Jonathan Hopper looks at new technology that could cut claims costs

Imagine for a moment a product recall underwriter's worst nightmare: you've just gone on risk for a new medication when safety fears are raised and a complete product recall is ordered. That's 10 million bottles of tablets in hundreds of thousands of pharmacies.

If that doesn't bring you out in a cold sweat, nothing will. But hold on a minute; imagine now, that every single one of those 10 million bottles of pills contains a tiny electronic tagging device - a device that can identify its precise location in a specific shop or on a cargo palate.

Does that turn the nightmare into a pleasant dream? Certainly should. The ability to locate the pills quickly and efficiently will cut down on recall costs enormously.

And here's the punch line: it's not just a dream. These tiny electronic tags and the technology that surrounds them are already here, it's just that most insurers haven't woken up to them. So let me be the first to welcome you to the wonderful world of RFID.

As an industry that's still struggling to get to grips with some of the fundamentals of new technology, such as connectivity and international data standards, it's no surprise that the insurance community remains largely ignorant of RFID.

Yes, the penny's dropped for one or two cargo underwriters, and Norwich Union's groundbreaking use of telematics in motor insurance is a huge leap forward, but beyond that the level of understanding is low.

RFID stands for radio frequency identification: a rapidly-evolving technology that allows the monitoring and tracking of goods or equipment.

The RFID tag itself is a tiny device that is a combination of a silicon chip and an antenna. Some of these can be as small as a grain of rice. Once the tag has been attached to an item such as a piece of expensive jewellery, that item can be tracked.

RFID tags come in two main varieties:
passive, which need to be detected by a close proximity (up to one metre) RFID reader, and active tags which broadcast a signal that can be detected by an RFID reader up to 100 metres away.

The cost for a single tag ranges from just a few pence for the smaller, passive variety to tens of pounds for the most powerful active tags with the ability to store considerable amounts of data.

Most of the early push for RFID technology has come from the US, initially in the retail sector where the giant supermarket Wal-Mart was one of the first to deploy RFID tags to track and monitor goods.

But other sectors are catching up fast. Gillette is investing in a mass trial of RFID technology, which could lead to the company buying half a billion chips to track its products through the supply chain.

One senior figure at Gillette went on record as saying that RFID tags are a much more effective management tool than barcodes because barcodes need human intervention. Last year Gillette invested in 500 million RFID tags.

Packaging tag
And there's more. Pfizer, the drugs manufacturer, is to tag the packaging for Viagra, a drug that's being targeted for theft by organised criminal gangs. Prisons and care homes are also using tags to monitor people's movement and activity on their premises.

There can, however, be a downside to tagging in retail, as Tesco found out recently. The issue is one of civil liberties. Earlier this year, one US consumer privacy organisation called for a global boycott of Tesco over its use of RFIDs. Tesco responded that it was only trialling the tags in 10 stores and consumers could not be monitored once they left the premises.

But the fact that the insurance industry has yet to recognise the full potential of RFID technology might not be as damning as it sounds, as most other industries haven't cottoned on either.

But from an insurer's perspective the tags could have a number of major benefits, in terms of both underwriting risks and business processes generally.

Companies using RFID tags are going to provide underwriters with the potential for innovative underwriting. Product recall is an obvious one.

A US manufacturer of car seats tags every component in the manufacturing process so that the company knows precisely what components are in what model of car seat.

If a particular component is found to be faulty and product recall is required, the company can very quickly and accurately identify every seat incorporating that component, thus keeping recall costs to a minimum.

Imagine a scenario in which a valuable item of jewellery named on an insurance policy is stolen from its owner's handbag. The insurer may have no way of knowing whether the claim is genuine. But if the piece of jewellery has an embedded RFID tag, its movements could be tracked.

Readers installed in places such as airports or borders would register the item's presence. The US Government is already talking about testing RFID technology at its border crossings.

If recovered by the police, the tag could contain data that linked the item to a named owner and an insurance policy, thus ensuring possession and owner are reunited and the insurer is also notified. Clearly this sort of application has the potential to improve recovery rates, reduce claims and keep premium costs down.

On the business process side, RFID tags allow for components or documents used in any sort of business process to be tracked and located. For insurers struggling to control millions of pieces of policy documentation, RFID technology offers a possible solution.

Courts in the US are now piloting a system to track 12,000 tagged documents containing sensitive data relating to children processed through the court system. Major IT companies like HP and Texas Instruments have developed document tracking systems including tags that are embedded in sheets of paper.

Although there have been issues surrounding RFID and its use in consumer markets, the benefits for the insurance industry are clear: speed of processing, increased customer satisfaction, a single view of the customer and fewer fraudulent claims.

Any public concern at the moment is fuelled primarily by a lack of understanding of RFID technology and this, we believe, will dissipate rapidly.

Insurers should certainly not be put off from investigating the potential of RFID tags; other industries are already embracing the technology and guiding its development.

Insurers have as much to gain as any other sector - perhaps more. So for any underwriter looking for a way to get a better night's sleep, RFID could well be the answer. IT

' Jonathan Hopper is technology director of Smart421