Monday, November 16th
3:50 p.m. - 4:30 p.m.

The Key to E-Commerce:
Straight-Through Processing

-- Gary Craft, BancAmerica Robertson Stephens

"Analyst Predicts Reshaping of Financial Services"

The third wave of the technological revolution is about to wash over the insurance industry, remaking the landscape and leaving a new order, equity analyst Gary Craft of BancBoston Robertson Stephens told insurers on Tuesday.

Speaking at the Annual A.M. Best Fall Conference, "Fulfilling the e-Promise," Craft laid out a series of predictions about the radical restructuring of insurance and financial services in the coming few years.

What's driving those changes is the rise of the Internet and the unprecedented drop in the cost of delivering data. Only a decade or more ago, it cost, on average, about $200 to deliver a megabyte of data through proprietary delivery systems. The microchip and the data storage revolutions -- components of the first two waves -- have joined with the Internet to reduce that cost to virtually zero, Craft said.

In coming years, that will mean:

• Insurers are going to have to eliminate $184 billion in "deadweight" losses or lose out to leaner competitors. Those costs come from rekeying data, keeping multiple sets of books for regulatory and business purposes and the costs of "not knowing" as agents and various parts of the insurance process keep data from one another.
• The focus of enterprise computer networks will focus less on collecting information for regulatory purposes and more on information that will help build the franchise.
• Insurance will break free of regulatory restraints that restrict how insurance can be transacted across state lines.
• Banks and "portals" will gain greater control over insurance distribution and customers' financial relationships. Portals are Internet sites such as Yahoo! or Intuit's Internet site designed to help customers find information. In order to preserve the checking account, banks will be "billing aggregators," stepping in to collect customer's bills and provide automatic payment. As they gain a greater role in financial lives, banks will become the major referral for insurance.
• Insurers will increasingly develop and file regulatory approvals for products specifically designed for Internet distribution. Some companies such as Reliance have already moved in that direction, but others are poised to create similar products, Craft said. "We're like a car that's revving before the green light is given at the race track."
• The insurance leaders of tomorrow will come from Yahoo! or America Online, or other marketing-oriented companies. In the 1970s, industry leaders came from a legal background, and in the 1980s there was a turn toward those with expertise in underwriting. "In the years 2000 through 2010, it's going to be people with consumer-marketing backgrounds," Craft said.
• One-stop insurance companies will give way to companies that specialize in various facets of the insurance process, including: originating policies, underwriting, administering policies, reporting, management investment, handling claims and product research and development.
• As insurance breaks up into components and the Internet becomes central, the underwriting pricing cycle will level out. Insurers will supplement underwriting profits with value-added services sold to the customer. The result: regular, more normal returns on equity.
• Single-point gateways such as online insurance malls will limit some insurers' ability to obtain distribution. Some of those gateways will become the sole outlets for "insurance factories."
• Brokers and agents will either move up the value chain or face extinction. One example is the world of online insurance sites, in which companies that run web sites sell leads to insurance companies. The company will then charge the agents part of that price in order to pass along the lead.