Fighting Insurance Fraud - Survey of Insurer Anti-Fraud Efforts

December 1997
Electronic Commerce in Property/Casualty Insurance: Strategic Advantage or Economic Imperative? Executive Summary

During the past quarter-century, advances in technology have steadily changed how the world does business.

Electronic commerce is transforming business processes on a broad scale. Fax machines deliver letters and other documents almost anywhere on earth. Personal computers have become standard tools for the home and office. Electronic data interchange allows trading partners to send each other enormous amounts of data — with virtually no human intervention. And the Internet distributes information worldwide.

The rapid advance of technology — and the need to understand how technology affects the flow of information in the property/casualty insurance industry — are the motivating factors behind this study. Senior management of insurance companies and other organizations in the industry need to be aware of what technology is available and how it can improve today's workflows and processes.

This study provides a foundation — in terms not buried in bits and bytes — for understanding electronic commerce and its effect on our industry. Using a number of case studies, the report details real applications of electronic commerce for insurers, agents, brokers, and other participants in the insurance marketplace. The study also looks at the potential benefits and costs of adopting the emerging technologies.

Today, through intelligent use of electronic commerce, insurers, agents, and brokers can gain strategic advantage over their competitors. Tomorrow, those same insurers, agents, and brokers may discover that electronic commerce is a necessity for economic survival.

What Is Electronic Commerce?
Electronic commerce is the integration of technology and business processes to facilitate both inter- and intracompany workflows, as well as communication with individual consumers. Electronic commerce uses technology to transfer information and conduct business. Many companies are using electronic commerce to restructure operations, streamline processes, reduce costs, improve sales and service, reach new markets, and distribute information.

Certain industries, such as travel, banking, and retail, have embraced the emerging technologies that make electronic commerce possible. Some firms have gone as far as completely revamping their business processes. The insurance industry has made real progress in implementing some of the technologies of electronic commerce, but the industry has been slow to adopt others. Insurers must carefully select which applications to implement, weighing the costs and benefits. Some applications of electronic commerce used in other industries do not easily fit the business of insurance. Many others, however, present insurers with interesting possibilities.

Conning & Company estimates that, by the year 2006, Internet sales of automobile and homeowners insurance policies will generate approximately $2.5 billion in premiums per year. That figure represents 1.1% of the projected 2006 industry total premium for those lines of business. But will consumers actually use the Internet to purchase insurance? Do insurers really need to worry about marketing through the Internet? Will establishing an Internet Web site — or, for that matter, adopting any other technology for electronic commerce — give an insurer a strategic advantage? Will electronic commerce ever become an economic imperative?

Because information is the lifeblood of the insurance industry, ISO believes that the technologies of electronic commerce will be a determining factor in the survival and success of insurers, agents, and brokers.

Technologies of Electronic Commerce

Electronic Data Interchange
Electronic data interchange (EDI) is the electronic transmission of business information between the computers of trading partners, such as businesses, other organizations, government agencies, and individuals. EDI is an efficient way for trading partners to exchange the information needed to transact business.

For EDI to work, the computer systems of trading partners must be able to communicate. Trading partners must have a common format for their data. The computer systems of the trading partners must also be physically linked, through a public or private network, a dedicated telecommunications line, or modems and standard telephone lines.

EDI can generate significant savings in time and money compared with exchanging information by printing, handling, and mailing paper. For example, a 1996 IBM study of the banking industry showed that the unit cost of processing a payment transaction (that is, paying a bill) decreases as the level of electronic technology increases. According to the study, a transaction would cost $1.08 to process manually at a bank, fifty-four cents to process over the telephone, and only thirteen cents to process on the Internet.

In the retail industry, EDI integrated with inventory management reduces warehousing and inventory costs and minimizes the need for markdowns on unsold merchandise. The insurance industry may be able to use EDI or other electronic commerce technologies to eliminate inventories of company-specific policy forms and applications. Instead, users can print the documents on demand when needed.

Alternatively, agents or others can complete applications and other forms on a computer and submit them by EDI, eliminating paper altogether. Insurers can return the completed policies and other documents by EDI for significantly less than the cost of generating and mailing paper documents. And because EDI is faster than the mail, insurers and agents can serve their customers better by moving to the electronic process.

Insurers can realize even greater benefits by integrating EDI with expert systems — computer systems that attempt to replicate the way an expert in a particular field would go about solving a problem. For example, an EDI transaction might provide data to an expert system designed for underwriting. The expert system could examine that data and decide what additional information the insurer's underwriting guidelines require. The expert system could then use EDI to order additional reports from vendors or other sources. Finally, the system could receive the reports electronically and analyze the information according to the company's guidelines.

By allowing such integrated systems to gather information and make decisions for less complicated underwriting risks, the insurer can free up its underwriters to focus on more complex risks. The improved workflow can increase underwriting efficiency and lead to better, more consistent underwriting decisions.

Electronic commerce can also improve the efficiency and cost-effectiveness of communicating with regulators. Examples include electronic reporting of workers compensation claims, electronic rate filings, and the electronic exchange of information about producer licensing and appointments.

Imaging
Imaging encompasses a set of technologies for electronically storing and managing documents and making the information available by computer, regardless of whether that information originated in paper or electronic form. In addition to storing documents, imaging systems can organize documents, giving users easy access. The benefits of imaging include improved workflow; more timely response to information requests; and reduced costs for filing, storing, and retrieving paper documents. Imaging can make documents available twenty-four hours a day, seven days a week, to multiple users — even users in remote locations. And, unlike paper files, documents stored electronically are seldom lost or misfiled.

Internet and the World Wide Web
The Internet is a worldwide network of interconnected computers consisting of thousands of smaller networks. The World Wide Web is an information retrieval system that operates on the Internet. The Web uses a set of open standards that allow computers of different types — and using different software — to access a tremendous array of text, pictures, graphics, audio, and even video.

Insurers are beginning to realize the importance of establishing a presence on the World Wide Web. Many companies have developed Web sites — collections of related information, usually with convenient ways of navigating through the material and finding the desired sections.

The level of functionality in insurers' Web sites varies widely. Some sites contain only general information about the company and its products. Other sites offer complete product descriptions. Still others let consumers send electronic messages to the company and help consumers locate the company's agents. And a small number of insurers have Web sites that collect a consumer's information — name, address, type of policy desired, and so on — and then provide a premium quote or even issue a policy. Several studies expect the number of such sites to grow slowly through the end of the century.

Insurers that wish to offer premium quotes or conduct transactions over the Internet need to implement strong security measures. Hardware and software systems are available to prevent unauthorized access to portions of a Web site and to protect both insurers' systems and the confidential information consumers submit.

Although some have speculated that the Internet will replace EDI, the Internet is far more likely to increase the use of EDI, providing a low-cost, easily implemented vehicle for transmitting EDI transactions. Insurers could use the Internet for almost any function possible with EDI — processing endorsements, receiving premium payments, certifying coverage, and receiving reports of accidents, to name a few. Insurers can also use the Internet to disseminate information internally or to agents.

As consumers become more accustomed to the instant, anytime, anywhere service made possible by the technologies of electronic commerce, insurers will have to develop the means to meet customers' expectations. Insurers are realizing that one of the realities of doing business today is the need to provide service around the clock, every day of the week.

Insurers, too, have become accustomed to instantaneous access to information — and are demanding it. Some providers are responding to that demand. For example, in 1998 ISO will offer Internet delivery of many key products and services — rounding out a portfolio of delivery mechanisms that already includes network and dial-up access.

Other Technologies for Electronic Commerce
An electronic mail, or e-mail, system enables persons or computer systems to send messages or notes by computer. E-mail is an easy way to exchange unstructured information, such as descriptions of unusual conditions at a risk or suggestions for underwriting improvements. Such exchanges are possible within an e-mail system or between separate e-mail systems.

Electronic funds transfer (EFT) is a low-cost method for automatically transferring money by computer. An individual or business can use EFT to make a bank deposit or payment or to transfer funds to the account of a creditor. Life insurance companies have for years used EFT to collect premium payments.

Electronic facsimile combines the familiar fax technology with computers. Users can send documents from fax machines to computers and from computers to fax machines. Companies are finding new ways to exploit that capability. For example, in one system, a consumer requests information through a computerized, interactive telephone system, selecting information through the phone keypad. The system automatically generates a fax containing the requested information and sends it to the consumer's fax machine or computer.

A smart card is a wallet-sized card that looks like a credit card, but has more ability to store and transfer information. The cards record information on magnetic strips or embedded microchips. Retailers are using this emerging technology to track customer purchases and compile profiles for targeted promotions and other personalized services. The health care industry in Europe is using smart cards to store patient information. Insurers may want to consider issuing some form of smart card to store data about insureds, their coverage, and their policy limits. Departments of motor vehicles could use such cards to facilitate vehicle registrations. Police departments could use the cards to report accidents. And roadside assistance services and body shops could use the cards to verify coverage or bill for services provided.

Conclusion
The property/casualty insurance business faces increasing competition — from within and from nontraditional providers, such as banks. Insurers, agents, and brokers must carefully consider the emerging technologies and the competitive advantages those technologies offer. Today, astute use of electronic commerce can yield economic rewards through lower costs, increased efficiency, more effective marketing, and improved customer service. As technology continues to advance, and its applications become more widespread, organizations that lag behind may find that they cannot compete. At that point, electronic commerce will be an economic imperative.