A New Perspective.

Following its conversion to a for-profit corporation, Insurance Services Office has become an avid acquirer.

The structural steel skeleton of a 22-story building being erected in Jersey City, N.J., symbolizes the reconstruction of Insurance Services Office Inc. as it completes its transition to a for-profit corporation.

Next year, ISO will move its headquarters a 10-minute ferry ride across the Hudson River from leased space at the World Trade Center to that new waterfront building, where it will occupy the top 10 floors. ISO expects the move will save it $6 million a year for 20 years.

ISO, which provides rate-making information, policy forms and statistical services to property/casualty insurers, has undergone a similar reconfiguration in its conversion from a nonprofit organization owned by insurers. ISO was formed in 1971, replacing several state, regional and national bureaus for property/casualty lines of business. In 1997, ISO converted to a for-profit. Insurers own 85% of the company, and employees hold the rest,

On Top of Market Trends: Frank J Coyne (left) and Fred R. Marcon, who have redirected the goals of the Insurance Services Office Inc., are shown here on the top floor of ISO's new headquarters, across the Hudson River from the current headquarters at the World Trade center. primarily through an employee stock-ownership plan.

ISO is the largest of five statistical agencies that collect premium, claims and loss data from property/casualty insurers and file it with state regulators. It provides statistical services, loss costs, policy forms and rating manuals to 1,500 insurers representing 85% of the commercial-lines market and 35% of the personal lines market. In addition, ISO provides some of those services to a larger segment of the personal-lines market.

The other property/casualty statistical agencies are American Association of Insurance Services, National Association of Independent Insurers National Independent Statistical Service, and National Council on Compensation Insurance, which deals only with workers' compensation.

ISO and AAIS also are advisory organizations that develop policy forms, manuals with rules for writing and rating policies, and loss costs that serve as the starting point for pricing policies. Insurers can adopt or deviate from the material filed by advisory organizations. The life/health industry has no similar advisory organizations.

"Small companies that don't have enough market share to develop an adequate rate need an advisory organization," said Darla L. Lyon, director of South Dakota's Division of Insurance.

More than 600 insurers use AAIS services. "In an era of mergers and downsizings, many companies are choosing to outsource their product development work," said communications manager Joseph S. Harrington. AAIS added 55 new company affiliates in the fiscal year ended June 30, the most it has added in any year.

"Years ago, a company might associate with an advisory organization or statistical agent out of a sense of loyalty. The trend today is to evaluate services and costs rigorously; the selection is 'strictly business,'" Harrington said.

To enhance its appeal to insurers, AAIS provides automation support, training materials, product customization and personal service, Harrington said.

About 500 insurers report data to NAII, including State Farm and Allstate Insurance Co., the two largest auto and homeowners writers, based on net premiums written.

The standardized forms developed by ISO and its competitors are important to insurers that rely on independent agents to sell their products.

The Grange Insurance Cos., Columbus, Ohio, work with 1,000 independent agents, and standardized applications make it easier for those agents to write policies for several insurers, said Grange public relations manager Patrick Faherty. Using an agency management software system, the agents enter the policy application information for various insurers. That information is sorted and sent electronically to the insurance companies overnight. The insurers record the new applications and send the updated records back to the agents.

Growing Revenues

When it restructured in 1997, ISO vowed to increase revenues by $100 million--about 41%--by 2001, without reducing prices. Among other things, that meant keeping a close watch on costs. From 1988 to 1996, ISO's average annual compound expense growth was 0.2% per year.

ISO is on track to reach that revenue goal. Revenue in 1999 was $325.9 million, up nearly 34% from $243.8 million in 1996. ISO Chairman Fred R. Marcon takes that as an endorsement of the services and products ISO offers insurers. "If they could do it better or cheaper themselves, they would," said Marcon, who has been chairman since 1995. Marcon also was chief executive officer from 1988 until Frank J. Coyne became president and CEO July 1.

ISO has grown primarily by developing new customers and products. "Our customers are developing products for things that weren't considered insurable, such as earnings," Coyne said. "ISO is being a full-service provider and making sure we're developing products either internally or through acquisitions that fit our customers' changing needs."

International Expansion

International expansion of its services echoes an evolution occurring within the insurance market, said Coyne, who joined ISO last year from Kemper Insurance Cos., where he was executive vice president, specialty and risk management groups. "There is recognition as you do enterprise risk management that the center of that is information. If you don't have that, you can't do business."

Newly deregulated insurance markets around the world also add growth opportunities. "The new competitive environment in those countries almost forces insurers to share data so their pricing is right," Coyne said. "In a cartel, prices would be adjusted if they were not right. In a competitive system, if only one insurer gets the pricing right, they make money, and everybody else loses."

In January, the Israeli government awarded ISO a three-year, $5.45 million contract to establish and operate the country's insurance databank for personal and commercial automobile liability insurance. In March, Lloyd's contracted with ISO to use its underwriting and claims products and services in the United States. Individual underwriters at Lloyd's are using the ISOnet Web-based system, which provides real-time access to a host of ISO's information services.

Also this year, ISO created an auto-claims database to fight fraud in Venezuela, marking the first time insurers in that country agreed to share data.

"Instead of targeting geographic segments of the world for expansion, ISO looks for opportunities," Coyne said. "For example, in Israel and Venezuela, the circumstances were right. We had resources on the ground. In Venezuela, we were able within a few months to set up a claims database and have 60% of the insurers reporting to us," he said.

Acquisitions

Since converting to a for-profit organization, ISO has made eight significant acquisitions or alliances aimed at expanding or improving its services to insurers. "Part of ISO's success has been learning what we don't do well and then partnering with those who do," Marcon said. "We tried to be all things to all people. In a membership corporation you do that. Today, it is appropriate to partner so the best product is available at the best cost"

The 1997 acquisition of American Insurance Services Group was a turning point. "It is important to understand that the industry had tried for about 10 years to build an all-claims database but was never able to pull it off," Marcon said. After ISO bought AISG and its claims databases, the National Insurance Crime Bureau, also an advocacy group, agreed to migrate its data to ISO, too. "Within a matter of three weeks, we were able to establish a basis for an all-claims database," Marcon said.

Three deals this year were designed to strengthen what ISO has identified as key industry components--lead generation, underwriting and claim adjudication.

The June acquisition of IMR Corp. speaks to the lead generation initiative, Coyne said. IMR provides marketing information, consulting and strategic analyses to insurers, risk managers, brokers and large insurance agents.

Claim adjudication is provided by ISO's investment in clickNsettle Inc., a Web-enabled and in-person dispute-resolution service. Although there are other online claim-adjudication companies, the way clickNsettle handles the transactions and the fact that the company has brick and mortar behind the Web presence appealed to ISO, Coyne said. "This alliance provides ISO with a unique opportunity...to help insurers put a lid on large and growing indemnity and legal costs," he said.

ISO's alliance with Surety 2000 is the underwriting piece of the puzzle, and it provides fraud-prevention services. Surety 2000 provides paperless, electronic verification of the authenticity of surety bid and performance bonds through the Internet.

"It's all those pieces of the things we're focusing on that are all designed to enhance the industry's service offerings and fill the gaps," Coyne said. "ISO has always been known for its database and the strength of its database. The real strength of ISO is what we do with that database and the intellectual capital that's here."

Defending Rate Making

The impetus for the conversion to a for-profit corporation was an antitrust lawsuit filed in 1986 by 20 state attorneys general against 32 insurance-industry defendants including insurers, reinsurers, ISO and the Reinsurance Association of America. The lawsuit alleged antitrust violations in connection with the development of ISO's standardized commercial general liability policy.

According to the suit, local governments were victims of an alleged scheme by four large U.S. insurers, working through ISO, to dictate the terms of commercial general-liability policies. The suit also alleged an effort by foreign reinsurers, including Lloyd's syndicates, to eliminate certain types of pollution coverage.

"We knew the lawsuits were frivolous, politically motivated and totally without merit, but nevertheless we quickly reviewed all our operating procedures, and our corporate decision-making processes were reviewed by reputable, outside, antitrust counsel," Marcon said.

The opinion of counsel was that ISO was operating legally, but there was concern about perception, he said. "Decisions were made by competitors, so you had the perception of price fixing," Marcon said. "The members of the board of directors were all insurers, so you had the perception of a smoke-filled room."

In the settlement reached in 1994, the defendants agreed to pay $36 million, of which $26.2 million was to be used to create the Public Entity Risk Institute in 1996 and a national risk-management database to help local governments minimize their liability risks and negotiate with commercial insurers for favorable coverage and rates.

At that time, ISO was governed by a 21-member board that included 18 insurance company executives and three noninsurer directors. ISO agreed in the settlement to change to an 11-member board with seven noninsurers, three insurance executives and one management director, a position held by Marcon. As a result, competitors no longer control the organization. All decisions were put in the hands of ISO's noninsurer-controlled board or professional staff.

Before the suit was settled, ISO also made a fundamental change in the information it offered insurers. Instead of issuing gross advisory rates for lines of business based on the data provided by insurers, ISO began issuing prospective loss costs. The difference, Marcon said, is that individual insurers have to take action to arrive at a rate they will charge based on those figures.

The difference for insurers between gross advisory rates and prospective loss costs is similar to the difference between going to the corner deli for takeout food or going to the supermarket to buy the ingredients. Insurers could simply use the gross advisory rates "off the shelf." Now, with ISO's prospective loss costs, the insurer usually must apply a loss-cost multiplier that reflects the company's own expense and profit loading and contingencies to get to the price it needs to charge the consumer.

It was Kentucky that originally told ISO to switch from gross advisory rates to loss costs. "They mandated it in a time frame that was unreasonable and the resulting product was just plain lousy," Marcon said. The concept, however, was sound, so ISO made the change on a state-by-state basis in a more reasonable time frame, he said.

At the time of the antitrust settlement, there was sentiment within the industry for ISO to switch to a for-profit organization. But Marcon resisted. "I thought the industry was going to seize the opportunity to consolidate organizations similar to ISO into one for the property/casualty industry. I was wrong. I still believe that ultimately the industry will demand one source of information. Economics will drive that consolidation."

Focusing on Profits

Reorganizing as a for-profit meant rethinking the products to fit what the customer wanted. "When we made the change from the ISO gross advisory rate to ISO prospective loss costs, all of a sudden we got a rude awakening," Marcon said. "Large insurers needed something entirely different from small insurers. We started to tailor our products."

"As a nonprofit, you tend to look at your members as a cost center" Coyne said. "As a for-profit, they are your customers, and the focus is on servicing, satisfying the customer, adding value for the customer. The responsibility of a for-profit is to grow value. You are only going to do that by satisfying customers."

ISO is positioned to take advantage of the growing out-sourcing trend. For example, insurers that maintain a force of inspectors who go out and look at individual properties as part of the underwriting process may become interested in contracting for the services of ISO's contingent of 600 field representatives throughout the country, Marcon said.

The restructuring also required an emotional and intellectual change among employees. "Many of us who grew up in the bureaucracy had difficulty making that switch" Marcon said.

It was mandatory to get employees to buy into the concept that they were owners and needed to make decisions based on their stake in the company's performance.

"What has to happen is you have to change the mentality, so I believe I own part of this baby," Marcon said.

But, it also means making some decisions that aren't based solely on cost and revenue potential--for example, continuing to provide printed products for insurers that don't have the technology to receive them online.

"To cut out paper for the small guy would probably be a good economic decision, but a bad business decision," Marcon said. "We're in business to foster competition for all."

ISO At a Glance

Insurance Services Office Inc.

Headquarters: New York City 

Chairman: Fred R. Marcon

President and Chief Executive Officer: Frank J. Coyne

Employees: 2,200

Primary business: Provides rate-making information, policy forms and statistical services to property/casualty insurers.