At your service: With new technology costing millions of dollars, insurers are turning to application service providers. (Technology).

With technology investment costing insurers 4% to 8% of their annual budgets, application service providers can be a cost-effective alternative to expensive technology systems. Application service providers are third-party vendors that provide remote application outsourcing via the Internet. Typically, the software automates such business processes as accounting, customer-service relations and benefits. "ASPs are insurance policies for insurers to shift out the risk," said William Pieroni, general manager of global insurance for IBM.

Because application service providers are just beginning to break into the insurance industry, they still have to surmount a considerable learning curve to understand how the business is structured. Application service providers have to learn that insurers have many distribution channels- selling via the work site, direct distribution and through agents, Pieroni said. "It's not a case of you've seen one, you've seen them all," he said.

Insurers are conservative by nature and make consensus-driven decisions. "You have to have the buy-in of key executives to convince top management. Insurance management isn't draconian, but consensus driven, so trying to implement an ASP strategy can be a challenge," Pieroni said.

Also, the weakened U.S. economy and the backlash from dot-coin failures put a wet blanket around the ASP concept last year, said Michael Adler, partner and Americas insurance leader for PwC Consulting. ASP analyst Phil Wainewright from ASPnews.com agrees. Wainewright points to the recent Chapter 11 filing by USInternet-working, the first application service provider to be listed on the Nasdaq, and he questions whether 2002 will be the year that online providers resurge or whether it will be a "period of terminal decline for a discredited fad."

A recent study commissioned by the ASP Industry Consortium shows that this method of delivering software programs via the Internet is just beginning to make inroads into the business community. The study polled almost 2,000 international business people, with 8% responding that they are currently using an application sold by an application service provider. More than 23% said they would likely purchase an application from an application service provider, while 69.5% said they were familiar with the term. With accounting and customer relationship management as some of the more popular applications outsourced, the survey attributed the lagging adoption rate of application service providers to lack of familiarity with the concept and concerns about security and ability to provide service.

It's not surprising that the industry hasn't jumped on the application service provider bandwagon, said Pieroni. "There's not a tremendous advantage in this case to be the first mover. Wait and see, and let the market harden; other companies put themselves in jeopardy by jumping in," Pieroni said.

But Adler admits that forces in the market still justify the need for application service providers, especially for midsize insurers who want to outsource back-office duties. Lynn Lawless, a partner in the financial-services division of PwC Consulting, warns those who use an application service provider not to hand off the value chain of the organization to a third party without keeping a watchful eye. "Don't think that you can ignore that area of business. That's a formula for disaster. The ASP model is not designed to offload management responsibility," Lawless said.

Technology consultants with the Gartner Group expect robust growth for application service providers, estimating that their use will produce a $25 billion market by 2004. Many trends are propelling the switch to outsourcing. Infrastructure processes like accounting, billing and customer service drain financial and human resources away from the core part of the business. The Gartner Group predicts that in light of the recovering economy in 2002, many businesses will outsource noncore business areas such as accounting, benefits and technology.

Finding the Fit

Application service providers address both the broader insurance-centric needs, such as claims handling and agent issues, and the niche areas that provide specific business propositions.

One such niche player is Cerberian Inc., which provides the road rules for employees' use of the Internet and management and reporting tools for employers. Tagging the Internet as the biggest on-the-job time waster since the coffee break, Gerberian offers insurers, agents and brokers an Internet-monitoring and filtering application service. Gerberian Vice President Greg Heaps said his service helps insurers achieve higher productivity by bringing focus to the on-the-job Internet surfing with blocking and monitoring. Cerberian also helps insurance companies by minimizing liability within corporate organizations due to potential surfing of offensive sites such as hate, violence and pornography. Cerberian's hardware sits on or next to a client's fire wall and monitors use of the Internet. Clients go to Cerberian's Web site for reports that track Internet usage by their employees.

Full-service application providers like Agilera offer a larger spectrum of services, including risk mitigation, human resources management, continuous disaster recovery and accounting. Agilera hosts a Lawson human resources financial software site for Kemper Insurance, the 20th-largest property/casualty insurer. The Web site, accessed through the Internet, contains Kemper's accounts payable and receivable, in addition to benefits management.

Because insurance underwriters are assuming risk for their clients, they must ensure that critical data survives any type of disaster. Agilera also provides continuous recovery systems for insurers and other types of business, so enterprise-level software and data are duplicated offsite, and a redundant business environment can resume immediately after a business disruption. Greg Benton, director of business development of Agilera, said a client's data, representing numerous terabytes, is housed offsite in a 20,000-square-foot facility able to withstand 110 mph winds.

Test Drive

Application service providers also can help insurers achieve long-term business objectives quickly by plugging into existing high-end technology systems. For example, most auto insurers don't have the depth of technology of, say, Progressive, but they want to streamline claims management or sharpen communications with agents without spending 12 to 24 months to develop the application in-house. "To build a new application might take millions of dollars, and most companies don't have the financial resources or bandwidth to do that," said Steve Ramirez, senior director of marketing planning for Mitchell International, another application service provider.

Auto insurers have many business challenges, such as reducing administration costs, facing rising severity trends and getting access to real-time claims reporting information. A few of the largest property/casualty insurers have invested huge amounts in technology infrastructure to accomplish the same objective. In 2000, Farmers Insurance Group, the third-largest property/casualty insurer, invested $100 million in its major claims initiative Operation Restore, which tracks a claim for Farmers captive agents from end to end.

Mitchell offers insurers an "end-to-end" solution for auto claims via the Internet. Upon subscribing to Mitchell's application service provider model, insurers are electronically connected to their staff and business partners, giving them faster communication and real-time claims-review and management capabilities. This includes the ability to electronically dispatch assignments and receive estimates and digital photos of the damaged auto as well as to electronically audit and review claims and conduct detailed analysis through online reporting tools. Ramirez said using his company's ASP model can reduce loss ratios by streamlining staff and field productivity and reducing cycle time of a claim by three days or more in areas such as time needed for rental-car use. Loss ratios for auto physical damage have been rising steadily, according to A.M. Best Co. data. In 2000, the average adjusted loss ratio for auto physical damage was 68.4, up from 65.5 in 1998.

One of Mitchell's top-10 insurer clients saw staff productivity rise 25%, enabling the same volume of claims to be handled by fewer staff appraisers by using the application service provider's wireless capabilities to send and receive assignments from the claim office. This increased staff productivity, Ramirez said, because communications take place using cellular technology, allowing the appraiser to transmit complete claim folders while traveling between locations. This enables the staff appraisers to complete one or more additional appraisals per day.

Middle-market insurers also want to automate routine call-center communications to increase productivity, while increasing customer-retention rates, said Ben Levitan, president and chief executive officer of ASP EnvoyWorldWide. "We're in the real-time notification business," Levitan said. Using the ASP's EnvoyXpress service, companies can create a message; distribute it to customers via fax, e-mail or phone; track delivery; and drive the next action in the communications work flow. By automating call centers for routine missed-payment calls, customer-service representatives are free to handle more complex incoming or outgoing calls.

Electric Insurance Co., a direct writer of private-passenger auto and homeowners insurance, turned to EnvoyWorldWide to automate portions of its call-center communications. Because we have a limited amount of resources available to manually contact customers, we were only able to touch a fraction of the customers that we needed to each month. With the use of EnvoyXpress, we have been able to communicate with five times as many customers, greatly reducing the number of canceled policies due to customer nonpayment of premium," said Jack Schumaker, customer service manager for Electric Insurance.

Agents and Brokers

Independent insurance agents, as well as brokers, face a continuous struggle maintaining and keeping up with new technology systems. Some ASP solutions can deliver sophisticated Internet-based front-office Web solutions with strongman Charles Atlas-like results in 120 days.

Rod Vaughn, who owns an agency in Tallahassee, Fla., has been an independent agent for 23 years. Working with a national organization of independent agencies, Strategic Insurance Agency Alliance, Vaughn recruits small independent agencies to form regional networks. Technology issues are among the major problems these smaller agencies face, Vaughn said. The most common complaint he hears is, "How do I deal with this monster called automation that took over our business?"

Using the Ebix ASP product for front-office agent business, these small agencies with six to eight staff members have access to the client's entire file electronically on one screen. They also can do their accounting and bookkeeping in a virtual office, becoming an almost paperless business environment.

Vaughn sees growth potential for application service providers in the independent agent channel in the next three to five years, as agents are struggling with old software systems and facing the decision whether to make costly upgrades. As agencies like Niceville Insurance Agency Inc., Niceville, Fla., and Beach & Associates in Tallahassee, Fla., use Ebix ASP, they also are able to do business in a client's office or hotel room using Internet access. "ASPs are too practical for independent agents not to go that route," Vaughn said.

CorrectNet's ASP model is beneficial to both insurers and the independent agents. According to President and CEO Robert Miller, CorrectNet enables insurers to grow potential sales and create loyalty from independent agents to the home office, by enabling the insurer to deliver Web-based solutions that help the agent get and retain customers.

CorrectNet can roll out a customized agency program to hundreds of agents in 90 to 120 days. The ASP model, as implemented by CorrectNet, is an alternative to life insurers' investing hundreds of thousands to millions of dollars to provide such a program to their independent agents. Instead, the insurer pays a limited "get-started fee," and each agent receives the service for a low-cost monthly fee. In one example, 350 agents are using CorrectNet's LeapLink program that delivers content, prospecting tools, online meeting functionality, event calendars and customer testimonials.

Inhabitants of the competitive world of insurance brokerages are always looking for an edge. So when clients ask them to assume benefits administration, brokers don't want to walk away from the added business, but they might not have the technological infrastructure to assume the tasks. BenefitAmerica, owned by UnumProvident, provides a benefits administration and enrollment ASP model for brokers and third-party administrators. "Brokers are looking for solutions so they can increase the number of products they offer and increase revenue without adding staff," said Sidney Simon, director of product management for BenefitAmerica.

Brokers only need an Internet browser to log on to the BenefitAmerica site and access their customer information to analyze enrollment patterns and statistics, review premium accounting and conduct marketing surveys to discover the potential for new products. Through the employer's Internet connection, employees can access the BenefitAmerica site to enroll or report a life event and make benefit changes.

"Managing benefits isn't the main part of a broker's business. Developing the software to do it would be an added cost," Simon said. "When they use our IT resources, they can focus on their main business objectives instead of ancillary business."

Claims Handling

Successful businesses can outgrow hard-drive space and building space. That's why Mississippi workers' compensation insurer and third-party administrator AmFed turned to an application service provider for help. Faced with shrinking server memory and crowded working conditions, Cherry Roberts, director of utilization and managed-care services, contracted with HNC Software Inc. three years ago to alleviate her business problems. HNC provided a product that houses all the data necessary to AmFed for bill repricing and reviews and prices medical bills according to usual and customary pricing, fee schedules for a particular jurisdiction and applicable preferred-provider organization discounts.

"Using HNC provided us with significant opportunities, as far as using resources. It helped with our server space and to recruit staff to work from home, so we don't have a desk-space problem anymore," Roberts said.

As a workers' comp insurer, AmFed's information-technology department faced a constant job of upgrading programs for changes in state regulations or pharmacy databases. "We were relieved to give up the upgrade. There is a constant change in regulations from the state. Now HNC gets the disk, and everything is loaded offsite. We're delighted by it," Roberts said.

Health insurers process some 6 billion claims annually, with 10% falling into the appeal bucket. Insurers kick back claims for a variety of reasons, and providers such as physicians and hospitals handle most appeals manually, using personnel to correct and resubmit the rejected claims.

When Dr. William Kirsh, president and CEO of eAppealSolutions, was CEO of Foundation Health Plan of Florida, he was frustrated by rising administration costs, including claims-appeal processing, which averaged 50 cents per member per month, putting a drain on profits. Not finding an answer to his problem, he created eAppealSolutions.

"Through eAppealSolutions, healthcare providers are filing appeals online in minutes, providers are collecting more money on their accounts receivable and insurance companies are reducing administrative costs and providing better customer service by processing appeals more efficiently," Kirsh said.

The software, provided through an Internet Web site, automatically converts a user's previously entered claim into an electronic format and files an appeal with the click of a mouse, applying state and federal rules to each appeal.

The cost for the service is borne by the provider, and insurers receive the information free of charge. Kirsh contends that the value of his system is measured financially. Currently, insurers spend $12 to $14 to handle an appeal; with eAppeal, it's cut to $4.95.

PwC Consulting's Adler predicts some more movement by insurers to application service providers in the next year or so, "but not a gold-rush situation." The ability of application service providers to differentiate themselves in the marketplace is their biggest challenge, said PwC's Lawless. "They have to say how they are different and offer a value proposition," she said. "Until they do, there won't be a lot of activity."