total expenditure.

e-business lowers barriers to market entry and increases competition.

The internet enables new entrants to the market to avoid the expensive and lengthy process of setting up traditional sales networks. In addition to start-ups, lateral entrants from other sectors also benefit from easier access to the insurance market: natural candidates are, in particular, financial services and internet companies such as banks, online brokers and internet service providers. These companies take advantage of their internet presence and brand name to add insurance products to their existing product range. The new breed of internet insurers is able to exploit to the full the potential which e-business offers for increasing efficiency, without having to be concerned about legacy business systems. Established insurers are thus facing growing competitive pressure.

Special providers are questioning fully integrated business models.

e-business makes it possible to disseminate information quickly and in large volumes. This allows insurers to deconstruct the traditional value chain and outsource certain links to specialist providers. Some new companies have already introduced consistent outsourcing strategies.

The role of traditional brokers is shifting towards the provision of finance management and risk consulting services.

The effect of e-business on insurance brokers depends largely on the insurance product in question: in the area of standard products, where there is little need for advice, traditional brokers are finding themselves faced with considerable competition on account of falling information costs. In contrast, where products require a large amount of advice and benefits and prices are difficult to compare, brokers will turn e-business to their advantage and offer more finance management and risk consulting services. This is particularly the case for complex pension products in life insurance, commercial lines insurance and the strong growth market of integrated risk management (IRM) products.

Insurance clients will benefit from greater transparency, lower prices and improved services.

e-business opens up new ways of reducing costs. Simultaneously hardening competition will ensure that these benefits are passed on to the customer in the form of lower premium rates. In addition, the internet offers a number of possibilities for increasing the value creation for customers by means of increased transparency and improved services not just in the area of sales.

How does e-business facilitate the break-up of the value chain?

Falling information costs make it easier to outsource individual stages of the value chain.

New information and communication technologies are making it easier for insurers to break up the value chain. Individual functions, such as underwriting, policy administration, claims management, investment or risk management can be optimised within the business divisions or outsourced to a rapidly growing number of specialised external providers. National borders are becoming increasingly unimportant, so that labour-intensive tasks can also be performed in low-wage countries. Claims management, underwriting and some parts of risk management are particularly suitable for outsourcing to specialised providers. Rising cost pressure will force traditional providers to review their fully integrated business model.

e-business facilitates business models with consistent outsourcing strategies.

One interesting development is being pioneered by various start-up companies, such as Ineas (www.ineas.com) in Europe or GeneraLife (www.generalife.com) in the US. These insurers sell traditional insurance products via the internet, but use e-business technology for consistent outsourcing. Both companies operate with a very small workforce. Their actual core competence is the design and structuring of products, as well as operating an internet sales platform. All other tasks are outsourced to specialist partner companies. Their main aim is to achieve efficiency benefits and offer clients additional services. Although such companies have not managed to acquire significant market share to date, they do present a threat to established insurers because of their potential cost advantages.

Online providers specialise in specific stages of the value chain.

In addition to online insurers, many new online companies are currently being set up in the insurance industry. One example is Cybersettle (www.cybersettle.com), a US company that tries to settle disputes between lawyers and insurance companies regarding liability claims. Another example is the company Mynd., (formerly PMSC), a provider of various back office functions for insurers.