About nine months ago, Misys, the technology firm, hatched a secret project code-named Orion. The plan was conceived within Misys, not the subsidiary that supplies systems and quotation engines to insurance brokers called Misys Financial Systems.
The first aim of Orion was to arrange meetings with a gang of six of the UK's top composite insurers: Groupama, Allianz Cornhill, Axa, Royal & Sunalliance (RSA), Norwich Union (NU) and Zurich.
In these meetings Misys expounded – and the insurers nodded – how general insurance should be distributed in this country. Their “shared vision” was for a single internet portal through which all the insurers' products would be made available to brokers. This portal, Misys said, would sit “above” other software houses and application service providers, distributing products to them and eventually their brokers.
Last week Orion became the joint venture I2i-link. Theoretically, any insurance provider will be able to “hook into” the portal and access net-rated insurance products that the gang of six have developed and rated. This is expected to be built and in use within three to four years.
In public, the software houses that are being asked to plug in to the portal have been reluctant to criticise the venture because they are frightened of upsetting the powerful insurers behind it. But privately, they are deeply, deeply suspicious. Until now, each has had an active involvement in – and significant revenue from – product development. Misys has also been one of their most bitter competitors for years.
A director at one of the four rival broker software firms says: “I think the insurance companies have got a screw loose. I can't believe they are going to invest in a company that has never brought any new technology to market – ever.”
An exaggeration perhaps. Misys has brought new technology to market including Oasys, its new package for brokers. The company claims to have spent more than any of its rivals on research and development. Misys has also developed M-Link, a portal for independent financial advisers (IFAs) that provides the basic blueprint for I2i-link.
The software house director adds: “What's in it for us? There is nothing in this for the software houses at all. Misys is going to have an incredible amount of income coming in if this works, and that is very worrying. We aren't allowed to have an equity stake, it was presented to us as a fait accompli.”
Steve Broughton, who heads the I2i-link consultative forum and is also managing director of RSA's intermediated personal lines book, responds: “What's in it for the software houses is money.” The software houses will be offered a negotiated share of transaction revenues.
An atmosphere of suspicion is also prevalent at some of the other insurers too. Many have strong relationships with other software houses, relationships that span product development and distribution.
Neil Utley, chief executive of Cox Insurance's retail division, is one of the few insurers brave enough to go on the record and question the wisdom of the venture.
“At this stage, I am not saying whether it is a bad thing or a good thing,” he says. “But I don't know how it is supposed to enhance competition when no other industry has adopted this model. Can you imagine Sainsbury's, Tesco and Marks & Spencer adopting a shared distribution model?”
Utley is also upset that there was no tendering process for the venture.
Colin Calder of Axa says the reason Misys won the joint venture deal was because Misys was the company that made the running.
But Utley replies: “If somebody came to my business or came your business with an idea that was going to cost a lot of money – £28m – you would put that idea out to tender to see if it was expensive, to see if it was value for money.”
Nick Illingworth, managing director at Provident is another insurer who is hugely sceptical about the venture. “We were only told about this on Monday October 16 and therefore the details are sketchy. We have four to six weeks to decide on what looks like a speculative investment. We can work out the costs in that time, but I am not so sure we can firm up on the benefits.” He does not expect to join at this stage.
The insurers' main concern is that brokers will pressurise their software houses to conform and that almost everyone in the market will turn to their insurers for help to fund the necessary development costs.
There will also be substantial in-house IT investment costs for all of the sixteen invitees.
David Grant, sales and marketing director at NIG, says guardedly: “This is one of a number of initiatives in the marketplace but we do have some concerns with regards to costs involved.”
“What's in it for us?” is once again many insurers' refrain.
Colin Calder from Axa's broker development side and a board member of the new venture retorts: “The insurer's return will come through their reduction in costs.”
But while I2i will indeed mean a massive reduction in transaction costs compared to those Misys Financial Systems charges, this
is not necessarily the case for some other software houses. NU ecommerce manager Phil Nunn says: “This has always been on the agenda. If you go back you will see this model in a number of papers in years gone by. It has been the ‘holy grail' we have tried to establish.”
Nunn says the insurers involved have been constantly reviewing how they could achieve the business model and have been evaluating its cost. It was only when Misys got involved that the model became viable.
Once the portal is fully functional, Misys, Allianz Cornhill, Groupama, Axa, RSA, NU and Zurich have agreed – in writing – that “our aim is to establish this as ‘the' portal for business to business”.
This, unsurprisingly, has prompted some software houses to make noises about competition law. They argue that many of the services on offer from I2i are services they already provide.
RSA's Steve Broughton responds: “The competition issue is something we have always recognised. This needs to be cleared through the Office of Fair Trading (OFT).
“The OFT positioning is that it is likely to want to talk to other parties. Therefore, until we are in the public domain and until it has a formal finalised agreement, it would not give a ruling.
“We have been working through this with competition lawyers on both the insurer side and the Misys side and we have absolute confidence that each of the angles we are looking at will be cleared by the competition authorities.”
The critical issue in this entire scenario may prove to be CSC. Globally, CSC is a massive supplier of insurer systems and may not want to rock the boat. It is conceivable that CSC will place pressure on its retail arm that provides broker systems, not to kick up a fuss.
And if CSC agrees to join the venture, the insurers would have got genuine critical mass.
“It will all end in tears,” says the un-named software house director. “I wouldn't be surprised at all if this came to nothing.”
If CSC agrees to the participate actively, then don't count on it.
The Critical Facts
The deal
The process has begun and it looks irrevocable. All six insurers have agreed – in contract – that this is to be “the” first portal through which they will distribute insurance. If the insurers did pull the plug on the venture, Misys could well say they were in breach of contract.
The software houses
Some might expect CSC to resist these changes. But an issue facing this company – at group level – is that it also provides many systems to insurers. This may mean its retail arm is pressurised to link up to the service. MCS's initial response was that this “misses the boat somewhere”. Does the company expect the venture to fail? Or does it simply not wish to play ball?
Policy Master derives massive revenues from things such as point of sale technology and documentation production. It will want a lot of money from transactions – guaranteed over a long period – to sign up to the new model.
Software houses also ask: “What's to stop them creating a massive data warehouse in the sky and cutting us out of the loop entirely?” Good question.
Competition issues
If the six insurers do go ahead and distribute products uniquely through this portal, some software houses and some insurers have made noises about anti-competitive practice.
Software houses fear a loss of revenue while the other insurers fear being unfairly forced into spending millions on IT development for their brokers and software house partners.
I2i's defence is likely to be that the service is free to anyone who wants to be part of it and that it is good for the industry. Software houses will be paid to link up. I2i says it has rigorously checked the issues with competition lawyers.
