To Be...Or B2B.

Online business-to-business exchanges may hold the real key to insurers' Internet success.

The Internet is finding its niche in the insurance industry. International consulting firm McKinsey & Co. projects that within 10 years, 50% of the global insurance industry's valuation will be in the Internet marketplace. Until recently, most resources being sold on the Internet were focused on business-to-consumer (B2C) exchanges. Now the tables are turning, and a new stage of the e-commerce transformation process is beginning to emerge, uniting buyers and sellers.

Business-to-business (B2B) e-commerce, the new market stage, is expected to grow to more than $7 trillion in all industries by 2004, according to the consulting company GartnerGroup Inc. While these exchanges are only now gaining visibility in the insurance industry, the future looks bright. TowerGroup, an information technology consulting company, estimates that up to 15%, or $20 billion, of nonpersonal lines premium will be transacted through B2B exchanges in the next five years. At this point, B2B primarily serves as a meeting ground for buyers and sellers of insurance, with the special qualification that the buyers are not always insureds; sometimes they are intermediaries acting on behalf of insureds, said Eduard Gecere, a research analyst with TowerGroup.

A Closer Look

In the past, companies involved with the exchange of services via the Internet relied heavily on electronic data interchange (EDI)--computer-to-computer electronic exchanges of business documents. EDI gained popularity in the late 1970s with the development of national standards. Technology experts today, however, believe traditional EDI is no longer the most effective means to carry out electronic transactions due to complexity and difficulties in establishing lines of communications. This, in turn, gives rise to B2B exchange models.

B2B exchanges represent a flexible and powerful medium for effecting new levels of market transparency, partner connectivity and lower transaction costs. The way the exchanges are configured today, they are primarily used on the front end of insurance sales cycles, such as lead generations, Gecere said. "In the short term, insurers and producers must align themselves with B2B exchanges to supplement their existing channels for generating and transacting business," he said.

B2B market spaces are divided into three unique exchange models: agent/broker-to-carrier, single-carrier product and multiple-carrier product. Each model is designed to improve on traditional data submission and workflow processing between participants. In addition, each relies on the Internet as the underlying network and connectivity infrastructure.

Agent/Broker-to-Carrier

Agent/broker-to-carrier exchanges are designed as open marketplaces, complete with industry forms. "This model deals with the function that falls primarily into the old agent-to-carrier paradigm," Cecere said. "It is essentially an exchange that preregisters agents and brokers and prequalifies them as to what types and amounts of business they are interested in buying. It does this all on the carrier side also."

Iwix.net, a multivendor online specialty insurance marketplace, falls within the agent/broker-to-carrier model paradigm. The company runs an exchange to facilitate agent/broker-to-carrier transactions, complete with more than 3,000 producers and more than 40 carriers and managing general agents. Iwix.net launched its B2B model system in April 2000.

"Our system mimics existing work-flows, which was very important to us in our design process," said Julie Garrett, iwix.net's vice president of marketing. Brokers and agents can complete an online application, upload files from their computers, fax hard-copy documents to the server or enter Web site addresses. This information is stored in the producer member's "electronic filing cabinet" on the iwix.net server, allowing them to create a single risk profile that can be submitted to multiple carriers, Garrett said. The B2B site focuses on commercial specialty lines.

The single-carrier product exchange can be best compared to an insurance auction exchange. The model is primarily operated by one insurer with a strong brand. The insurer sponsors the market space and supplies all products to the exchange. "This exchange involves one supplier, one carrier and many qualified buyers that participate in a classic auction-type format, where products are bid upon. The primary difference between this model and the other two is that products come from just one underwriter," Cecere said.

Single-Carrier and Multiple-Carrier

Swiss Re's ELRiX.com--the "Electronic Risk Exchange"--is an example of a single-carrier product exchange model. Qualified brokers and primary insurers bid for standardized Swiss Re reinsurance products and services, such as the online submission and pricing of property facultative risks in the United States and marine coverages anywhere in Europe, listed on the exchange in an auction-style format. A price calculator generates reserve prices or offers based on buyer risk portfolio data. Members gain access to the exchange after entering a series of passwords, and data is then transferred via an encrypted 128-bit link.

The most common model today multiple-carrier product exchanges, are run by third parties and are designed to offer buyers added components of choice--a feature not often found in single-carrier models. "Multiple-carrier product exchanges provide a comprehensive view of the open market price. What you have are many suppliers negotiating for price and competing along the lines of brand," TowerGroup's Cecere said.

New York-based Widelines is a multiple-carrier product exchange that operates a functional B2B platform and connects insurance producers with underwriters. The platform features single-entry, multicompany interface (SEMCI) that provides what the company's executives call "synchronous data transmission" between the two parties. More than 1,200 agents and brokers participate in Wideline's marketplace.

These exchanges differ slightly from agent/broker-to-carrier exchanges by the differences in value proposition offered to participants. "Ideally, agent/broker-to-carrier exchanges offer a broker a better way for transacting business volume with his or her existing (or short list) of product suppliers. Contrast this with a multiple-carrier product exchange in which the value proposition to the user lies in offering new access to markets previously too opaque or unprofitable," Cecere said. In multiple-carrier exchanges, buyers and sellers are offered new relationships with parties they'd never conducted business with before. "In reality, exchanges today straddle the line between these two types, and as exchanges develop, the distinctions between the two may blur," he said.

The Industry's Viewpoint

While several retail and electronic industries are finding much value in B2B exchanges, insurers involved in the market spaces are experiencing only minimal success.

"In terms of getting submissions, I would say it is successful because we are getting exposure. In terms of business we want to write and do, in fact, write, I would say it is not yet successful," said Lawrence Davis, chief operating office at Mutual Marine Office Inc., New York, which participates in several different exchanges. He offered two reasons for the limited success: The exchanges remain in the early phase of evolution, and participating organizations are using them as testing grounds for price shopping. But Davis anticipates that as the exchanges mature and people begin to establish relationships through them, they will become workable entities within the industry. "As with anything, it is going to take some time and trial before they become successful," he said.

Kemper Insurance Cos., which entered the B2B e-commerce arena slightly over a year ago, agrees that it is too early in the process to measure success. "We are finding that we are on the cutting edge, as a lot of the models are still continuing to develop. However, we have had some success in a few of the exchanges," said Jim Stevens, vice president of marketing and sales.

Hartford Financial Services agrees that it's still early to judge the success of any of the models. "It's been very successful from a learning standpoint, and we have a good understanding of what's really happening in the space," said Robert Schwartz, director of Hartford's e-business technology solutions department. While the industry will certainly move in the direction of B2B market space, the consumer, or business owner's, comfort level with doing business online is going to drive everything, he said.

In addition to improving time to market for new products and services, B2B market spaces are beginning to help some companies improve their customer relationships and increase their efficiencies. As B2B becomes more widespread, both technology experts and insurers believe these benefits will pave the way to its success in the coming years. In fact, Forrester Research estimates B2B commerce will significantly outpace B2C commerce in the near future.

Benefits to Reap

The benefits that B2B exchanges bring to the industry are beginning to be felt by some insurers. "These exchanges offer superior technology and lower costs," Cecere said. TowerGroup predicts B2B will help reduce costs by ensuring back-office connectivity and scalability, in addition to serving as entry points for insurers into noninsurance B2B value chains.

"I believe the benefits of these exchanges can be broken down into three areas: lower administrative costs, faster quote processing and increased customer assistance," said Adam Pelzman, chief executive officer of Widelines, a single-source insurance B2B marketplace. The desire for a more personalized, single point of contact with companies is being met with B2B exchanges, Pelzman said. In addition, these benefits are also being felt by underwriters. "From the underwriters' side, they are getting increased distribution, the ability to screen submissions, reduced administrative costs and access to product networks," he said.

Agents and brokers that have experienced challenges in accessing specialty markets in the past may reap the benefits of B2B exchanges. The main benefit for agents and brokers is that it adds transparency to the marketplace. It lets everybody see what is out there, and it levels the playing field for all agents to gain access, said iwix.net's Garrett.

"What the exchanges provide is a place for agents to access a larger or more sophisticated group of insurance carriers for their clients. For the carriers, they potentially provide access to a greater number of potential customers," said Kemper's Stevens. "If these are to work for both agents and carriers, they need to facilitate doing business more efficiently while still allowing carriers to present their value propositions to clients and not just a bottom-line price. The more sophisticated sites will also provide more knowledge about the various coverages available and specific needs to agents and their customers."

But it is the connections they make that insurers deem as one of the biggest benefits to exchange participants. "The chief benefit for all parties is that B2B facilitates new business relationships," Garrett said. "These [exchanges] are places that people who never conducted business before can come and do just that." For example, an East Coast agent, skeptical about using Web-based insurance services to market large accounts, recently purchased $50,000 of employment practices liability premiums from a Calif.-based carrier via iwix.net. "This brought together the right insurance parties to bind a nice piece of business," Garrett said.

Focusing on Technology

Technology is the driving force behind B2B exchanges. New advances, such as extensible markup language--or XML--and wireless communications, are paving the way for B2B's growth.

"Wireless technology is obviously an issue of increased access," said TowerGroup's Cecere, adding that it facilitates a broader range of access ports for bidders, particularly for buyers. "If you think about where wireless technology would fit in at this stage, it would primarily enable the buyer or bidder, in most cases an agent or broker, to facilitate more global access to the exchange."

XML also is taking its place in the market spaces. "The significant question for insurers is how to Web-enable back-office functions. The real future of exchanges is in automating transactions on top of lead generation. That is going to involve significant work from the insurers' side to bring their back-office systems up to a point where they can handle process and transactional automation during the exchange. That is just one of many factors that should be pushing insurers to integrate technology like XML and other Web-based technologies," Cecere said.

Following industry standards from ACORD and adopting XML as the development language standard are absolutely critical, said John Flynn, insurance practice partner at BusinessEdge Solutions. He believes that the mere choice of technology or architecture by a company in some ways indicates whether they are willing to think of themselves as an exchange partner.

Knowledge and experience with technology will give a better insight into B2B future success, Cecere said. "What exchanges have to realize is that it may not be enough to simply introduce buyers and sellers and vice versa," he said. "They will have to go deeper into the supply-chain process and automate some of the transactions, like submitting business, handling the clearing and settlement of payments and serving products. This involves significant technological savvy and experience."

On the Horizon

Although about 1,500 B2B exchanges exist today, analysts believe only about 250 are going to survive, said Ty R. Sagalow, chief operating officer and executive vice president of AIG eBusiness Risk Solutions. But new technologies and real value added from third-party sponsors may assist in the survival of B2B market spaces.

While B2B exchanges are not yet commonly used by insurers, Cecere believes they will become more commonplace in the industry in the coming years. "We think B2B has the chance of being a really significant and legitimate model over which to migrate select portions of overall sales and serving of insurance."

Flynn agrees that the exchanges will have a place in the insurance industry, but he anticipates that it will take some time before they are a significant presence. "Exchanges are still a forward-thinking notion. They are happening now, and there is going to be more of them in the future. However, they are not going to happen as quickly as they have in other industries, given the nature of the complexities of relationships and products," he said.

But Flynn believes that B2B exchanges will have a powerful impact on insurers. "I think it is really going to drive the way certain types of products are thought about, certain types of services are enacted and from different parties." Flynn believes it is crucial for the commercial brokerage space to evaluate these exchanges, deeming it the next evolution of the brokerage paradigm.

B2B vs. B2C

What success business-to-business (B2B) exchanges will bring to insurers is a key question for the industry. Part of the answer may lie in comparing B2B with its predecessor--business-to-consumer (B2C) models.

While the B2C market has experienced tremendous growth and received much attention over the last few years, B2B e-commerce is poised for equally explosive growth, according to a recent report by the investment banking firm Goldman, Sachs & Co. The report points to B2B opportunities emerging into two distinct sectors: e-commerce infrastructure and the actual conducting of B2B commerce over the Internet. While B2C customers are chiefly looking for one item to fill a need, B2B buyers are searching for a selection to fill their customers' needs.

Eduard Cecere, a research analyst at TowerGroup, believes projections for B2B success in the future boil down to one thing--fundamentally different qualities of people involved in the exchange. "Those that are participating in B2B exchanges are very different and are much more educated about it. One of the things that has been panning Out about the B2C model is that much online activity by the public has been primarily educational, such as policyholders' information about products, coverage and companies. In fact, actual online sales via B2C models are very low," he said.

Cecere believes that the difference seen on the B2B side, however, is that its participants are already well informed about available products and services, even before they enter the exchange site. "B2B participants have more to gain from the exchange. For a member of the public, saving 15% on your auto policy quote is much less of a benefit than for an agent or broker looking to try to mitigate a significant portion of his or her lead generation over to an exchange, getting access to products they never had before and transacting business," he said. "The stakes are a lot higher and the impetus is much greater for B2B professionals."

In examining both models, Cecere believes B2B has a future niche in the insurance marketplace. "I believe that the potential for growth of B2B is there because the whole model is built on a more fundamental benefit to the industry and those involved than we see on the B2C side."

Matter of Trust

Without trust, business-to-business e-commerce will not survive, said Orson Swindle, commissioner of the Federal Trade Commission, in a statement. While transactions made over the Internet are characterized by increased speed and variety, the potential for fraud surrounds the market.

In 1999, 51% of the 2,500 global firms surveyed by Forrester Research Inc. said they wouldn't conduct business online with companies they didn't know. Doing so entails risk of nonpayment and nondelivery of goods and services, they reasoned. While it is not yet known how much fraud is taking place across B2B exchanges, several companies are joining an effort to secure transactions via B2B exchanges and minimize fraudulent risks.

Five fundamental questions often raised by B2B exchange participants are: are participants who they say they are; will goods arrive safely; are goods what they are deemed to be; will sellers get paid; and is a site secure and reliable. To address these concerns, American International Group Inc., New York, and Dun & Bradstreet Corp. recently formed a joint venture called Avantrust, a collection of risk-management tools aimed at reducing online exchange frictions.

"To be successful, we knew we had to tackle these questions. As a result, we came up with an initial set of five products and services," said Ty R. Sagalow, chief operating officer and executive vice president of AIG eBusiness Risk Solutions. Avantrust, which was launched in October, offers products and services such as authentication and verifications for businesses, network security insurance and seals of approval, and online trade credit insurance.

AIG netAdvantage Suite, one of the five Avantrust products, provides coverage of up to $25 million for attacks within B2B transactions. "This is a robust insurance policy that protects exchanges up to $25 million for liability, property and business-interruption loss arising out of computer attacks and hacker risks, as well as coverage against cyber-extortion threats," Sagalow said. In addition, a company suffering credibility damage as a result of a hacker attack is covered for public-relations fees needed to rebuild its reputation, as well as being provided with up to $50,000 for a cyber-criminal reward fund.

Joining in companies' efforts, several independent trust programs have been launched to protect companies from fraud with partners. In 2000, the Forum for Trust in Online Trade--a global consortium of B2B sites and SGSOnSite, a division of Societe Generale de Surveillance SA that is involved in verification, testing and certification--was formed to ensure that companies were trading with reputable partners. The forum facilitates online trade by informing B2B stakeholders about services that enhance confidence and build trust between buyers and sellers worldwide. In addition, it rates vendors participating in its five member marketplaces on several criteria, such as the ability to deliver orders and comply with certain environmental standards, and it awards seals of approval based on the criteria.

One way insurers can protect themselves against fraud is by conducting e-business with familiar partners, particularly when first venturing into the B2B exchange process. Ultimately, to grow successfully, insurers must find ways to conduct e-business with strangers. "Customers' biggest fears with B2B fraud are talking to someone who is not who they say they are, or if they as the seller are not going to be paid by someone unfamiliar to them," Sagalow said.

Another way B2B users can reduce the possibility of fraud is by participating in Internet marketplaces that are open only to preapproved members. It is the creation of future Internet trade standards for conduct and accountability, however, that insurers already involved in B2B markets hope will assist in eliminating concerns and will enable buyers and sellers to conduct business safely--even with strangers.

To protect their customers, B2B exchange companies are paying close attention to security issues. "The way we have attempted to reduce or eliminate the potential for fraud on our exchange is by installing a 128-bit encryption system, requiring users to go through multiple layers of passwords and user names and storing machines in a secure facility," said Adam Pelzman, chief executive officer of Widelines, an insurance B2B marketplace.

Several companies also are beginning to explore the addition of digital certificates--electronic files used to identify people and resources over electronic networks such as the Internet--onto their exchanges to minimize risk of fraud. Paul Henriod, president of eReinsure, said these certificates have great value in B2B exchanges. "Security is a large issue with the use of the Internet. In addition to fire walls and passwords, many groups and individuals will ultimately adopt digital certificates, which will enable the secure, confidential communication between parties," he said.