Making a Market.

Net markets can ease business transactions for insurers by creating online sales hubs.

Net markets, also known as business-to-business exchanges, are expected to be one of the highest growth Internet segments over the next four years. In a report published in February, Forrester Research predicted that by 2004, net markets would capture 53% of the $2.7 trillion in U.S. business-to-business e-commerce transactions.

Net markets are built to promote electronic commerce between businesses through transaction-based Internet hubs--central locations where potential buyers and sellers converge.

While some have noted similarities between electronic data interchange and net markets because they are both focused on easing business-data communications between firms, there are notable differences. Net markets, which are built upon Internet technology, can offer a much lower cost of entry to participants, are much more flexible and malleable to use and offer almost immediate access to anyone interested in participating. Net markets help companies conduct business faster, buy or sell excess inventory or capacity more easily and allow them to more easily and less expensively increase their universe of buyers and sellers.

One of the longest-running insurance net markets is Catex (www.catex.com), a business-to-business exchange for insurance, reinsurance and risk management. Begun in 1996 to facilitate the swapping of catastrophe exposures between interested parties, Catex transactions now include traditional premium indemnity, second-event covers, industry loss warranties, stop loss and aggregate covers, and treaty and facultative covers. Late last year, Catex revamped the technology behind its trading operation, and in the first month of the Catex 2000 Trading System, subscribers posted risks and offers to provide more than $1 billion of coverage from more than 80 cities around the world.

Other initial insurance net markets have been focused on marketing applications. For example, Benefitmall.com matches insurance brokers and carriers with small-business owners seeking group benefits for their employees. In addition to providing access to a portfolio of products, Benefitmall (www.benefitmall.com) automates key sales and service functions and provides a community for insurance brokers and small-business employers with industry news, employee-benefits education and other value-added services.

Markets Evolving

Building community is the single most important aspect to any net market because it helps attract and retain participants. VerticalNet Inc. (www.verticalnet.com) achieved a market capitalization in the billions of dollars based on the concept of building vertical trade communities for more than 50 industries, including insurance, manufacturing and food service. But initial community success alone does not dictate who will build the most successful--and enduring--net markets.

As Internet technology has increased in sophistication, new net-market applications, such as trading engines, have emerged. Beginning with vendors such as OpenSite Technology Inc. (www.opensite.com) and Moai (www.moai.com), the first generation applications were typically an auction, where a single seller attempted to rid themselves of excess assets to multiple buyers. As these initial vendors entered the market, the auction became more sophisticated, primarily through the creativity of the vendors and their clients.

Over the past year, trading engines have evolved and are typically built upon XML (extensible markup language), which allows structured data to be transferred from any application in a standard, consistent way.

While their predecessors typically had applications built to solve a specific business problem, new firms such as TradingDynamics Inc. (www.tradingdynamics. com) and Tradeum (www.tradeum.com) -- which VerticalNet recently acquired --are being built by theorists who are savvy in diverse areas, such as auction science, game theory, mathematics and economics. As a result, their application suites are flexible enough to support new revenue models such as reverse auctions (one buyer, many sellers), exchanges (many buyers, many sellers) and negotiation (one buyer, one seller), in addition to auctions. In turn,

businesses have the opportunity to design new net markets, incorporating theoretical modeling augmented by their specific industry expertise and implemented through these newest trading-engine applications.

What can this possibly mean to the insurance industry in the future?

Like in most industries, the first net-market entrants from the insurance industry were primarily marketers. Despite some "cannibalization" of business from other distribution channels, overall revenue potential should increase for sellers in these types of markets just by gaining access to many new prospective clients. For example, with Benefitmall.com, the increased access is to small businesses. There are 1.6 million businesses in this category with annual sales between $500,000 and $50 million.

Net markets also might help participants to reduce distribution costs, but this depends on the fees and costs associated with doing business online and the impact on existing distribution channels.

Streamlining the Process

Insurers could benefit by using net markets to streamline their internal business processes. The insurance industry spends an estimated $121 billion on distribution costs alone. As much as 20 cents of every insurance premium dollar is spent on paper-based distribution. An insurance net market built on XML and offering value-added services such as workflow-process definition, integration and management could decrease those costs significantly.

While traditional insurers have begun the process through the use of intranets and extranets, they have yet to take advantage of the benefits of net markets.

This is likely to change if some predictions about the future of the industry come true. Gary Craft, e-finance research analyst and managing director of Deutsche Banc Alex. Brown, has said that insurers providing one-stop shopping will give way to businesses that focus on the various facets of the insurance process, including originating policies, underwriting, investment, handling claims and product development.

Alton Cogert, founder of Strategic Asset Alliance, a consulting firm that focuses on insurance investment management, is in the planning stages of a net market where insurers, reinsurers and intermediaries can buy and sell insurance risks. His plan includes building a community for senior insurance executives to exchange ideas and information.

Pricing Options

Net market pricing processes is evolving to encompass dynamic pricing--which is used during auctions, reverse auctions, exchanges and negotiations--as well as fixed pricing, which does not involve negotiation. Fixed-pricing markets can involve one buyer and one seller, catalogs (either many buyers to one seller or one buyer to many sellers) and aggregated catalog hubs (many buyers to many sellers).

Markets with different pricing models are often handled separately, but future net-market winners will support both spot markets with dynamic pricing and fixed-pricing markets. Application vendors are moving into that space, as evidenced by the acquisition of TradingDynamics, a dynamicpricing model, by fixed-pricing Ariba Inc. (www.ariba.com), which focused initally on prenegotiated pricing. The acquisition, which closed in January, was announced less than a month after TradingDynamics released its first software application.

Setting the Standards

Another emerging area for net markets is self-governance. In the property/casualty arena, an international professional membership organization known as the Insurance Industry Internet Standards Task Force (www.I3STF.org) has had a slow start. Its goal is to encourage property/casualty insurers, brokers, attorneys and technology vendors worldwide to focus on standards, education and policy issues as they relate to the use of the Internet in the communications of insurance claims and policy data. The task force's February 1999 white paper, Towards Internet Standards For Insurance Claims Data & Transfer. . Task Force Structure Sequence & Organization, provides a good background for both property/casualty and life/health professionals.

Finally, other benefits--and new businesses--will result from insurance net markets and, in turn, further support them. These market-support roles will include:

* information available on the net market or resulting from trading on a net market, such as the closing prices on reinsurance transactions that Catex posts;

* trust, or the ability to guarantee identity, transactions or performance; and

* infrastructure to help move products and information, such as that provided by eCredit.com, which connects businesses to financing partners and global information sources so credit and financing decisions can be processed in real time at the point of sale.

Integrated or individually, any of the above will offer benefits to the insurance marketplace and will provide the core element for future valid insurance businesses.

Gates Ouimette is a business-to-business e-commerce consultant based in Medfield, Mass.