Systems blooming?

At last dreams of electronic trading in commercial lines are being realised. But will the blossom succumb to the first breath of wind? Dermott White reports

The problem with the way business is done in the commercial lines market is that it has hardly changed over the last ten years.

Where personal lines business has slowly but steadily embraced technology, through full-cycle electronic data interchange (EDI), the same productivity and efficiency gains have eluded commercial lines. But there are now signs that a solution to the dilemma is closer than ever.

Electronic trading is important for several reasons. The primary factor is cost. Streamlining and improving the efficiency of the business process can have a dramatic impact on the costs associated with each transaction.

Research from Acturis shows that the current average turn-around time for each commercial process, from confirmation to final delivery of documentation, is 164 days (see How long a policy takes to process). Acturis research also shows 46% of all insurance documents printed contain errors (see What errors are made). And that brokers use e-mail for less than 10% of the quotes that they submit to insurers (see How brokers submit quotes).

Time consuming
Acturis co-chief operating officer Theo Duchen says that the slowness of the process stems from the high error rate, which is caused mainly by the continuous re-keying of information - at least nine times during the whole process.

"The thing to bear in mind is that the process in commercial lines is a very costly exercise. About 34% of premium is consumed in the whole process - 21% on the insurer's side and about 13% on the brokers' side," he says. "I believe it's possible for insurers to operate at about 10% of premium and the brokers could operate at about half their levels."

The second advantage is emotional. Cutting down the amount of re-keying also cuts down on frustration and frees up time for other things. A full-cycle system cuts back on the administration, allowing insurers to spend more time underwriting and brokers more time with clients.

Risk details are entered into a broker's system once and then transferred electronically to the underwriter. Any response is saved automatically, not only in the underwriter's system, but also in the broker's system. This also applies to commissions, accounting entries and reconciliations, traditionally the worst areas for keying errors. It is estimated that at least half of every broker's accounting department is devoted to reconciling accounts with insurers.

Audit trail
Duchen adds that an electronic process could cut the turn-around time on the process to as little as 48 hours because policy documents can be dispatched electronically to the broker, to be printed off at the point of sale.

A natural extension of transferring information electronically is that it aids regulatory compliance by automatically creating an audit trail - something that the Financial Services Authority (FSA) will insist on when it takes control of broker regulation in 2004. Management reports will also be easier to generate.

All this adds up to more efficient business for the broker, and faster, better service for customers.

Neil Emerson, the IT director at Bland Bankart, a regional broker currently preparing to use the Acturis system, says brokers have high hopes for their systems and improved data transfer.

"In terms of direct efficiencies and cost saving, we anticipate releasing more capacity so that we can handle more business with the same number of staff.

I would be disappointed if we couldn't generate 10% additional capacity in the short term, increasing as we move towards a more connected environment," he says.

If the benefits of electronic trading are so big, why has it taken so long to introduce it? One of the main barriers to automating the commercial lines process was the suspicion that technology would destroy the relationship between the broker and the underwriter that is considered so important for agreeing insurance contracts.

Commercial insurance is more complex and varied than personal insurance and needs the dialogue between broker and insurer to make sure that risks are properly underwritten.

And it is with this problem in mind that several insurers and software houses are developing new solutions for the commercial lines process.

They are building in to their processes the ability for brokers to complete business over the telephone, when they need to consult an underwriter.

The information is still captured and exchanged electronically once the risk is agreed.

Three-link chain
Sirius group marketing director Simone Romain says: "The whole emphasis of all three parties in the chain [insurers, systems providers and brokers] is on automating the bit that can be automated easily, while allowing the experience, the intuition and the relationship between commercial broker and commercial client to still be extremely important."

The switch to technology is being pushed by the insurers, the systems providers and the brokers themselves.

Three insurers, AXA, Royal & SunAlliance (R&SA) and Aviva, are all developing extranets to provide their brokers with online commercial lines transactions, particularly for small and medium enterprise (SME) business. All three have taken the view that it is better to develop that capability for brokers rather than to wait for the all-embracing market solution that will be eventually provided through Polaris, although their extranets will be compatible with it.

AXA has already announced that it intends to integrate business-risk.com with broker systems provided by Acturis and Sirius, while R&SA has similar plans for RoyalSunConnect.co.uk, according to R&SA small business manager Simon Cooter.

"The thing that will drive this is broker demand. If brokers can be convinced by the systems suppliers that they have a solution that is more effective than their previous solution, then they'll move on," he says. "We all make investment decisions based on expected return and the brokers are waiting to be convinced that that return is going to materialise."

MCS is another systems provider
developing new ways of taking on commercial lines. MCS's iSector aims to make the commercial lines process more efficient by cutting the amount of information that needs to be sent to an insurer when insurance is required

Underwriting agent
MCS general manager James Sharp says iSector would see MCS and brokers join forces to establish a new company as a commercial underwriting agent.

While insurers would still set the underwriting rules and be available for negotiation of more complex risks, the underwriting agency would have the contact with the retail broker and agree the product and the rates, electronically.

"The insurer simply becomes the underwriting capacity, in which case it is less onerous to send them the amount of information they need," says Sharp.

MCS's iSector proposal is still in development and insurer portal integration with broker systems, to avoid re-keying, is still months away, but the first steps to taking the commercial lines process electronic appear to have been taken.

Results cannot come too soon for brokers, who want to benefit from the opportunities in the commercial lines market.

As Romaine, from Sirius, puts it: "Generally speaking, I think the commercial broker is currently very well placed in the market. We see that they have positive relationships with the insurers, less forms of competition than the personal lines broker and a clear and undisputed channel to market, as far as the growing SME market is concerned."