Border crossing: technology may help insurers use the expansion of the European Union to their advantage.

Information technology and insurance go together. The effective use of IT can enable an underwriter to manage risk, respond to change, extract maximum value from data and cement relationships with intermediaries and customers.

Technology will be a key weapon for European insurers as they jostle for space in a complex and evolving market. The expansion of the European Union on May 1 from 15 members to 25 has offered long-term potential to those insurers who can combine product development with geographical reach. The euro, the EU's single currency, is in use in 12 of the member countries. This number will rise over the coming years as new members meet the economic criteria for its adoption.

Life insurers already are focusing on the opportunities that are likely to flow from efforts to create a cross-border pension within the EU. The pensions market also will be boosted by the cuts in public spending that a number of European countries have introduced in order to reduce budget deficits.

The advantages of technology tend to grow as companies get deeper into it. These organizations will find that they can develop products faster, create smoother flows of information within their organizations, and make their employees more efficient. IT also aids in the development of call centers, which have become important to the operations of insurers in recent years. And, by permitting underwriters to tie directly into the computer systems of intermediaries, technology fosters the sale of mass products, such as travel insurance. AIG Europe, for instance, has been able to increase its travel insurance business through an online link with travel-oriented Web sites and call centers. Through the system, the insurer can provide both immediate quotes and tailored products.

Technology has a definite role in training. The British Insurance Brokers Association reported in March that more than 2,700 brokers had successfully undergone risk management-oriented online training in preparation for the onset of nonlife regulation by the Financial Services Authority in January 2005.

The ability of the insurance industry to extract value from technology will be affected by cultural attitudes. Northern Europe, by general agreement, is much more wired than the south. Scandinavia, with its long distances and bleak wintertime landscape, has long been receptive to advances in communications technology. Sweden and Finland have become centers of mobile telephone technology, which, because of its ability to create a common standard, helped put Europe years ahead of the United States.

With the exception of cell phones, there is a strong feeling on this side of the Atlantic in Europe that countries always will trail the United States in the use of technology. Europe, it is often said, is too cautious, too diverse and too regulated to grasp fully the advantages offered by the information technology revolution. European countries tend to have strong employment laws, supported by social custom, that make it difficult to carry out the kind of restructuring that is likely to accompany a major move into IT. By contrast, U.S. companies are regarded as freer, and more willing, to slash payrolls and reshape themselves to meet changing market needs.

Marketing Challenges

The deep differences among European countries can negate some of the distribution advantages that technology creates. The encouragement that the adoption of the euro might appear to give to online, cross-border shopping, for instance, can be offset by the intense national loyalties of insurance consumers. Customers, it seems, will continue to buy from names they know. For this reason, the European insurance giants tend to retain local brands alter they acquire them. Also, linguistic and cultural differences effectively rule out cross-border marketing campaigns. An advertisement that works in the United Kingdom will, even after translation, have little relevance in Greece.

Europe's strong tradition of data protection can make it difficult for companies to disseminate personal information on their customers within their organizations. This can crimp cross-selling. The determination to safeguard privacy is especially pronounced in Scandinavia and Germany. There is a strong historical memory in Germany of the abuse of personal information by the Nazi regime.

IT spending can be affected by the state of the underwriting cycle and by the rate of consolidation among both underwriters and brokers. A soft market may, for instance, push organizations toward IT investments that promise to generate substantial cost savings. A merger may be followed by the scrapping and replacement of the IT system of the acquired entity. Peter Staddon, head of technical services for the British Insurance Brokers Association, said the heavy rate of consolidation within the U.K. underwriting sector of recent years has led to problems of digestion. One large underwriter, for instance, might be left with a number of systems. Eventually, Staddon said, these IT operations will be rationalized.

Consolidation across the financial services industry is blurring the lines that once separated its various sectors. As banks and insurers come tinder the same corporate umbrella, they are likely to upgrade and integrate their IT systems in order to cross-sell more effectively.

Decentralized Approach

Munich-based Allianz AG is well positioned to assess the unfolding IT picture in the European insurance market. Allianz, which has operations in a number of European countries, takes a decentralized approach to technology, according to Munich-based spokeswoman Gesa Walter. This strategy, Walter said, reflects the local nature of the insurance business. "So the IT decisions we have in the group," she said, "must be very different and are different."

Walter said that Allianz's Italian operation has successfully developed online insurance sales. But online business is not a serious factor in Germany, where Allianz has a large sales force and a customer base that is reluctant to buy complicated products electronically. German customers, Walter noted, ;Ire willing to use the Internet to buy travel insurance, which is both inexpensive and relatively simple in its structure. And these customers will use the Web to gather information and to carry out simple administrative tasks such as notifying the insurer of address changes. "Buying online is difficult," Walter said, "because for a lot of products you need advice, and they are very complex."

Allianz systematically draws on local experience, tapping into the knowledge of chief information officers in the various territories in which it operates. "We try to achieve synergies," Walter said. "If one model works very well in France, why not use it in Italy or Germany it" it fits the process? But in general for the insurance business, we need local solutions."

Connecting Producers

U.K. life insurer Legal & General Assurance Society Ltd. is deeply committed to IT, according to Margaret Smith, director of business information systems. Smith said that L&G's IT people are firmly within the culture of the organization, seeing themselves as Legal & General people first and IT specialists second. Smith said that L&G's IT committee looks closely at possible strategies and helps set priorities. "It can't just be technical," Smith said. "It has to be totally based on business."

L&G launched its Web site in 1995 and encouraged intermediaries at an early stage to get onto the Web. "The main reason we have stressed our business-to-business with the intermediaries." Smith said, "is that our products are not that easy to understand." She expects this to change--but only gradually. Over the next four years or so, Smith predicts that customers will develop a taste for doing business via interactive television, which she regards as friendlier than the personal computer.

IT, Smith said, is integral to L&G's "multieverything" profile: multidistribution, multiproduct and multitied. Not only must the company respond to changes on each of these fronts, she said, but it must be aware of threats from viruses and worms and the efforts of criminals to steal identities and launder money. One of Smith's roles, she said, is "making sure that we don't add to the spaghetti. We actually keep things as simple as we can."

Smith said that L&G is committed to straight-through processing. "Most people seem to be in the value chain at the sales end," she said. "We are actually pushing it right the way back to our back office as well."

Smith regards regulation as both a major challenge and a major opportunity for the financial services sector. She said that the consultation process that accompanies proposed regulatory changes can steer firms into very fruitful impact analyses. This can guide the creation of new products. IT, Smith adds, is key to this process. "I think it's really important the information technology isn't just added on the end," Smith said. "Information technology has a part to play in how we respond to regulation."

Smith points to L&G's work in pension simplification in the United Kingdom. This, she said, fits in with the government's effort to encourage people to do more to provide for their old age. L&G, she said, has been examining the performance of pension products that are already on the market. "We look [at a product] and say, 'What could we do to make this good for the consumer, good for us and easier to do than when you first look at it?'"

Precise Calculations

Bob Conlin, vice president for sales and marketing at Bedford, Mass.-based technology supplier Centive Inc., believes that the European insurance industry presents a strong potential market for Centive's enterprise incentive management system. Conlin said that EIM systems can save money tar underwriters by eliminating payment errors to brokers. When brokers complain of underpayment, Conlin explained, the response of many underwriters is simply to pay the amount sought rather than risk losing future business. He said that the system also would be effective against overpayments made through error. All told, Conlin said, overpayments can run as high as 3% to 8% of total commissions. With a commission payout of $100 million a year, he said, "that's $3 million to $8 million falling right off the bottom line."

Conlin said the system can calculate commissions accurately and ensure that they will be paid on time and even consolidated into one check. This improved service, Conlin said, should appeal to brokers. "From the broker's standpoint," he asked, "whose product is he going to sell more of?"

EIM, Conlin said, is the last great cost center in an organization to be automated. He said that it can accommodate credit hierarchies and manage multiple currencies. Centive's prices range upward from around $500,000, with the largest insurers spending around $2 million. Conlin said that the system will allow insurers to offer special promotional incentive funds, changing commission rates to adjust to market conditions and improving the "alignment between the sales and allied departments. "What EIM does for the sales side of the house," Conlin said, "is provide a very flexible platform quickly."

Low Adoption Rate

The British Insurance Brokers Association has been working to encourage its members to make the most of information technology. Not least among its reasons, said Staddon, is the desire of the Financial Services Authority that brokers be able to communicate electronically with it when they come under regulation. Staddon believes that some small commercial brokers are still operating by fax or mail. "So they may not be as e-enabled as they ought to be," he said.

Staddon said that a certain wariness about technology is demonstrated by the nature of the responses that BIBA gets to its electronic mailings to members. When BIBA adds a fax-back response form with the emails, he said, the response rate is likely to triple. To Staddon, this suggests that many of the brokers have not fully mastered electronic back-and-forth. His message to the membership: "Hey, guys, it's technology, but it's not frightening."

BIBA is active on a number of technology fronts. It is working to arrange broadband connection for its members at 40% of the cost price. It is also looking for a way to make it easier for brokers to hire equipment. BIBA, Staddon said, also is talking to brokers about using client money in their care in a secure, interest-bearing bank account that would finance IT purchases.

Staddon said that the U.K. government has encouraged businesses to make greater use of information technology, "but government doesn't seem to be at the top of the tree when using technology themselves." He pointed to the apparent inability of the government to use motor vehicle registration records to track uninsured drivers. Nor is Staddon impressed by the efforts of the European Union to promote electronic commerce. "We all know about EU directives," he said, "Thought up by the French, written by the Germans and implemented by the English."

Information technology has proven its worth to the insurance industry on both sides of the Atlantic. IT has shown that it can help organizations create broad-based strategies and make the most of their customer bases and intermediary networks. How technology develops further within the European insurance market will depend largely on how Europe itself develops.

Key Points

* Technological advances can help insurers combine product development with geographical reach.

* Opportunities are likely to flow from efforts to create a cross-border pension within the EU.

* Linguistic and cultural differences effectively rule out cross-border marketing campaigns.

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Allianz AG

A.M. Best Company # 85014

Distribution: tied-agents

Legal & General Assurance Society Ltd.

A.M. Best Company # 84279

Distribution: Multidistribution, including

independent agents

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