Finding real share value

Acord’s Gregory Maciag on the use of standards by reinsurers, insurers, brokers and service providers to share data securely.

Players in the insurance and reinsurance marketplaces worldwide are sending customer and risk data across company boundaries with unprecedented frequency and speed. The safe, secure transit of data to and from independent players (reinsurers, insurers, brokers, and service providers) is creating new opportunities for improved efficiency and service for the client, and better financial performance for the provider.

These more-accessible but still-secure boundaries are allowing all to gain the benefits of more accurate information exchange. The quicker pace of cross-entity communications is also improving customer experience from underwriting to claims processing.

A shared language of information standards – a modern lingua franca – is permitting all this to happen. Companies are applying insurance standards making it easier to communicate faster and more efficiently, both internally and externally. In North America, UK, EU and elsewhere, companies are leveraging ACORD standards to gain competitive advantages – both by using their own capabilities and by capitalizing on the strengths gained from alliances with business partners.

Two factors are driving the greater usage of information standards: web services and a changing business climate. Technology is driving business change as the booming demand and unprecedented capabilities for web services touches nearly every industry worldwide, especially the data-driven financial services business. Meanwhile, market regulatory reforms, investment market performance measures, and burgeoning global demand are pressuring the industry to use technology better, stronger and faster.

These forces all are difficult to contend with, but the good news is that the insurance industry’s response is a positive one. Today’s insurance clients are benefiting with broader, faster, more accurate access to insurance information, products and services. Whether they are the largest pan-European company or the rural Sunday driving motorist, they are gaining access to electronic bridges to their providers in the insurance industry.

Within the insurance industry itself, too, business partners are using safer, more secure links over which to share data. Once the stuff of science fiction, ubiquitous access to information within any system (both inside and outside of company boundaries) is becoming commonplace.

Web services: right now, please
Web services are creating new capabilities for nearly every industry, tapping broadband internet connections among businesses and consumers. Functionalities such as credit checkers and search engines are well-known examples of web services in the business world. In the insurance world, ACORD members say that web services offer a unique chance to use technology to leap forward.

First, what is a ‘web service’? It is a piece of autonomous systems behavior that does a useful job for other pieces of software. Web services are tireless specialists, working efficiently at their own operations and interacting with other specialists and generalists using simple request and response mechanisms.

In the transaction-intensive world of insurance, web services have brought unprecedented technology capabilities. Opportunistic competitors are translating these into customer value and business value. Web services allow a reinsurance company, for instance, to take pieces of business functionality and offer them to other users such as brokers or primary insurers.

Web services are being developed and used up and down the value chain – from initial application to underwriting to policy issuance to service to claims settlement. Another example is a system that allows a broker to input and transfer client and risk data to a carrier’s systems in real time, with underwriting and pricing information being returned within seconds to the point of client contact.

The industry is finding web services to be of huge value because they allow diverse systems to use the original data about a customer or a policy no matter what application or system was used to input or store the data. Of special note is that web services allow carriers to extract data from ‘siloed’ legacy systems and feed it to other systems. Because the insurance industry was one of the original adopters of computers in business, the industry has a large number of these legacy systems, and has long had a problem in trying to develop cost-effective ways to link these systems to other, newer systems.

XML (eXtensible Markup Language) is the foundation of web services. I like to describe XML in terms of cans and labels. Simply put, standards based on XML mean that everyone can understand the label on every can in a large container truck filled with boxes of cans.

•The contents of the can represent a piece of data.
•The can represents a place to hold the data.
•The label represents metadata (data about the data).
•The cargo container on the truck represents today’s massive databases of information about customers, risks, claims, and other business information.

An example shows why this is important: a claims employee visits a business to make an assessment of a damaged vehicle. She gathers data about the driver, accident, and vehicle, and enters it electronically into her hand-held computer device. From the site or back at the office, she uploads the data to her company’s system, which then routes it to the motor insurance carrier and repair shop. Her company’s system generates correspondence that is sent to the insured business. Meanwhile, the insurance carrier generates a cheque for the business and sends repair authorisation to the repair shop and claims adjuster.

While this seems simple, what is revolutionary is that data is entered once and acted upon by multiple parties. This is possible only by standards-driven web services powered by XML.

XML delivers openness and semantic integrity to the world of information management in insurance. That’s why so many insurers and other providers support ACORD’s work with XML. It gives them the fastest route to making their data and business messaging compatible with the rest of the industry and other verticals. It also helps insurers develop an audit trail for regulatory reporting.

Industry-wide, insurance carriers already have realised or anticipate realising ef?ciencies of 20-30 percent on new integration projects by using ACORD XML standards, estimates analyst firm Celent Communications.

In the next few years, enterprise web services will enable insurers to buy or outsource the standardised parts of their big processes, such as policy administration, claims, underwriting and rating, and build only the parts the that provide real advantage.

Business climate changes
Underwriters, brokers and service providers from Bermuda to Brussels and Seoul to Stuttgart and all points in between are facing changes and challenges. These include a booming global appetite for risk management and insurance capacity, the emerging regulatory environment of the European Union and its interplay with country-based regulation, and individual market dynamics.

For example, Lloyd’s of London, the originator of the concept of underwriting centuries ago, is emerging anew from a series of challenges. It has drawn its new blueprints and is building a new foundation of business practices and new capabilities based on technology and standards.

An issue that extends around the globe and concerns many ACORD member company CXOs is ‘contract certainty’. This buzzword simply means that every entity involved in the insurance or reinsurance transaction needs to know more precisely what risk an underwriter is assuming and the insured is handing off. For years, underwriters in London and elsewhere have followed the tradition of verbally binding a risk, and then following up with paperwork later. The multi-billion-dollar disputes over coverage for the World Trade Center attacks in 2001 have made industry leaders and regulators push the industry to change that practice and create clearer, written terms (aka ‘contract certainty’) much earlier in the process.

Poor data quality – that is, client and risk data that is missing, incomplete, nonstandard from one risk to another, out-of-date, or otherwise suboptimal – is another industry target for standards evangelists. The 2005 hurricane season in the US pointed out anew the problem that poor data quality can hamper the industry’s ability to ‘model’ catastrophic events. The result is that the models misestimate the financial costs of natural disasters, terrorism and other large-scale risks.

Capturing and storing accurate, timely risk data at the time of application is the first step. The second is to pass along that data to business partners at every point in the insurance process including the time of claim. It is standards-based computer systems that offer the solution for this need as data moves along the insurance value chain. Lloyd’s outgoing CEO Nick Prettejohn told the recent ACORD Forum London audience that “only by the adoption of data standards will we reliably get good quality, timely data being shared by trading partners.”

Clem Booth, chair-elect of the board of directors of ACORD, former chairman & CEO, Aon Re International, and incoming member of the Management Board of Allianz SE, told the same audience: “If you run a global business, you have to do this from within an ACORD standards environment. There’s just no other way to do it.”

The business issue of largest consequence to insurers (albeit of least interest to the insurance buyers of the world) is underwriting profit. Within the UK and European insurance markets, Industry leaders are calling for a reemphasis on underwriting performance. Prettejohn succinctly stated the problem to Forum goers: “To exceed that cost of capital, you have to make an underwriting profit – otherwise you are destroying capital, which is what the industry has been doing for the last quarter century,” until 2004.

Improved underwriting profit can be achieved by increasing the efficiency of business processes and by making business and corporate information more transparent within an organisation and within the investment community. The key catalyst to making all these changes is the same: information standards.

Freeing people from processes
Adopting ACORD industry standards makes for more valuable human interactions demanding more creativity, more subtlety, more negotiation and more profit. Using ACORD standards lets management and professional talent be allocated to the opportunities that truly deserve the attention of humans. ‘Business as usual’ (the humdrum processing work) can be consigned to an automated layer while ‘business as unusual’ (the value-added work) is elevated to the human realm.

Which global markets will be ascendant in the coming years? What I hear from business leaders is that global insurers and reinsurers feel less and less bound by national and regional boundaries and will move business away from markets where the transaction cost is high and underwriting expertise is not strong. They will shift their capacity to more efficient exchanges.

London and European markets
Many of the reforms in London market, for example, are focusing on improved business processes using ACORD standards to reduce transaction costs and improve time efficiencies in the marketplace. In the broader European market, while the regulatory and market pressures vary, the same thing is happening.

To answer the call for greater contract certainty and quicker policy issuance the market has mandated that placing of business be done on one London market sanctioned ‘placing slip’ (the document containing risk, broker, and underwriter data). The next step will be adoption by the market of an standard electronic slip called a Global Placing Document - developed by ACORD members worldwide – which is expected to be used by multiple markets globally.

The London market, which includes Lloyd’s, also has put in place ACORD standards for claims processing and accounting and settlement to modernise its common transaction processing infrastructure. New ACORD XML standards for electronic file sharing now allow for simultaneous access to claims files in different data repositories by all parties to a claim: brokers, insurers and reinsurers. This, and the phased introduction of ACORD XML standards into back office accounting processes, is expected to remove most remaining dependencies on paper processes in the market.

I like to say ‘London gets it’. In fact, an entire chapter of my book The Business Information Revolution is devoted to that very topic. Our recent ACORD Forum London illustrated the interest in reform in this market. It drew 600 market participants to two days of sessions held in the heart of the London business district.

The reinsurance markets embraced standards earlier than other lines of business, and today this segment leads the way. “Can you play on the global markets if you don’t embrace proper [information] standards in the international reinsurance world?” asked Clem Booth at the ACORD Forum London. “The fact is that 75 percent of all reinsurance which is transacted globally is transacted with 30 reinsurance companies. My answer to that is if you don’t embrace the mainstream [of information standards], you can’t play,” in the reinsurance market.

One additional change throughout the global world of commerce is that technology systems have become nonproprietary. That’s a fancy way of saying that CXOs don’t want to be tied to a certain technology without flexibility to interact with other technology. Businesses are now in a ‘plug and play’ environment. The insurance industry is using open standards to support that lasting and fundamental trend. The standards provided by ACORD and other organisations serving the insurance industry support that ‘plug and play’ trend readily.

The current pace of standards acceptance is high. To cite a historical example, the typewriter was first described by a British inventor in 1714, but the first true working model did not appear until 1867. The principles of artificial refrigeration were discovered in 1748 in Scotland, but the first commercial home refrigerator was produced in 1913. Today’s changes are happening much more rapidly. Usually, improvement is a constant process that brings small but incremental benefits. But sometimes, like now, a convergence of factors creates forward leaps. As the optimists like to say: “It’s all good.”