INSURANCE TECHNOLOGY TODAY AND TOMORROW
Insurers as DP Vendors
Best’s Review-Property/Casualty Insurance Edition
by Nancy James
UNFOLDING before the insurance industry is an unforeseen marketing phenomenon as insurance companies finally bring workable agency computer products into the competitive systems market. Aetna’s IBM Gemini system is the product of two industry giants and, in my opinion, is the first system to be worthy of a creditable mark in the open marketplace.
It is exactly the openness of that marketplace and the subsequent position of the independent system vendor which I address in a look at the short-term future of agency automation systems.
Aetna currently is offering the Gemini system to agents at discounted hardware costs, a particularly attractive offer in competitive terms, since Aetna is sustaining all development and software
costs. It is no news to the independent systems vendors that insurance companies have enormously greater resources for capital development expenditures than do the vendors, including the capacity to fund extensive product research and configuration costs. The question, then, is what market Position will be assumed by Aetna’s system and by other similar systems as they are introduced to the industry. Will the final product be available at costs competitive with those of established vendors?
Who Controls Cash Flow?
The most significant benefit Gemini and similar systems offer the parent insurance company is improved cash flow. As every agent who has learned to bill a binder knows, there is considerable profit potential in holding premium dollars in high-yield, short-term interest-bearing accounts while waiting for carriers to bill company accounts payable. The company position has been aggravated over the years by inefficiencies and delays in policy processing and subsequent agency billing. It is wholly a company problem, but one which the agent understands.
With company-sponsored computer systems available to the agents, the company accounts payable clock will start ticking as soon as the daily electronic transmission of new and renewal policy data is complete. This transmission will be made possible through an automated agency/company communications interface, which has been publicized to the agent as a great advantage for accelerated policy production. Agents who have made careful use of cash flow potential observe that the costs of the entire system-hardware, software, and possibly even R&D-can be recovered on a unit basis with the profit potential of a single year’s cash flow. Increased cash flow from the second and subsequent years and from multiple systems, then, is profit.
A Process of Self-Selection
That’s just the start. An insurance company also can look to additional revenues from greater underwriting pro f its. Commercial Union discovered early in its agency systems research that profitable agents have a tendency to automate and, in fact, do automate. A very desirable book of underwriting business thus becomes available through an agent with whom an automation or interfacing link is established. If the original premise that profitable agents tend to automate holds true, and there seems no reason to doubt it, underwriting profits can be added to cash
flow profits to support near giveaway costs for computer systems.
In addition, agents in full interface mode will, in the future, completely replace company staff support needed for keyboard entry functions of policy and claim data. These costs, now duplicated by
agent and company as transactions move back and forth in the discrete, autonomous systems environments operating today, will have a single source: the agent’s office. As a consequence, the company will be relieved of associated data entry costs. The result will be lower operating expenses and more profit potential.
Combine these with decreased communications transmission costs, and you find a significant potential for a dramatic decrease in the total operating expenses for writing business through automated sources. Sophisticated electronic satellite and earth station communications networks will be cost efficient in comparison with the expenses of surface postal delivery, while the time benefits of overnight agency / company communications offer attractive business incentives.
As Aetna and other industry giants offer their products, there seems to be a growing realization that companies can continue virtually to give their systems away and still realize enormous profits. It is a most extraordinary environment which could lead to this conclusion. In this environment, the independent vendor will be hard pressed to compete at all.
Independent agents, in searching for their own operational solutions, need to employ the same negotiating skills they apply in daily sales situations. There is no reason why agents, as well as the public, should not share the potential wealth with companies, both in reasonable commission levels and in lower premium cost to the consumer.