Timing Is Everything In Insurers E-commerce Efforts
There should be little doubt that the Internet is starting to play a major role in the way insurers transact business. Over the last 10 years, the Internet has grown significantly faster than all other distribution channels and this growth is accelerating.
Overall, the Life and Property-Casualty insurance market has grown at almost 5% per year, however distribution via the Internet is growing by over 22% annually.
This growth is evident in the estimated 27 million consumers who have shopped online for auto insurance over the last two years. Of those consumers, more than 21 million were researching and requesting quotes.
Clearly, e-business is a strategic inevitability that insurers will need to deal with over the long-term. The fundamental question is not whether an insurer should invest in e-business infrastructure, but rather the timing, magnitude and prioritization of those investments.
The primary guiding principle used to leverage resource allocation should be the value potential of these investments.
In spite of the notable increase in online interactions, insurers have had varying degrees of investment appetite and incorporation of strategic intent for e-business strategies. Aggressive investors followed the exuberance of the initial e-business explosion and spent millions of dollars developing infrastructure and functionality. This rush to build out capabilities was driven by the belief that there were first mover advantages, and by an aggressive estimate of how significant e-business would be in the near-term.
Conservative adapters only put the minimum investment into e-business capabilities. It was their belief that consumers would never adopt e-business distribution and services, or that they would be very slow to do so. These insurers believed that they had a significant lead time in which to transform their information technology infrastructure.
The remaining insurers were perplexed. They believed that e-business distribution and services would become an important tool, but they did not know where to start investing.
Given the uncertainties around the speed and size of these changes, many have not understood what to invest in first, and according to what prioritization.
We have identified a potential action plan for each of the varying approaches and will highlight a value driven framework to drive their efforts going forward.
Aggressive: Those who embraced e-business and built complex functionality within the first few years of the new era have established a presence, but now need to reassess their core capabilities.
While many of these companies were premature in releasing large-scale rollouts, these insurers will need to continue their investments to integrate these capabilities into their core legacy infrastructures.
Conservative: Although original projections of e-business growth may have been optimistic, these insurers must acknowledge that over the next 10 years they will need to have the ability to provide products and services via the Internet in order to compete.
These insurers should develop their e-business strategy today in the context of their alternative distribution channels and begin a phased implementation approach to meet customer expectations in the coming years.
Perplexed: These insurers will need to more fully consider their e-business options and assess the value creation potential of the various opportunities. Prioritization of their next steps needs to be based on the value potential of the various technical capabilities.
Once the prioritization has been established, these insurers will need to commit to their strategy and maintain consistent investment in their e-business infrastructures.
Historically, insurers have not been early adapters of leading-edge technology or business models. However, in recent years, insurers have begun to invest more of their overall IT budgets in e-business related projects. We estimate these initiatives will account for over 25% of internal and external IT spending in 2002.
This increase in e-business spending, coupled with the uncertainty and potential for value destruction, requires a value-driven methodology. We have identified five key steps to understanding value creation potential.
1.) Identify Opportunities: Insurers have many opportunities when considering e-business strategies, such as developing capabilities to bind coverage online, process claims notification, provide customer access over wireless devices, etc. Each opportunity will have varying implications around expansion potential, time to build, scalability, implementation life cycle, sourcing and flexibility.
2.) Measure Value: Insurers should identify sources of value to be derived from the various e-business opportunities. For example, a capability may increase customer retention through improved access to policy information or reduce costs of processing claims through online notification capabilities. For each opportunity being assessed, the insurer must develop a rigorous free cash flow model in order to project the incremental benefits of each opportunity.
3.) Measure Costs: Next, insurers should use a total cost of ownership approach to identify the capital, technical support, administrative and end-user costs of each opportunity. Most projects only calculate the capital expenditures around hardware, software and implementation. However, there is a risk that the other costs around maintenance, telecommunication fees, help desk, training, etc. will be neglected. Often these additional costs will exceed the original capital expenditure.
4.) Link Value to Cost: The value and the costs for each opportunity should be brought together in order to provide an understanding of which opportunities will provide the greatest potential for value creation.
5.) Set Prioritization: Based on the value and cost of each opportunity, an insurer can set a prioritization that identifies the high-value, low-cost opportunities for immediate implementation, in addition to consideration of other logical sequencing implications.
There is a vast difference in hoping for value creation and planning for it. Even when planning for value creation, it is often elusive and only achieved a fraction of the time.
However, the e-business phenomenon is critically important for insurers to embrace. While some have already made considerable investments and others are just beginning, this will require a significant change effort over the next 10 years. All insurers will need to adopt a value-driven approach, given the material amount of spending necessary for change management and the potential for value creation or destruction.
William Pieroni, is general manager, global insurance sector, for IBM, based in Armonk, N.Y.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 26, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.