From Inkwells to the Internet.

Technology has reshaped the insurance industry in the past 100 years. It will continue to be a driving force--in ways that will surprise and challenge insurers.

One hundred years ago, high technology in the insurance business meant the typewriter and the telephone, two inventions just beginning to make inroads into insurance offices in 1900. Factoring in inflation, typewriters cost then what computers cost today.

Pen and paper were the primary tools of the trade. Insurance policies generally were handwritten. Insurance companies felt no pressing need to mechanize office procedures.

The volume of business was manageable, and reporting requirements were limited.

Although the first automobile liability policy was written in 1898, cars were few and far between in 1900. Few people carried homeowners insurance. Insurers had only begun writing liability insurance in the late 1880s. Group life insurance was not introduced until 1911, and the first state workers' compensation laws were adopted between 1911 and 1919. All of this kept policy volume down.

Supporting Business Growth

In the early years of the 20th century the introduction of office technology supported growth in the insurance industry. At the same time, mechanization had an impact in ways that were unforeseen.

Typewriters brought large numbers of women to work in offices. Office work had long remained a male bastion--even after women had been recruited into factories. In the 19th century young men had done clerical work as an apprenticeship leading to positions of greater responsibility.

As the volume of paperwork increased and offices were mechanized in the 20th century clerical work was separated from administrative work. Clerical jobs no longer led to the executive ranks.

In the first half of the century, insurers adopted several new office technologies. Among them were automatic telephone switching, the electric typewriter, duplicating machines and copiers, adding machines and calculators, tape recorders for dictation, and data-processing equipment that used punched cards.

Tabulating Systems

The life insurance industry was among the first to adopt punched-card tabulating systems. When printing capabilities were added around 1915, insurers were able to produce many internal reports, from actuarial reports to lists of policies managed by agents. Later, alphabetical tabulating capability allowed insurers to list policies by policyholder name rather than by policy number, simplifying weekly at-home collection of premiums for industrial life insurance. These advances in data processing and printing technology allowed insurers to keep pace with the growing insurance needs of a burgeoning economy--and with increasing reporting requirements.

While mechanical office devices were changing the business internally, other technologies were extending the industry's reach externally. The telegraph, telephone and railroads spread company operations from a local environment to other towns, cities and states. These communication and transportation technologies gave rise to the large national companies that built the financial foundation for a robust national economy

Enter the Computer

These advances set the stage for the arrival of the most significant processing tool, the computer. During World War II, government agencies used computers successfully for scientific and other work. After the war, the computer transformed data processing in commercial fields.

In 1947, the Life Office Management Association formed a committee to investigate the potential uses of computers in the insurance industry. Remington Rand Corp. formally introduced the computer to the insurance industry at a forum at the WaldorfAstoria Hotel in New York on June 2, 1950. Four insurance organizations sent 47 representatives to learn about the capabilities of the Univac computer system. Subsequently, large insurers studied the feasibility of using a computer system in their data-processing work.

The computer emerged just in time to power a rapidly growing life insurance industry. Between 1948 and 1953, according to the Bureau of Labor Statistics, the number of insurance policies in force increased by 24%. There were more than 60 million ordinary life policies in force in 1950, many requiring quarterly or semiannual premium notices--at a time when the industry faced recurrent shortages of clerical workers.

Life Insurers Lead

Large life companies were among the leaders in adopting computer technology. Of the six Univacs shipped to U.S. businesses in 1954, two went to life insurers. By the end of 1955, there were more than 20 computer installations in insurance companies. By early 1963, some 146 life insurance companies accounting for most of the industry were either using computers or planning to do so, according to a U.S. Department of Labor survey.

Applying computers to the property/casualty business was more challenging. It was difficult to develop integrated systems for the many lines of insurance, especially since products and rates constantly changed in response to changing competitive conditions and loss experience. By the mid-1960s, most large companies had adopted computers to handle major home-office record-keeping functions: billing, accounting, policyowners' dividends and agents' commissions.

Reducing Expenses

During the early phase of automation, companies used computers to reduce administrative costs. Productivity increased as computers allowed companies to grow their volume of business without a commensurate increase in employment. Also boosting productivity in the late 1960s and early 1970s were inexpensive copiers, facsimile machines, small electronic telephone switchboards, the word processor and the microcomputer.

As computer automation grew in importance, insurance companies built large electronic data-processing organizations. This growing team of information-management professionals joined forces with the underwriters and actuaries who traditionally had been the backbone of the business.

Desktop Computer Power

Over time, as computers became cheaper and more powerful, computer power expanded from the data center to the desktop. Mainframes were supplemented by personal computers, working initially as standalone units and later linked in networks. Networking technologies eventually transformed the industry by supporting the strategic re-engineering efforts of the 1980s and 1990s.

With more computer power on the desktop, insurance professionals became more technically proficient. Computers did more than simply automate routine business processes. They made it possible to carry out more complex analytical and decision support tasks.

Financial departments used computers for actuarial analysis and statistical forecasting. Companies began to use computers to generate qualified sales leads. During the proposal process, life agents could analyze complex personal factors related to the prospect.

Impact on Underwriting

Information systems had a big impact on the fundamental insurance function of underwriting. Automation extended the underwriter's judgment and experience to a wider variety of risks in more locations than could be visited. The technology made it easier to identify and classify risk characteristics. It helped the underwriter to gather information from remote sources and apply his or her judgment in a structured way.

Computers further made possible the development of rule-based systems which can, for example, model the way decisions are made by the best underwriters and claim handlers, then make these decisions automatically. This technology has improved the quality and cut the cost of many processes in underwriting and claim administration.

Information Age

In the 1980s and 1990s, with the growth of the Internet and e-mail, the insurance industry completed the transition from the industrial age to the information age. This radically changed the nature of insurance work and created a host of exciting new opportunities.

In the industrial-age office, essentially a production line, work moved from desk to desk. Jobs were narrowly defined and repetitive. And everyone had to work together during the same hours in the same office to sustain the flow of paper.

The production-line approach was suitable for handling a large volume of customer transactions, such as processing insurance claims, and it permitted the standardization of jobs, transactions and technologies.

But most workers had little sense of the overall system in which they were functioning, and production-line operations could be labor-intensive and slow to respond to customer inquiries or problems.

The information-age office, based on networked desktop information systems, changed the nature of work. Instead of executing one task in an assembly line-style workflow, an individual or small team could handle a variety of customer-related activities for one or more accounts.

This new customer-focused approach demanded new ways to measure productivity. Rather than simply considering the number of items processed, companies came to judge productivity in terms of customer satisfaction, repeat business and willingness to purchase multiple products or pay a premium for high levels of service. The new system also improved the work life quality for employees by giving them broader responsibilities and the capability to satisfy more customer requests.

As growing quantities of data were created and stored in computers, insurers began to understand how to turn this data into information that would help them better understand their business and make better strategic decisions. By leveraging internal data with data available from external sources, insurers were better able to understand customers, identify prospects, develop market niches and gain competitive advantage.

The Virtual Office

Instantaneous, global access to information has enabled insurance companies to develop completely new organizational structures and new ways of working. They have decentralized across time and space; all workers no longer need to be assembled together and work the same hours.

Portable computers with communication capabilities enable employees to create a "virtual" office wherever they are. Networks link home office and field employees with agents so they can share files and resources.

The Internet Changes Everything

With the introduction of the Internet and the World Wide Web, automation strategies have shifted from an internal to an external focus. No longer simply a tool for employees, technology is used to enhance and redefine how insurers work with customers, suppliers, agents and other partners.

An e-business transaction can take the form of an agent getting information from an insurer's Web site to support a sale or an employee ordering supplies through a Web-based procurement system. Customers may choose new self-service options over the Internet to reallocate 401(k) investments between fund options or to make simple policy changes.

E-business transactions can eliminate inefficiencies in relationships with suppliers and distributors. In addition, many customers enjoy the option to get services at their convenience while the expense savings that companies realize can be passed back to customers in the form of product improvements or lower rates.

Web-based sales have been relatively slow to advance in the insurance industry. Many insurance products are more complex than other products sold electronically, such as books, compact disks or even stocks. Less than 1% of insurance sales occur on the Internet, compared with about 4% of retail sales.. Forecasts say it will take at least five years for Internet sales to reach 5% of total insurance volume.

Insurance companies are beginning to enter the e-business arena in a variety of ways. Ecoverage.com a new insurance company, is working with an underwriting partner to develop auto, homeowners and marine insurance for sale only on the Internet. InsWeb (www.insweb.com) is a Web-based site that generates leads for insurers and agents. Ebix.com is a reverse auction that allows insurers and agents to bid for customers. Quicken Insurance (www.quickeninsurance.com) is a "mall" offering quotes from several carriers of auto, health, home, disability, small business, life and other insurance. Quotesmith.com offers instant quotes on auto, life, medical, dental and other insurance.

Insurers and agents alike can view e-business as a threat or as an opportunity. In its role as a pervasive low-cost communication network, the Internet can drastically cut transaction costs. It can be viewed as a link with the various people with whom insurers interact, improving the efficiency and timeliness of interactions within a value chain. It ultimately provides an opportunity to redefine the insurance value chain and can transform how carriers and producers work together for the benefit of the customer.

Change Cannot Be Escaped

The enabling technology of the Internet is driving fundamental changes across every industry, and insurance is no exception.

Business models are changing in retailing, brokerage, travel and entertainment. Customers are going to have more information at their fingertips and more options than ever before. The way companies use technology will play an increasingly important role in separating the winners from the losers.

The insurance industry looks completely different than it did when policies were handwritten and information was collected on punched cards at the dawn of the 20th century. The last 100 years were interesting, but the next 10 may be our biggest challenge yet.

David Annis is chief information officer for Hartford Financial Services Group, Hartford, Conn.