Technology - Electronic paper trail

In the late 1970s, a radical alternative to processing and transacting insurance, from the paper-based methods of old, emerged. Kevin Lomax, founder and now chairman of IT provider Misys, was one who shared this vision and saw the great opportunity to make the insurance industry more efficient. And, by 1979, the first electronic systems for brokers were introduced.

This new technology offered brokers the opportunity to reduce costs and gain a competitive advantage. The first broker system of its kind was launched to manage back-office functions and, despite scepticism, the development of such systems has had a significant impact on the broking community and on the general insurance market more widely.

The early to mid 1980s saw the emergence of a raft of new software houses - all claiming to be able to streamline a broker's business. However, despite an eagerness to capitalise on the benefits technology could bring brokers, not all survived. The main reasons for this boiled down to a lack of financial stability and proven technology to ensure survival in a competitive market.

However, by the mid 1980s the remaining software houses had strengthened their position with the introduction of comparative quotation engines.

By replacing the common manual rating guides, brokers could reduce costs and offer increasingly competitive rates and service to their clients.

The mid to late 1980s also saw the beginning of software house consolidation with a number of acquisitions. The acquisitive software houses further strengthened their position and have subsequently built their business upon this consolidation. This presented a real challenge for the newer entrants, with many finding competing against enlarged organisations increasingly difficult, which lead to a reduction in the number of players.

Market scepticism

Consolidation also generated a certain amount of fear within the market with regard to the longevity of software houses generally. Some of the newer entrants that did not survive made promises on which they could not deliver, which tarnished the collective image of the software houses in the eyes of brokers.

But, as with any new processes or technology, there is inevitable scepticism that reigns among its target group until such time as the benefits are proven. Within the broking market, this was all the more apparent because of its radical departure from the traditional paper-based approach. It took time for the technology to establish itself and for brokers to realise benefits such as gaining more time to focus on their clients and winning new business.

Software houses have also come to recognise that, first and foremost, their customers are insurance people and they do not necessarily want to be technology experts. This is an ongoing challenge for software houses to ensure clear communication between supplier and customer to ensure technology continues to deliver real business benefits.

At the same time that technology was creating an opportunity for common trading, by 1985 brokers realised they could use their collective buying power to negotiate better terms with insurers by joining forces in a network.

By trading as a group rather than as individuals, brokers saw the potential advantage over other brokers. Through the use of technology networks, they could also reduce costs for insurers.

By the early 1990s the development of full-cycle electronic data interchange brought further benefits and cost savings for personal lines brokers and insurers - revolutionising trading efficiency.

Again, the development of full-cycle EDI was initially greeted with caution by some insurers. It was only when insurers such as Landmark (AIG), Axa and Bishopsgate (Fortis) took the plunge that the industry began to fully embrace technology. This method of trading is now well established among the industry - with increasing volumes of EDI transactions being made through software houses every day.

The mid 1990s saw the launch of the first direct writer - Direct Line - and was famously the catalyst for change within the personal lines market.

Insurers such as Norwich Union launched their own direct arms because they recognised the change in customer purchasing habits brought about by Direct Line's success.

The fact that the direct writers were offering clients cheaper premiums initially generated concern among the broking community. Analysts forecast that the vast majority of personal lines business would be written via the direct writers by 2000. It is now 2004 and brokers have proved themselves to be resilient and the analysts wrong.

Since then brokers have adapted, recognising the need to grow, merge or specialise to compete and survive, or have joined a network to benefit from enhanced terms and services.

Over the course of the last two to three years, some of the insurers that had introduced direct arms have not been able to achieve the level of brand recognition and critical mass to sustain profitable growth. As a result, they refocused on brokers because a large number of consumers still prefer a broker's expertise and service. Now, some of the leading direct writers are reaching saturation within the personal lines market and are looking to new areas such as small to medium-sized enterprise commercial business and other distribution channels.

The success of Windows 95 in 1995 as a PC operating system meant that businesses began to focus on the benefits that PC applications could bring.

Software houses recognised this and started developing Windows-based products.

Nowadays, it is common for brokers to integrate Windows systems alongside their broking applications.

The market's first big merger in 1997 - that of Royal & SunAlliance - was brought about by market pressures and led to increased focus on expense savings and best use of resources. Some of the larger insurers, with complex infrastructures, various IT platforms and duplicated roles, had been inward-facing for a number of years and began addressing the need to reduce costs in order to compete. The use of technology, particularly full-cycle EDI, and the outsourcing of certain functions, such as sales and marketing, proved an effective way of reducing costs. This was also recognised by many of the networks that were focused on the delivery of both products and services to meet the needs of insurers and the intermediary market.

The combination of market forces, technology, insurer results and strategies also influenced consolidation of the broker market and, by the late 1990s, there was considerable focus on consolidation and segmentation. The smaller personal lines brokers had to face an influx of new larger call-centre brokers and many have moved towards specialist schemes or niche markets in order to focus on their strengths.

At the same time, insurers started to look closely at the brokers, networks and software houses that would be the main players. Rather than spreading resources thinly, insurers began focusing on a defined set of customers, which they believed would become increasingly important. Hence, a move towards segmentation.

As many analysts had forecast, brokers have continued to dominate the distribution of commercial lines business. In recognition of this, insurers began to focus increasingly on the broker channel. Also in the late 1990s, networks began to offer an increased number of commercial products and services and software houses started to plan the launch of electronic trading for SME business.

By 1999, as consumer habits changed and the internet rapidly became an effective means for purchasing insurance, brokers began to develop a web presence. For this new generation of web users, software houses began developing a range of internet and email solutions, paving the way for the introduction of web trading.

At the same time, insurers were developing extranets, which were initially designed as information-gathering tools. This has evolved and now brokers can send risk information directly into the insurer's system. This function, however, has so far been limited by the lack of integration to brokers' back-office systems.

The year 2000 saw the formation of the General Insurance Standards Council as a means of self-regulating the industry. However, as the parties involved were unable to agree on fundamental issues, plus the fact that the government had to adopt EU directives focused on protecting the consumer, the Financial Services Authority was passed the regulatory mantle.

With the release of the first consultation papers in December 2002 and FSA regulation scheduled for January 2005, the FSA began to look at how general insurance was traded. With IT systems forming an integral part of a broker's day-to-day operations, many turned to their software houses for support and guidance. This led to many of the leading software houses launching compliance software to enable brokers to effectively record various regulated activities. Again, this adaptation of technology offered advantages to brokers as electronically stored information is easily accessible, thereby helping brokers to be transparent to the regulator.

Industry standardisation

Over the years, developments in technology have created opportunities for software houses to work together on common projects that have benefited the general insurance industry. In the 1990s Polaris developed commercial data and XML standards for insurers - improving rating for brokers. This desire to move towards standardisation saw the development of initiatives such as imarket, which illustrate the industry's increased acceptance of the need to embrace technology and a softening of early scepticism.

Software houses keen to continue providing business-critical benefits also began working closely with the FSA to know how best to provide support.

For example, the Software Suppliers Advisory Panel has been set up specifically to cover the implementation of electronic reporting by regulated firms.

The panel discusses and challenges FSA reporting requirements on behalf of the software house community in order to ensure effective communication with the industry.

One of the challenges faced by the FSA is the significant increase in the volume of reports from regulated firms in 2005 as it means they can no longer process the information manually.

By the end of 2003, networks became fashionable again as a result of uncertainty over FSA regulation. Brokers that wanted to maintain independence and remain in the industry sought help from those with a vested interest in a prosperous broker market and the capability of helping them prepare for FSA authorisation.

Many different types of networks exist today. Independent networks do not require a change to agency agreements or loss of independence. Other, more 'prescriptive' networks require members to commit significant volumes of business to a defined insurer panel. The brokers no longer hold the client money and the network decides the strategy. There are also acquisitive networks as well as the more informal alliances. Brokers need to be very clear about the differences, costs and associated risks before making what is, in many instances, an irreversible decision.

Looking ahead

With January 2005 in sight, evidence would suggest that brokers that understand the real implication of regulation are investing in IT systems to ensure that they meet the compliance obligations.

With supposedly fewer broking firms post-regulation, there will inevitably be some consolidation among the software houses. The financially stable, market-leading software houses will continue to support the largest number of brokers and will deal with those brokers that have more staff accessing the system.

At the same time, there will inevitably be some consolidation among the networks. However, it is important to remember that the insurance market is cyclical, competitive and has many different distribution channels with the resilient independent broker being a very important one.