An increased focus on transparency and the auditing of placement negotiations are just two of the market factors that have fuelled the latest trend towards electronic trading, writes Chris Dobson.
In the current economic climate, understanding how to deliver a quality product in the most efficient and appropriate way for customers, at the lowest level of cost, is the key to business success. Technology undoubtedly plays an important role in achieving this. Yet today, efficiency of trading in commercial lines lags behind personal lines. Many brokers are choosing fax, post and e-mail or going to individual insurer websites to send risk information, despite the significant costs involved in entering data numerous times.
However, change is afoot. This year has been a pivotal one for the availability of e-trading platforms to the commercial insurance market, which has significantly grown. Leading software houses have been developing solutions that enable brokers to send standardised risk information to multiple insurers. In addition, insurers and brokers are now integrating their systems directly to transact more efficiently.
Innovation in commercial trading is gaining real momentum and delivering significant workflow benefits for brokers. This will also have tangible service benefits for small to medium-sized enterprise customers. Insurance providers that avoid this step change in transacting commercial business could be doing so at their peril.
The commercial lines market has finally reached a turning point in terms of trading electronically. New platforms have been launched and developed, providing brokers with the ability to transact small commercial lines business with a panel of leading insurers easily and efficiently, without the labour-intensive process the market has become accustomed to.
For example, Acturis has successfully been developing e-trade, offering eight different SME products from a panel of insurers, which now also includes the much sought after commercial combined electronic capability, with mini-fleet in the pipeline. This platform has seen an increase in activity of 84.2%, with the number of requests for a quote at nearly half a million. Likewise, the successful launch of Powerplace earlier this year has already attracted more than 300 brokers and expects to be writing £100m in gross written premium by the end of 2010.
There are a number of market factors that have fuelled this latest trend toward electronic trading, not least of which is the increased focus on transparency and auditing of placement negotiations that create a more receptive industry.
Insurers are increasingly automating the underwriting process for smaller commercial lines, encouraging or even requiring that submissions be made via their own websites. For some insurers, 80% to 90% of their submissions are received in this way. As a result, the broker is faced with re-entering data into each insurer's website. For low premium and commission business, this is threatening to make these lines of coverage unprofitable for the broker.
Trading via software house systems, however, brings greater process efficiency benefits. Current or previous processes involved too much paper, too much scanning and too much data entry. The number of times a case has to be handled, and the ease and speed with which it can be brought to completion, are key. The software house and bespoke broker platforms allow brokers to cover more insurers and be more productive.
Often data is keyed in once and automatically transferred to a number of insurers, allowing brokers to obtain quotes and place business with the minimum level of data entry, thus saving time, reducing error rates and costs, not forgetting the benefits of back-office integration — limited need to re-key. Using such a system, brokers can obtain quotes and place new business for SME risks from their systems virtually immediately. No paper need be involved, filing is carried out on the system and a full audit trail is provided.
From an insurer's perspective, unlike personal lines platforms, the commercial rating engines are mostly held on their systems. As a result, they have the ability to update rating and documentation faster and to maintain their own rating granularity. This also saves the software house the cost of maintaining a multitude of complex rating engines.
Advances in technology have also clearly had a huge impact on driving e-trading. Service-oriented architectures, web services and XML technologies are all helping to make electronic trading more seamless and less costly. These technologies are creating more flexible structures and easing integration between systems — both internal and external.
As a result, insurers and brokers are able to leverage existing systems to connect directly to business partners or into trading networks, realising more of the efficiency benefits from the use of these systems. More flexible architectures are allowing the trading systems themselves to better mimic each user's existing workflows and reduce the amount of change involved.
At the moment, e-trading is mostly used for simpler products that can be sold as a single predefined package, such as shops, tradesman, offices and surgeries. Systems are also now extending beyond the new business stage into the full cycle dealing with mid-term adjustments and renewals.
With that said, adoption rates to date have been slow. There is still a significant number of brokers that do not have access to such platforms — or do not even want to trade in this way. In a recent survey of 250 brokers, some 29% were adamant that they do not want to trade electronically. Clearly there are reasons why brokers choose not to adopt such tools. Improved usability, breadth of product range and improved efficiencies are key factors that would kick-start broker usage of the platforms and this has to be an area of focus to help drive change. With the developments discussed and progress that is already being made with providers such as Acturis, the industry is on the right track and will see more broker requirements being met by the beginning of 2010.
The credit crunch is another factor that is undoubtedly putting providers off the investment in technology for electronic trading. In the short term, the costs of integration, training personnel on a new system and potential duplication of activities pending integration are likely to increase costs, not reduce them. Although cost will be reduced in the longer term, 'churn' is likely to go up and retention down.
But how long can providers get by without the technology in place? While SMEs continue to favour face-to-face arrangements through established brokers as their main channel for arranging cover, research suggests they are becoming open to other mediums and less loyal to current providers: 15% of SMEs would consider changing insurance provider (an increase of 4.7% over 2008) and almost a third would be willing to arrange their cover over the phone. Add to this the fact that some commercial products, such as commercial van, are increasingly being seen as commoditised products with the ability to attract online sales, and the fact that direct writers, affinities and banks are becoming increasingly attracted to the market, SMEs certainly have more choice.
By streamlining the business process, boosting flexibility and helping to control costs, e-business can help brokers become slicker, more efficient and effective, allowing them to focus on what they have always done well — offering their usual professional advice and expert guidance and building relationships with their customer.
There may always be a segment of brokers that choose not to trade in this way, as electronic trading does not fit with their business model. This may be a very logical decision for some, as long as they recognise the cost implications of doing so, and the industry continues to provide options to cater for all needs.
What is clear is that electronic trading is here to stay and will continue to grow. How quickly it grows will depend on the market forces driving change. But significant progress is likely in the next year in terms of availability of products and usability. Companies that fail to embrace the technology will simply be unable to remain competitive, just as has been the case in personal lines since the introduction of electronic data interchange more than a decade ago.
Chris Dobson is distribution and development director at Fortis
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