A new way of thinking: online technology is not just for administrative tasks anymore. Insurers are now beginning to use it for more complicated parts of their businesses. (Information Management: Industry Strategies).

Medical interviews have long been a tedious part of the life insurance underwriting process, but Beneficial Life Insurance Co. has found a way to expedite the process, relieve agents of the interviewing responsibility and remove redundancy in data entry--all through a Web-based tele-underwriting system. And the company estimates the new system saves about $25 per interview, or about $15,000 a month.

Beneficial's system is part of a new level of technology among insurers. Using Web-based technology to automate administrative tasks has been routine procedure for many insurers. Now, some are taking the next step by applying technology to the cognitive parts of their businesses--the underwriting of complex risks, better and faster management of claims, and the making of strategic decisions that determine a company's future viability.

For the industry, it is a new and bold direction with its own set of cost/benefit risks. It runs counter to criticism that the industry is slow to adopt technology.

"You could say insurance companies are behind the times because of their risk-averse nature," said Jamie Bisker, director of research for the insurance practice of the Tower Group. "But the reality is they're not dumb or slow, but rather can't proceed as quickly as they'd like." The Tower Group is a research and advisory firm based in Needham, Mass.

Contrary to common belief, insurers are aware of every piece of technology that comes along, Bisker said. The sheer complexity and variety of their businesses, however, may serve to discourage insurers from making wholesale technological changes. Instead, they implement the most advanced technologies for "pinpoint uses," such as personal lines within a single state, Bisker said. "Technology creeps its way into carriers, an evidence of their pragmatism," he said. He estimates that 62% of carriers use technology for underwriting at least one line of business, particularly personal lines, auto and term life.

While use of technology so far has improved efficiency, Bisker says the newer cognitive uses are a "generational change." They employ artificial intelligence, including case-based reasoning, customized underwriting, fraud recognition and better claims services.

Electronic Thinking

According to Bisker, case-based reasoning draws upon data to determine whether a new case is similar enough to others on the books so that it can be underwritten the same way. This type of artificial intelligence makes decisions automatically--a good use in jet-underwriting systems, for example--and frees up underwriters for more difficult cases. In novel cases, underwriters report the data so that it can form a new category and be leveraged later. Bisker said case-based reasoning also eliminates human inconsistency in judgment and human errors when case information has to be manually recorded more than one time.

Customized underwriting allows development of coverage based on the circumstances of an individual. Before artificial intelligence, such personal underwriting would have taken too long, but Bisker said it can tie a client to an insurer for a lifetime. Members of Generations X and Y, who are younger people, may expect this personalized level of service, he said.

This level of customization can also be applied to fraud recognition and meeting the requirements of the USA PATRIOT Act, a terrorism-fighting law that requires insurers and other financial-services providers to alert the federal government of possible money-laundering activities.

Any of the artificial-intelligence programs can also generate better capabilities in adjudicating and servicing claims, resulting in more accuracy and speed, lower costs, and better customer retention. These programs can be accessed by agents, body shops, rental-car owners and claims adjusters. The programs can assign cases to adjusters who are free, for example, and direct jobs to body shops adept at repairing certain types of vehicles.

Adoption of technology for cognitive parts of business is "spotty" industrywide, said Bisker. Leading the way are such large companies as the Hartford Financial Services Group, Progressive Corp., Fireman's Fund, Nationwide Insurance Enterprise and USAA Group, according to Bisker. But others have also taken the leap, including some newer and/or smaller insurers.

Total Make Over

General Fire & Casualty Company is one of the latter. Based in Boise, Idaho, it covers agribusiness operations, including food producers, packers, growers, livestock operations, beef and dairy in 20 states through about 120 contracted insurance agencies. Its contract sizes range from $5,000 to $1 million in premiums with an average of about $45,000.

A newer company (formed in 1979 and redomesticated from Nebraska in 2000), it took the rare path of completely remaking its prior information systems: A subsidiary did the work in 45 days from November 2001 to January 2002. The system, gNet, handles rating, issuance, claims, a loss-control system, invoicing and an external Web site as an information tool for outside entities. GNet runs entirely on a Microsoft platform and has unlimited growth potential.

President and Chief Executive Officer Dan Crandall said that with the exception of some documents that arrive by fax, all information works from the same database in real time. Any authorized person with the necessary equipment can access the system through the Internet. The system not only expedites underwriting and claims, but Crandall said management can operate on live data. "It's the difference between driving the Exxon Valdez and a cigar boat," he said.

The system has been "phenomenal" for the growth of business, Crandall said, with the speed of policy issuance a big plus. General Fire & Casualty usually issues a policy within 14 days as opposed to 90 to 120 days by competitors. GNet also helps the company settle claims quickly, increase its cash flow and retain clients. "We not only retain our accounts, but have a very high profile in the industry that would normally take a carrier a decade to build," he said.

To overcome user resistance to change, the company designed gNet to have the same look and feel of the previous applications and then phased in the sophisticated pieces of the system.

More Time for Sales

Beneficial Life, another small insurer, uses its Web-based tele-underwriting system to consolidate tasks previously performed by several people. Based in Salt Lake City, the company writes individual whole life, universal life and term life insurance.

To summarize, the system gives underwriters the responsibility of interviewing life insurance applicants by phone, usually within four hours of when agents request the interview. These underwriters use a Web-based application accessed through the company's intranet portal. The system replicates the interview information and makes it immediately available to all underwriters and new-business representatives. Brent Burgon, director of application services, said the company chose the system design because it could be easily and quickly deployed and would provide a good return on investment.

The system improves the quality of underwriting by obtaining information that is consistent, thorough, and unaffected by interest agents may have in issuance of the policy, said Sylvia Pacheco, manager of benefits and underwriting. "We phased it in beginning in November 2001, and the producers have bought into it," she said. "Most of them were delighted by it. They'd rather be out making sales and providing financial services than gathering medical information."

Beneficial has about 600 to 700 active producers, both contracted and independent agents, Pacheco said.

Getting to Know Customers

Nationwide has developed a project it calls Electronic Business Intelligence to support its Customer Choice strategy, which is to offer access to products and services through any means and at any time customers choose. The company's Web site and intranet play major roles in this endeavor.

EBI integrates Web data with other customer data and analyzes how each visitor uses the site so that the site can be fine-tuned based on visitor behavior. As a result of improvements, quote requests, claims reporting and bill paying surpassed expectations by 50% in 2001, and Nationwide reported a 400% increase in transactions for 2002.

In a way, EBI is the mirror image of using technology to increase knowledge. In some respects, it is using knowledge to improve the technology. "It's a little of both," said Susan McManus, director of marketing and usability. "We can use the technology to understand our customers better." But a future phase will be using the technology to improve underwriting and claims, she added.

An example of what Nationwide is learning from EBI is the identities of people browsing its Web site for auto-insurance quotes. The company provides hundreds of thousands of quotes each year on the Web site, but binds only a small fraction there, with most of the business secured through traditional channels.

Since it incorporates policy information from agents and call centers, EBI can identify the anonymous Web browsers by matching vehicle information and the person's gender, birth date and ZIP code. "We're able to deduce that odds are this is the same person," said McManus. "We are able to see and track how many times existing customers are coming and what their demographic characteristics are. Not surprisingly, those using the Internet are younger, pay higher average premiums and have more policies with us." Such information helps Nationwide understand the power and value of its Internet presence.

Nationwide uses the information to design Web site content and functionality. McManus said Nationwide has made a "huge investment" in its information technology systems, and it has expenses that didn't exist five years ago, "but we believe it's a must-have for customer service, and it will be more cost efficient in the long run." Like most companies five years ago, "we were stuck in very product-centered, siloed channels," she added. "It was difficult to know how many policies a customer had. Now we're collecting millions of events every day. The challenge is boiling that down to something meaningful and coming up with golden nuggets of opportunity."

Bisker of Tower Group said his clients have time frames of nine months to five years for recouping the costs of new technology, but typically expect systems to pay for themselves in 18 to 24 months. He said larger companies tend to have the money to pay for them, "but technology can level the playing field for smaller carriers if they are willing to make the investment." Basic systems can cost less than $500,000, and it takes expertise to build and maintain them, he said. One of the advantages of case-based systems, however, is that system owners "can literally learn on the fly" in that the addition of exceptions to the knowledge base creates new cases.

In addition to costs, companies need to consider resistance by users, particularly if they are third parties such as independent agents or brokers. Bisker suggested that in those cases, insurers might want to provide software for free, multiyear contracts, and guarantees of some additional business so that the third parties might expect a positive return on any investments they might have to make, such as high-speed cable lines. A general rule is that producers tend to do business with carriers easiest to do business with, said Bisker.

Cynthia Saccocia, a senior analyst at Tower Group, said another good rule in making technology decisions is to be sure the technology solves the problems of users. "Companies sometimes drive the tech to users rather than bringing the tech to them by illustrating the improvements it might bring to one's work and activities," she said. "It's a matter of presenting a new way of doing business vs. solving their problems." Some third parties don't even recognize they have problems, she added.

RELATED ARTICLE: Unfathomable Risks Drive Insurers to Third Parties

If insurers believe they can improve their return on equity for the company, they may be more likely to create their own software technology for underwriting or claims management. But when they face a specific problem, such as terrorism, they are more likely to reach out to third-party expertise.

"It's harder to project a return-on-investment on catastrophe management because it's designed to keep you in business, to maintain your solvency and portfolio," said Peter Ulrich, a managing director at Risk Management Solutions, from his Newark, Calif., office. "Other projects can be discretionary, but catastrophe management is really a necessity."

In September, Ulrich's firm launched a U.S. Terrorism Risk software product based on an application of Game Theory, an approach that suggests the likelihood and targets of an al Qaeda attack can be modeled by understanding the operational and behavioral characteristics of the terrorist organization. Underwriting terrorism insurance became more of a concern with Congress' passage of a law in December providing a federal backstop to terrorism losses but requiring every insurer to offer terrorism coverage. Until passage of the law, many insurers simply avoided taking on the risk.

Big insurers may try to understand and underwrite the risk themselves, said Ulrich, but most insurers will go to a third party because of the needed level of expertise. "Terrorism risk is a brand-new issue, and there's a certain amount of skepticism about whether it can be modeled," said Ulrich. "For those who think it can't be, they'll go about it themselves, but a growing number will see models are out there backed by a significant amount of science. My team has access to the world's leading experts on terrorists."

Ulrich said insurers' ability to use their own data improved rapidly after the terrorism attack in September 2001. "Sept. 11 was a huge eye-opener in that it revealed a correlation of potential losses across lines of business that people never before thought had correlated," he said, citing the link between property insurance and workers' compensation. "Clients may have 20 different systems and no ability for them to talk to each other. Sept. 11 got the attention of chief executive officers to pull multiline data together, and some companies are more nimble than others."

Gordon Woo, the Ph.D. mathematician who was the architect of the RMS model, has predicted al Qaeda activity will seek the path of least resistance in a way similar to the flow of water. But it will also try to stage spectacular land, sea and air attacks, especially against symbolic or high-profile targets, according to Rohan Gunaratna, a Ph.D. research fellow at the University of St. Andrews Centre for the Study of Terrorism and Political Violence, author of "Inside Al Qaeda," and a key adviser to the RMS development effort.

RMS has worked for more than 10 years with the insurance industry in underwriting both man-made and natural catastrophe risks. It employs about 350 people. Ulrich declined to disclose revenues, but the private company is the largest catastrophe modeling firm and has a more than 50% marketing share, he said. Major competitors are EQE International and AIR Worldwide Corp.

ERC: Digitizing the Claims Process Worldwide

GE Employers Reinsurance Corp.'s claims processing has come a long way in just three years, thanks to a project to digitize its 100% paper-based system.

As recently as two years ago, ERC's claims arrived by mail. File clerks sorted them on shelves. Once forwarded, they often went to the wrong handier and had to be rerouted.

Today, ERC's Global Claims Induction system is 100% electronic using digital imaging technology and it initiates workflow tasks without human intervention. The system automatically triages and dispatches claims documents to appropriate adjudicators around the world. Once the adjusters review the digital document, the system feeds the information to ERC's payment system, which issues the checks. From start to finish, the adjudication process often takes hours. Previously, it took days or weeks.

About 40 to 50 people spent about 18 months building and phasing in the system at a cost of about $3 million. Some 400 people worldwide file claims onto the system. ERC still accepts faxes, mail and even phone calls, but immediately turns them into digital images for processing.

About half of ERC's business is property/casualty reinsurance. A quarter is life/health reinsurance, and the rest is commercial lines direct, including medical malpractice and stop-loss.

GE's famed Six Sigma process played a critical role in development of the Global Claims Induction system, said Keith Myers, ERC's global-operations process owner for induction. "[Six Sigma] blackbelts who are process engineers helped improve and standardize our operations before we even began to build," he said. "Otherwise, we'd be automating a bad process." ERC has 23 new projects under way to improve the digitized system, he said.

Since the system rollout in May 2001, ERC is on track for realizing more than $40 million in cost savings over the first; five years, said Andrea Pearson, global claims leader. The elimination of paper records alone allowed ERC to get rid of 20,000 square feet of filing space in the United States. "But we didn't do this just to save money," she said. "Once we got the system in place, our whole strategy changed."

One way it has changed is hiring of experts. With telecommuting now common, ERC is no longer constrained in hiring based on where people want to live and work. The other main way is customer service, which is the main consideration in Six Sigma process improvement. The company now knows where a claim is and who has it. Myers said that kind of information also provides a kind of "analytics powerhouse theory," which is what Six Sigma is all about: The system can quickly assess employee workloads and allow redistribution to keep the claims process running smoothly. ERC processes from 750,000 to 1 million claims a year.

With so much information captured and stored centrally, Myers is enthusiastic about prospects for applying that data to the front-end parts of the business, underwriting and quoting. "We're already starting to do this in our facultative business," he said. "We're much more aware of claims now before contracts go into renewal periods."

As in other GE businesses, ERC employs "digital cockpits," technological dashboards that monitor progress in real time to better control processes and ensure that customers' expectations are being met. Pearson said the cockpits help ERC to constantly track claims flow, pricing, operating margins and other measurements.

"The bang for our buck is to do a better job for our customers," she said. "It's easy to be internally focused, but this is a huge win for our customers."