E-Insurance: Analysis of the

Impact and Implications of E-

commerce on the Insurance
Industry

Anshu Arora

Dissertation submitted for the award of Msc in

Actuarial Management

Cass Business School

Faculty of Actuarial Science &Statistics
106 Bunhill Row
London
EC1Y 8TZ

May 2003
 ABSTRACT

The term 'e-commerce' has become widespread- a force that is here to stay. E-

commerce and the Internet are increasingly becoming one of the most important

drivers of strategic change for business and national governments. Yet the insurance

industry has been lagging behind other financial services to embrace this new change

within its activities. The Internet has enormous potential, as it is a medium that

provides cheaper and more efficient communication links. This dissertation analyses

the current developments and trends within the insurance industry. It also assesses the

extent to which e-commerce affects the day-to-day activities of insurance companies

and examines some of the implications of e-commerce on the life insurance industry

and associated sectors.

As boundaries between businesses are reduced and a greater level of customer

empowerment is seen, the very nature of financial services may change. Four

postulated strategic business models arising from e-commerce are: intermediary

marketplace, work-site marketing, eyeball attractor and transaction processor. Within

the insurance industry, there shall be less of a distinction between short and long term

insurance products and product design and the pricing of such products shall

dramatically adapt to come in line with Internet selling methods. This however may

affect the long term financial stability of the insurance company with insurance

companies having to lower their profit margins to compete on-line and the dynamic

nature of e-commerce having valuation, solvency and appraisal implications, as well

as affecting the actuarial control cycle.

1
ABSTRACT..................................................................................................................1

1 AN INTRODUCTION TO THE INTERNET .......................................................5

1.1 THE INTERNET WORLD WIDE WEB AND E-COMMERCE…………………………………….. ….7

1.1.1 The Internet……..……………………………………………………………………………...7

1.1.2 Electronic commerce………………………………………………………………………….8

1.2 CURRENT DEVELOPMENTS AND USAGE IN INSURANCE ………………………………………...8

1.2.1 Developments…………………………………………………………………………………8
1.2.2 Usage ……………………………………………………………………………………….10

1.3 THE E-MATRIX ……………………………………………………………………………11

1.4 CURRENT TRENDS WITHIN THE INTERNET…………………………………………………….14

1.4.1 Customer power……………………………………………………………………………..14

1.4.2 Boundary reduction…………………………………………………………………………15
1.4.3 Speed ………………………………………………………………………………………15
1.4.4 The digital revolution…….…………………………………………………………………15
1.4.5 Connected Workforce…………………………………………………………………….…16

2 CURRENT ISSUES WITHIN THE INSURANCE INDUSTRY.......................17

2.1 NEW MARKET PLAYERS………………………………………………………………………..17

2.2 GLOBALISATION...……………………………………………………………………………..17

2.3 REGULATION AND DEREGULATION …………………………………………………………..18

2.4 THE AGEING POPULATION……………………………………………………………………...18

2.5 SOCIAL CHANGES.……………………………………………………………………………..19

2.6 CHANGES IN THE TYPE OF TRANSACTIONS…………………………………………………….19

3 THE INTERNET & LIFE INSURANCE: IMPACT AND IMPLICATIONS .20

3.1 CURRENT POSITION OF INTERNET USAGE BY LIFE INSURANCE COMPANIES…………………... 20

3.1.1 Web Presence Stage…………………………………………………………………………20

3.1.2 Interaction Stage……………………………………………………………………………..20
3.1.3 Transaction Stage……….. ……………………………………………………………..…..21
3.1.4 Enaction Stage……………………………………………………………………………….21

2
 3.2 IMPLICATIONS FOR LIFE COMPANIES…………………………………………………………..22

3.2.1 Survival of the fittest………………………………………………………………………...22

3.2.2 Specialisation………………………………………………………………………………...23
3.2.3 A Niche scenario…………………………………………………………………………….24

4 THE INTERNET & OTHER MARKETS: IMPACT AND

IMPLICATIONS……………………………...…………………………..……...25

4.1 IMPACT ON INSURANCE

BROKERS………………………………………………………………………..…………...…25
4.2 IMPLICATIONS FOR
REINSURERS..………………………….……………………………………………………….27

5 BUSINESS MODELS ............................................................................................29

5.1 INTERMEDIARY MARKETPLACE MODEL……………………………………………………….29

5.2 WORK SITE MARKETING………………………………………………………………………30

5.3 EYEBALL ATTRACTOR…………………………………………………………………………32

5.4 TRANSACTION PROCESSOR ……………………………………………………………………33

6 FINANCIAL IMPLICATIONS OF THE INTERNET AND

INSURANCE……………………………………………………………………..35

6.1 THE PRICES OF PRODUCTS……………………………………………………………………..35

6.1.1 Competition for commodities……………………………………………………………..35

6.1.2 Dynamic pricing…………………………………………………………………………….35
6.1.3 Privilege Pricing……………………………………………………………………………36
6.1.4 Change traditional actuarial pricing models…………………………………………..36

6.2 IMPACT ON CAPITAL AND LONG-TERM FINANCIAL STABILITY………………………………..37

6.2.1 Capital costs………………………………………………………………………………...37

6.2.2 Reducing costs potential…………………………………………………………………..37
6.2.3 Reduced Margin.s………………………………………………………………………….38

6.3 IMPACT ON APPRAISAL VALUES………………………………………………………………38

6.4 IMPACT ON VALUATION AND SOLVENCY REGULATIONS……………………………………..38

6.5 DOT-COM SHARE PRICES…………………………………………………………………….39

6.6 IMPACT ON THE ACTUARIAL CONTROL CYCLE……………………………………………….40

3
7 E-SECURITY WITHIN E-
COMMERCE……………………….……..……………………………………41

7.1 KPMG INFORMATION SECURITY SURVEY………………………………………………….41

7.2 THE WAY FORWARD…………………………………………………………………………42

7.3 THE E-COMMERCE DIRECTIVE & REGULATIONS…………………………………………..44

8 CASE STUDY: EAGLE STAR DIRECT…………………………………...46

8.1 BACKGROUND OF SETTING UP THE WEBSITE……………………………………………..46

8.2 EAGLE STAR DIRECT EXPERIENCE EXAMPLE……………………………………………48

9 THE ROLE OF THE ACTUARY……………………………………………..51

9.1 STRENGTHS………………………………………………………………………………51

9.2 WEAKNESSES…………………………………………………………………………….51

9.3 OPPORTUNITIES………………………………………………………………………….52

9.4 THREATS…………………………………………………………………………………54

10 CONCLUSION………………………………………………………………..57

APPENDIX………………………………………………………………………..59

BIBLIOGRAPHY………………………………………………………………….60

4
1. An Introduction to the Internet

The term ‘e-commerce' has become widespread; a force that is here to stay. E-

Commerce and the Internet are increasingly becoming one of the most important

drivers of strategic change for business and national governments. Similarly, it is

beginning to have a significant impact on people's lives. Everyone from shops to

financial institutions is looking for ways to leverage the Internet for increased

revenues, improved profitability and greater customer/brand loyalty.

The spectacular returns on 'Dot Com' firms have made companies such as Yahoo!

and Amazon.com household names. In an article in U.S. magazine ‘Fortune’, it was

noted that Venture capitalists invested $5 billion in 1998 for Internet ventures – a

533% increase since 1995, with an additional $2 billion invested in the first quarter of

1999.

Yet with the bright light shining on the future of e-Business, recent research by

Deloitte & Touche raises some disturbing facts for the insurance industry. Only about

10% of insurance companies believe that the Internet and online services are currently

very important in relation to overall information technology expenditures. That figure

only rises to about 50% when asked if it would be very important in five years.

Clearly, this issue needs addressing in depth as to why this is the case.

The main purpose of this thesis shall be to critically examine the impact of e-

commerce, with specific reference to the insurance industry. Firstly a brief

introduction to the Internet and e-commerce shall be given, considering the current

5
usage, developments as well as characteristics of each type of e-commerce

transaction. The second chapter shall focus on issues currently surrounding the

insurance industry and how the Internet has changed these. Chapters three and four

shall discuss the impact of the Internet on the life insurance industry and other

markets respectively. Chapter five shall describe and evaluate some of the business

models that are currently forming within insurance e-commerce. Chapter six shall

examine the financial implications of the Internet and Insurance in terms of product

design and its pricing and the impact on capital and long term financial solvency.

Chapter 7 shall focus on issue surrounding the security of e-commerce useage,

examining the e-commerce directive and discussing KPMG’s research into current

security.

Chapter 8 examines using Eagle Star Direct as a U.K. specific insurance company

case study and the issues surrounding the setting up of a successful insurance website.

Chapter 9 focuses on looking at how the role of the actuary fits can add to the e-

commerce environment in terms of the strengths, weaknesses, opportunities and

threats actuaries can create.

Finally, the conclusion shall link up the whole project, extracting the main

implications of e-commerce on the insurance industry and suggesting extensions for

further research.

6
1.1 The Internet World Wide Web and e-commerce

1.1.1 The Internet

Originally created in 1983, the Internet was primarily intended for organisations in

defence-related research, namely ARPANET (Advanced Research Project Agency

NETwork), to provide a secure and reliable communications network.

Today the Internet is a global network, which connects smaller networks by the use of

a common addressing system, and communications protocol called TCP/IP

(Transmission Control Protocol/Internet Protocol).

The World Wide Web enables quick and user friendly access to various information

sites and saw an exponential growth rate during the 1990s, becoming the most

significant aspect of the Internet. The websites are connected to one another by

means of hyperlinks, which are written in a language called HTML (Hypertext Mark-

up Language). The user may gain direct access to that specific website by means of

typing in the allocated URL (Uniform Resource Allocator).

7
1.1.2 Electronic commerce

Electronic commerce may be defined as being

“Any form of business or administrative transaction or information technology

exchange that is executed using any information and communication technology”1

With the growth of commerce on the Internet and the World Wide Web, e commerce

often refers to purchases from online stores on the Web, otherwise knows as e-

commerce Web sites. They may also be referred to as "virtual-stores" or Cyber

stores. Since the transaction goes through the Internet and the Web, some have

suggested another term: I-commerce (Internet commerce), or i- commerce. E-

commerce can be business-to-business (B to B) or business to consumer (B to C) and

two other variants of this. This shall be examined in further detail later.

1.2 Current Developments and usage in Insurance

1.2.1 Developments

Compared to other areas such as on-line brokerage and on-line banking, development

of the Internet in the insurance industry has been less extensive. The effect of e

commerce is the subject of intense debate in the insurance industry, although actual

translation into solutions is still in its early stages. In personal insurance (e.g. motor,

1
Reference: e centreUK

8
private liability and household contents), a recent Swiss Re survey predicts on-line

channels to have gained a market share of 5-10% in the US, and 3-5% in Europe by

2005. In the area of standard insurance products, where there is little need for advice,

traditional brokers are facing considerable competition because of decreasing

information costs. In the cases of more complex products (particularly pensions, life

assurance and health insurance products) competition has been less intense.

In Europe, three main companies dominate Internet insurance: the UK insurer

Prudential, Skandia of Sweden (Skandia Banken) and AXA, a French insurer that has

been very successful in the US with its DLJ Direct Financial Service. A Forrester

survey has identified the rise of virtual insurance ‘supermarkets’ in response to

consumer demand for comparison, shopping for mortgages, insurance and funds.

Predictions say that these will dominate the market by 2005. A number of companies

are now selling life assurance over the Internet directly to consumers. This sector

looks sure to expand. (The launch of the NetBank and Insurance.com combined

website being a good example). Such sites will provide customers with information

and quotes on home, life, health and other insurance products.

9
1.2.2 Usage

Currently, some 220 million people around the world are online and Internet usage is

projected to grow to 350 million users by 2005. According to Dataquest a US based

Research Company, worldwide retail sales over the Internet were US$ 31 billion in

1999 and will be US$ 380 billion by the end of this year (2003). Further research

predicts that electronic sales of financial products shall increase five-fold by the end

of this year to become the single largest service sold online.

Fig: 1.2.2: Prediction of growth pattern

10
1.3 The e-matrix

Internet activities can be broadly categorised by the following matrix2

Business Consumer

B2B B2C

C2B C2C

2
Source: E-Actuaries ibid. The Economist

11
Business-to-Business (B2B) is where a large company invests all of its resources

within the Internet and its activities. Web sites that allow secure connections between

the companies internal web site (called the Intranet) and users who may be accessing

the facility from a remote location facilitate this. Such a system is called an extranet;

a good example being Cisco systems whose operations involve trade in computer

hardware. Cornall, Monica J et al (2000) mention that in 1999, B2B transactions

represented 85 percent of total e-commerce revenues.

One of the most recent developments has been the creation of B2B online exchanges.

Analysts predict that by 2003, over 35 percent of Internet transactions are completed

via these exchanges. Exchanges may be used to efficiently acquire a firm’s inputs

and sell its outputs to its targeted market. Commercial insurance and reinsurance are

examples of areas that are ideally suited to the online exchange concept.

12
Business to Customer (B2C) is where having greater accessibility increases retail

market share and the customer has more awareness of the exact services and products

offered by the customer. An example of this would be Lasminute.com

Researchers believe that the gap between business to consumer (B2C) and B2B shall

widen at a dramatic pace over the next several years, with B2B growing by 100

percent annually, while B2C is only expected to grow by 50 percent per year.

Customer to Business (C2B) enables the customer to directly contact the business

more so than the other way around. For example

Customer-to-Customer (C2C) allows customers to deal with other customers through

an intermediary. For example, Names123.com allows customers to place a bid on a

particular web site name and keep track of their bid by the use of password account

information.

13
1.4 Current trends within the Internet

1.4.1 Customer power

Owing to the accessibility, user friendliness and low barriers to entry customers can

readily compare offerings between companies and find the most suitable offer for

them within a relatively short period. As suppliers become increasingly accessible,

the market becomes more disintermediated. Sites that continually revise offerings to

customers facilitate commoditisation. However as such open competition there arises

the necessity for customers to regard branding as a key source of competitive

differentiation amongst businesses. Quality and price also influence market share in a

market where the customer expectations are continually becoming more demanding.

Indeed if customers collude together (C2C) this power increases even further. Poor

service quality becomes more significant as bulletin boards can spread news of such

and drastically effect business credibility.

As businesses target the customer directly, push-marketing strategies, whereby

intermediaries are more involved in the marketing of products, become increasingly

the key to success. The web enables consumer-purchasing decisions to be analysed

even on a one-to-one basis. However hand in hand with this advantage comes the

danger of violating personal information regarding a customer under the Data

Protection Act.

14
1.4.2 Boundary reduction

As business boundaries reduce themselves, value network becomes more established

whereby other extra services in addition to a customers purchase are available. As

mergers and acquisitions between firms becoming increasingly common, each firm

can concentrate on its core activities and outsource other non-core components of

their business. Furthermore, extranets facilitate collaboration between customers’

distributors and the firm.

1.4.3 Speed

The evolution of value chain into a value network speeds up the delivery of the

service to the customer. Factors of competitive differentiation such as price demand

and competition are readily available to a firm, which allows real, time dynamic

pricing. As simulation of business models is significantly easier and quicker on the

net than in real life and fewer barriers to entry exist on the net, maintaining an

innovative product becomes somewhat harder for companies.

1.4.4 The digital revolution

There is a transition from obtaining items, which are tangible to intangible products or

services at every stage of the buying process. This facilitates price, quality and

efficiency. A good example of this is the move towards the purchase of MP3 files

instead of buying a CD.

15
1.4.5 Connected Workforce

Intranets within a company allow management to communicate with employees in a

fast efficient manner at fraction of the traditional cost. Moreover, employees can

communicate with one another, thus enabling virtual communities of the best staff for

a job to collaborate and provide the best solutions to the business’ needs, irrespective

of time, distance and language constraints.

With the age of this wired workforce comes the disintermediation of certain

management and other staff being given greater responsibility. The management and

implementation of knowledge in an efficient manner throughout the firm becomes a

key source of competitive advantage.

16
2 Current issues within the insurance industry

A number of issues within the insurance industry need addressing. Where relevant

the impact of the Internet on these issues shall also be analysed.

2.1 New market players

Many new firms have ventured into the UK insurance industry to include banks,

building societies, and non-domestic insurance companies and privately owned

companies. These new entrants largely form allegiances with the traditional market

players. However, the major barrier to entry is distribution. The Internet overcomes

this and by having low barriers to entry encourages new players into the insurance

market. Moreover, it emphasises the significance of being competent in branding and

direct marketing i.e. company advertising.

2.2 Globalisation

Historically the UK insurance industry has been domestically based with little or no

international focus. Barriers to entry such as tax, legislation, government, distribution

channels and culture have meant that even a pan-European industry has failed to

flourish in the past. However, as economies of scale and comparative advantage lead

to global cost efficiencies and also partly due to the trend towards a standard

European currency, pan-European companies have more of a chance to be established

17
thus facilitating globalisation. The Internet directly facilitates this globalisation and

allows a global distribution potential to exist, although the other barriers still must be

overcome.

2.3 Regulation and deregulation

In the past, the domestic insurance market has had little regulatory control, with the

emphasis being on freedom and openness. However to offer greater consumer

protection and to follow in line with other countries, the U.K. market has undergone

more stringent legislation and regulation to provide specific professional guidance.

Ironically, the reverse has also occurred with new market players encouraged to enter

the UK domestic insurance market e.g. Tesco Insurance. The Internet effectively acts

as a ‘push’ mechanism for the government in providing solutions that are different

from those already in place (such as stakeholder pensions). In addition, it allows

regulatory change into place, emphasising customer focus and reducing the

boundaries between banking and insurance.

2.4 The ageing population

As the longevity of life increases and the birth rate falls, the burden upon government

social security schemes takes its toll i.e. the dependency ratio increases and there

arises the opportunity for private firms to enter the market, encouraged by the

government.

18
2.5 Social changes

Changes in patterns of employment, such as “flexi-time” working, means a new type

of customer with different requirements. The Internet largely facilitates this by

changing working and living habits and allowing more working from home.

Consequently this has several implications for the type of insurance people want to

buy e.g. employees may not thus need longer term types of insurance; the risk and

rating factors may be reduced etc.

2.6 Changes in the type of transactions

It has been predicted that in the future business-to-business transactions will exceed

business to customer transactions as B2B transaction size and frequency is larger.

Moreover, business infrastructure will make way for enhanced consumer options and

increased consumer spending in the future. Due to the extensive supply chain (many

business supplying the customer being interlinked and interdependent) many systems,

databases and networks are incompatible and hence the insurance industry has

problems with sharing data. For example, many insurance brokers are not linked to

insurance companies themselves and hence are unable to upload or download

information. Another example is the lack of a systematic link between an insurer and

a reinsurer. Current changes to resolve this dilemma include building links between

supply chains e.g. a system that enables an insurer to obtain underwriting data from

information suppliers.

19
3 The Internet and life insurance: impact and implications

3.1 Current position of Internet usage by life insurance companies

Stages of incorporation of Internet into existing businesses can be broadly categorised

into four main stages.

3.1.1 Web Presence Stage

To obtain on-line quotes on a contract that they may be interested in and the activities

of the company are largely targeted activities. However there is no processing of the

information past this stage and a customer must obtain an application form to process

the transaction any further.

3.1.2 Interaction Stage

This is where a company uses web pages to provide information about their products

and services i.e. corporate information, to include financial statements and balance

sheets. This stage is very basic and apart from raising brand awareness, there is no

real significant impact and incorporation into existing businesses.

20
3.1.3 Transaction stage

This is where the company has enhanced information technology and may even have

facilities for customers to place orders and transactions

3.1.4 Enaction stage

Here the company has used the net and IT. to redefine their business and are known as

e-enabled businesses. The emphasis is on interactive customer relationship

management and full integration of Internet facilities into the company. An example

of such a company might be Cisco systems.

Currently most companies are in the interaction stage and thus need to upgrade their

business value by making the Internet an integral part of their business value and

despite the insurance industry’s hesitancy to embrace the Internet as a channel for

distribution, the outlook over the next five years is very positive.

“While the online insurance marketplace represented only about $1.9 billion in

premiums ($1.6 billion net-influenced sales and $0.3 billion online sales) in 1999, this

market is expected to grow to $11.1 billion in premiums ($7 billion net-influenced

sales and $4.1 billion online sales) by 2003.” 3

3
Source: Forrester Research.

21
A recent Gartner Group study indicated that 72 percent of insurers surveyed stated

they would provide online quotes, and 39 percent indicated that they would be able to

complete sales online by the end of this year.

Appendix A shows some of the major retail based websites available in the U.K.

toward the end of 1996.4 Although it may initially suggest Internet incorporation

within the insurance industry, it is important to appreciate that the level of this

Internet technology incorporation has been to the interaction stage.

3.2 Implications for life companies

3.2.1 Survival of the fittest

One possible impact of the Internet in the future will be the position whereby only a

small number of companies shall exist owing to economies of scale in

commoditisation. Having established a strong brand, their support services for their

products will be diverse and be innovative and technological. Inclusion a muti-

channel distribution strategy along with bundling a variety of secondary related

products will help them to provide insurance products for both the long and the short

term.

These companies will be the result of the merger and acquisition of several existing

financial companies and may be a global venture. Profit margins although

deliberately kept low will exist and the emphasis shall be on high volume, minimum

4
Source: Wire Ltd The Internet & Financial Services

22
unit cost sales, with heavy investment of capital in advanced technology. The target

sector will be the average person who has relatively simple insurance needs.

Customers may find that loyalty discounts exists and they shall be quite happy to

purchase other products from these big market players.

3.2.2 Specialisation

Here each company will choose to concentrate on their core business competencies

outsourcing non-critical components and leaving the distribution of their products to

independent firms, such as supermarkets, who have a wider consumer base. There

shall be a trend towards a virtual office environment.

Communication between manufacturers and distributors (B2B) would be by using

extranet facilities and allow one to one marketing. It will be imperative, from a

competitive point of view, for insurers, to offer online transactive services and to

participate in B2B online exchanges. On the positive side, the expansion of this B2B

e-commerce should result in cost-savings for policy administration.

The industry would see a deregulation with branding and diversity of the distributor’s

customer base becoming key sources of competitive advantage. ‘White label’

products would become increasingly common as competition increases and new

players emerge. The resulting effects will be the demise of many small and medium

sized companies and a reduction in the number of Independent Financial Advisors.

23
3.2.3 A Niche scenario

As the number of people surfing on-line increases every day and wealthier and more

educated customers display sophistication about them a niche market might develop

in the future to meet the complex financial requirements of such customers, who have

complex financial needs. These needs will include continual personal expert advice

through channels such as Independent Financial Advisors or a Direct Sales Force

Team as well as self-education support in the form of information available to the

customer on the Internet. As innovative products and quality of service become

overriding issues, administration becomes complex and expensive and indeed

customers may choose to forms C2C alliances to sell second hand endowments, for

example.

24
4 The Internet and other markets: impact and implications

4.1 Impact on insurance brokers

The market in which insurance brokers operate is very diverse. Consequently, the

potential of e-commerce is also diverse. An investment broker will advise on which

type of investment product or investment fund matches a customer’s risk tolerances

and personal circumstances, including tax issues. These factors are variable and

hence the broker is, from a business point of view, in a good position.

Moreover, customers are aware that insurance is a necessity and not a luxury and

hence are prepared to take time to seek advice in relation to a lower-cost best value

approach.

Within the corporate market, brokers are aware of the importance of a best value

approach in terms of cost and creditworthiness. Brokers also advise on corporate

pension issues in terms of selection of investment managers and assessment of

solvency risk. Direct dealing insurers however, who promote cutting out the

middleman, are replacing the role of the non-life broker.

Moreover, the position of the smaller retail insurance broker is very different to their

larger competitors.

By a combination of web-based marketing sites and the facility of transmission of

data between systems using a standard interchange facility may facilitate low cost

electronic trading for brokers which may be paramount to the survival of the smaller

25
broker. Web-enabled TVs would increase the potential market and thus provide even

greater savings.

Also Internet usage allows an alternative to the traditional manned claims desk by

allowing free exchange of information on claims procedures. All, however, face the

threat of disintermediation and broker commission rates are under threat. This has

been partially due to the Internet, as customers “go direct” with the underwriters.

Brokers have responded to this by increasing the range of risk management services

that they offer. However, this still does not deal with the issue of the Internet being

responsible for edging them out of the market altogether, as the development of a

Universal Electronic Data Interchange allows communication between customers and

insurers that is more direct.

Not all is bad news. Indeed the Internet can be advantageous for the broker in terms

of providing them with a faster more cost efficient method of transferring information

globally and hence enabling them to pass on the savings to their customers and hence

attract more business.

The Internet is also changing the role of the broker from an intermediary to an

“infomediary” who conveys information to the customer. As markets become

increasingly dependent on standardised information such as the FTSE indices, the

broker becomes the supplier of information that affects these indices.

26
The Internet’s ability to improve the communications highway may stimulate

development of securities, thus making the market more complex but fruitful for the

broker.

In essence, the Internet could speed up trends that are already present in the market.

If this is the case then only those brokers, who are continually re-evaluating their role

and its changes due to the Internet, will be able to reap the full benefits. Indeed

ignorance of this technology may result in significant consequences.

4.2 Implications for reinsurers

This topic is somewhat difficult to address, as reinsurers have minimal Internet based

activity. The problems they face are different to brokers as they are not involved so

much in the transfer of information and they are more the risk bearers. The ease of

information sharing allows customers accounts to be continually monitored by

reinsurers. It will also mean that they are up to date, thus making renewal simpler.

Moreover, this data is easily manipulated and stored thus decreasing administrative

costs.

Within the London market this advantage is readily apparent with organisations such

as Lloyd’s enjoying the increased efficiency gain. However, the Internet facilitates

competitors in the reinsurance industry such as the Bermuda reinsurance centre.

These centres have benefited greatly from the impact of the Internet as distance and

location has been a traditional barrier to entry. Furthermore, such centres are in an

27
ideal situation to postulate legislation for newer forms of e-commerce that would

complement their existing tax position and hence generate even further business.

These competitors have undoubtedly affected the traditional market share that Lloyd’s

enjoys and thus it is imperative that such points should be considered.

28
5 Business Models

This chapter will examine some of the models that are evolving within e-commerce

5.1 Intermediary Marketplace model

This model is where the main body connects with an associated organisation that

allows an ever-increasing number of buyers and sellers to interact, based to B2C

transaction. It enables a commodity to be sold for the right price and the commodity

to be suitable for the buyer. The model emphasises consumer choice and power. As

customer awareness increases and competition becomes fiercer, intermediaries may

set up on the Internet. These companies may compile information search for the

consumer in relation to the best deal for them and based on this provide them with

link to the most “suitable” sites.

However it is fundamental to question, suitable for whom – the customer or the

insurance firm? It is clear that such companies would generate revenue from

companies using their services as a push strategy for their own business. Indeed to

make full use of the Internet potential they should provide additional services for the

company such as online underwriting.

Note, however, that such a model would have a more profound impact on the retail

financial advisor market rather than the insurance market. It inevitably gives power to

the consumer whose expectations are continually rising, hence increasing competition

even further and decreasing profit margins.

29
An example of such a model is InsWeb, which acts as a trusted third party between

customer and the insurance company. It provides a marketplace so that consumers

can research and shop from companies. From an insurance companies point of view

InsWeb provides a captive audience of pre selected, quality referral candidates.

The model is a relatively feasible one but it should be ensured that high competition

within the market exists. Success of this model largely depends on having good

suppliers, a large frequency of “hits” on the website and brand recognition.

Technology is also important in improving the flow of business and hence retaining

customer business.

5.2 Work Site Marketing

This model is a B2C model with a B2B delivery mechanism. The idea is to

effectively serve the employee benefit market especially potential buyers of financial

service products. The marketers of these model design products for this target group

via specific web or Intranet forums (see fig 5.2). Employees of the host company can

then, at no cost to the host or employee, manage their employee benefits (that have

been provided by the host) as well as purchase other optional items of insurance (e.g.

car insurance). Revenue is generated primarily through commissions from product

providers. Other revenue may be generated through advertisement.

30
This strategy has potential as it serves a considerable sized market, which is

underserved. The main advantages of this model are:

§ It aggregates consumer buying groups which achieves market power and

discounts

§ Facilitates product customisation

§ Host Company receives good employee benefits management administration

at no cost to themselves, hence easing the burden on the human resource

department.

§ As the structure of the benefit is in line with the payroll system there are less

costs which means better terms for the employee

A current example of this model is AnswerFinancial

Host Company

Work site
marketing web

Employee
Employee
Employee Employee Employee

Figure 5.2: Work Site marketing for one company

31
5.3 Eyeball attractor

This model is similar to the marketplace model. It is a B2C model which has an

extensive distribution capability. Its main purpose is to attract consumers from the

web for a predefined set of products and act as a reference site for link to

manufacturers that are “recommended”. An example would be if screened customers

visit the web site to try to find the cheapest holiday insurance and is then referred to

an insurer providing such a service. Revenue is generated from the referral stage.

C
C

S C

C
Eyeball
S Attractor
C

S
C

C= Consumer

S= Supplier

Fig 5.3: Eyeball attractor model

32
This model is the cost commodity based out of all of the models and marginal value

will be difficult to obtain in the long run. Success is largely dependent of having

correct links to the manufacturer web site and a strong “hit” rate on the website.

Obviously considerable technology is required to maximise the efficiency of this

model. For example, if the web site is to ask a customer to fill in their detail then it

must e ensured that all details that are required by the manufacturer of the product are

correctly in place on the application form and that the technology for data transfer

between the eyeball attractor and the manufacturer is compatible.

Survival of the website shall largely depend on maintaining a high number of visits to

the website. Note that costs to gain customers in the first place might not necessarily

be recovered by customer loyalty.

An example of this model is InsuranceBenefits.com

5.4 Transaction processor

This model is B2B. The structure of the model is like a matrix whereby it has

exponential links to any number of companies along an industry vertical. These links

add value by using the web to increase the efficiency between supply chains, thus

reducing friction costs. For example, such a model would allow flows between an

insurer and a reinsurer through an electronic network. The benefits would be a faster,

real time communication within the network as well as a reduction in the

administration costs involved.

33
Success in this model is largely dependent on innovative technology, business

recognition within the relevant industry and widespread usage amongst the industry.

The main goal shall be to become the industry’s “motorway” and standard. Examples

include SelectQuote and CyberComp.

34
6 Financial Implications of the Internet and Insurance

6.1 The prices of products

6.1.1 Competition for commodities

As the Internet facilitates price comparisons to be made very quickly and customers’

expectations of quality service continue to rise, price competition increasingly

becomes a source of competitive advantage. As new players enter the market and

defy traditional systems of insurance, by using advanced Internet technology, they

intensify this situation. This could mean that the long-term solvency of certain

insurers could be at risk.

6.1.2 Dynamic pricing

Traditionally premiums have been calculated using pooling of risk and 19th and 20th

century mortality tables. As customer expectations rise, they may expect offices to

update their premiums in line with their actual experience. The Internet not only

enables this but also theoretically could allows the calculation of a real time premium,

based on up to the minute claims experience. However, this might lead to a situation

whereby the customer demands that their premium is not used to subsidise someone

else’s, who may have a higher risk exposure than them. This might mean that higher

risk customers may become excluded.

35
6.1.3 Privilege Pricing

Insurers may choose to lower a particular premium if they know that it is likely that a

customer shall retain their custom with them over a long period e.g. a pension. The

way in which associated products can be targeted and marketed at that customer

makes the proposition have even greater economical potential. However, the cost for

getting it wrong can be all too high as well. Hence, lifetime value pricing becomes

paramount to success and the real time scope of the Internet enables such information

to be shared globally amongst insurers so that this complex process can be done more

accurately.

6.1.4 Change traditional actuarial pricing models

Historically premiums have calculated by working out the expense per policy. This

does not take into account the way in which volume of business decreases marginal

cost. Hence this may mean the traditional market players who base their premium on

the old model are charging more than their competitors, who have lower costs by

using Internet efficiencies. Hence, in the future companies must ensure that their

expenses are based on real life pricing techniques and are kept as low as possible to

attract as much new business as possible and indeed retain existing business. Indeed

other ways of generating revenue such as web space advertising and selling customer

information might change that final premium and hence attract business from their

competitors.

36
6.2 Impact on capital and long-term financial stability

6.2.1 Capital costs

Although it is cheaper to build a web site rather than an office cost still exist. Initial

costs such as web site design and strategic and implementation design can accumulate

to a substantial sum. An example of this is Zurich financial services spending £100m

on the development of a global e-business exchange.

6.2.2 Reducing costs potential

The Internet facilitates cost reductions, especially in administrative terms by using a

straight through processing system. It also reduces distribution costs, as the Internet

favours pull rather than pull strategy. Figure 6.2.2 shows the policy administration

charges for the “Property & Casualty” insurance market. Clearly it can be seen that

the internet has considerably lower costs per policy compared with the agent/broker

and call centre.

20

15
$ per policy

10

0
Agent/Broker Call Centre Internet

Fig 6.2.2 Policy Administration charges for personal lines Property & Casualty

37
6.2.3 Reduced Margins

As customers expectations rise in terms of higher quality of service and lower prices

competition amongst e-insurance players will increase. This shall inevitably cause a

situation whereby competition is such that profit margins will be cut to gain a bigger

share of the market. Indeed, companies who do not advocate this philosophy may

suffer consequently. Retaliation of these companies by using one-to-one marketing

techniques, better customer relationships and cross-selling may work depending on

what extent these companies are prepared to invest in such techniques.

6.3 Impact on appraisal values

The traditional method old discounting Present Values of Future Profits at a risk

discount rate will become harder to calculate in a constantly changing Internet

environment. The Internet and one-to-one marketing techniques allow a company to

evaluate the value of a new business from existing customers. New business from

new customers could be evaluated more accurately if greater research was done into

the demographic market. These aspects together make the traditionally difficult

calculation of goodwill somewhat easier.

6.4 Impact on valuation and solvency regulations

As boundaries are reduced between “e-financial services”, the industry hasn’t merged

in terms of regulation and tax treatment. This has lead to regulatory arbitrage to exist

38
within the financial services. For example First-e is open to all UK customers but is

not regulated by the FSA. The web site allows more attractive rates of interest to be

offered to the customers, as it is not UK regulated. Customers can also benefit from

the differences in the valuation basis between countries and hence obtain a more

attractive deal.

In addition, e-commerce may impact the valuation basis in terms of generating

alternative business models. For example, consumer data selling or perhaps

advertising may dominate traditional mortality experience in terms of generating

income for the company.

6.5 Dot-com share prices

It is not a secret that many “dot-coms” have enjoyed high share prices for a limited

period and then seen their share prices plummet. An example of this is

lastminute.com. As there are few barriers to entry many companies see the business

opportunity and enter the market and within a matter of weeks see this all to common

story happen to them. From an insurance point of view this has meant that it has been

difficult to make a stock market valuation on a company using traditional discounted

cash flow techniques. Asset portfolio valuation, high volatility and yield basis in

discounting liabilities all become more complex issues that need consideration.

39
6.6 Impact on the actuarial control cycle

The traditional actuarial control cycle, used to assess financial performance of an

insurance company, is difficult to implement in a dynamic e-commerce environment.

Instead of monitoring the past, a combination of ‘prediction, action and reaction’ is

the key to controlling any e-commerce-based business. Consequently, sensitivity

testing and statistical analysis become crucial.

40
7 E-Security within the E-Commerce

As insurance companies start to incorporate the web into their business plans, there is

growing concern that they expose themselves to greater risk than they envisage. The

Actuary Magazine5 (October 2002) reports on a trebling of hacking groups since

2000. Also they state that there are more than 6,000 hacker groups worldwide, with

increased sophistication in their operations and activities, with motives being often

political. Yet despite these alarming findings, insurers have responded with

confusion and uncertainty.

7.1 KPMG Information Security Survey

KPMG have conducted a survey (2000), published as the Information Security

Survey, in which 200 companies were questioned upon their views of e-security. The

report suggested that over 75% of the respondents were concerned that e-security was

the main obstacle to the use of the Internet for transactions, specifically referring to

issues surrounding confidentiality, viruses and e-fraud.

Despite raising these concerns it is shocking that only a minority of financial

institutions have taken sufficient action to tackle e-security. The survey highlighted

the fact that most of the respondents failed to meet the most basic requirements of

BS7799, the British Standard code of practice for information security management.

5
The Actuary Magazine, October 2002, p22

41
In particular they rarely tested their websites for security risks and even if they did the

procedures for reporting security breaches were weak. Within any security system,

there are the most basic requirements of a firewall internal protection facility. This

was not even present in nearly a third of the respondents of the survey. Lack of such

basic requirements raises the question as to why such security is not in place.

Some of the security risks of doing business over the web

· Masquerading/spoofing, this includes other websites ‘pretending’ to be a

legitimate e-commerce site; individuals masquerading as legitimate customers,
and employees pretending to be customers.
· Message interception e.g. theft of credit card information
· Accidental disclosure of customer information, leading to legal liability
· Communications error leading to transaction corruption
· Web server attack which brings a denial of service and/or a change in the web
server’s content
· Email viruses caused for malicious reasons
· Message repudiation whereby customers are denied use of transaction facilities or
sending messages to the website hosts

Table 7.1 E-Security Risks

7.2 The way forward

In leveraging their business insurance companies must manage risks and be able to

mitigate these risks. Largely this shall mean reviewing their policies, procedures and

infrastructures. In addition, it is fundamental to ensure that any third parties are not

increasing their risk exposure. There are ranges of solutions to these new risks that

can be utilised. For instance, public key infrastructures help to increase privacy, data

integrity and authentication.

42
Historically networks have often been the targets of attack, but with the advent of e-

commerce, this risk has been more threatening, as there is that much more to gain

from penetrating a network and obtaining sensitive information. What is paramount

is to remain updated with new security measures constantly as it is unlikely that the

risks will be able to be completely eradicated.

PKI represents an example of a type of new security measure called ‘layered

security’. Layered security uses non-independent security controls, which

individually provide limited protection of less than 50%, but together (e.g. 3-5

controls working together) can provide protection of up to 90%.

However where present, layered security has also been responsible for increased

security breaches, indicating a greater detection of security breaches, rather than less

security itself. This serves as a useful tool, as once a breach in security has been

detected then appropriate measures can be taken to contain the damage caused.

Indeed this suggests security breach recognition is key to staying one step ahead and

this layered security system seems to offer support in respect of this.

These new techniques and tools, however, are only part of the solution. The best way

forward is for security issues to be raised at meetings at board level and a pragmatic

approach be sought as a company, rather than leaving it to the ‘techhies’ to sort out.

Success lies in being vigilant and strength in risk management. Many employees do

not appreciate the impact of the risks involved with their decisions and consequently

43
simple controls, such as increased web domain security is often ignored, leading to

potential website hijacking. Reputation takes years to build but can be destroyed

within minutes. In this sense, another key source of competitive advantage has to

emerge from regarding e-security as a serious issue, to be addressed by all levels of

the insurance company.

7.3 The E-Commerce Directive & Regulations

The E-commerce directive 2000/ 31/ EC came into force in January 2002 and

endeavours openness in international European financial services. It serves as one of

the European Commission’s action plan before the Lisbon European Council meeting

in 2005.

The first step is to smoothen the transition of current rules and regulations into the

new framework of legislation. Certain existing legislation such as the Third Life

Directive only partially allows cross-border activity. Within the UK the directive was

implemented in the form of e-commerce regulations and currently only 3 other

countries – Austria, Germany and Luxembourg – have implemented e-commerce

legislation which complies with the directive.

The E-commerce legislation stipulates that specific information about the electronic

service provider is disclosed, to protect the consumer. Specific information refers to

details such as the name of the service provider and their contact details (e.g. email

addresses).

Commercial communication must be made clearly and any special promotional offers

along with relevant conditions must be clearly presented. Once the service provider

44
has accepted an order then it must be confirmed within a reasonable time period via

electronic means.

Specific information in relation to concluding an electronic contract must be disclosed

by the service provider.

The terms and conditions of any arrangement must be clearly accessible, easily stored

and reproduced by the customer.

Failure to comply with such requirements may result in the service provider being

liable for any damages and possibly regulatory action, which may allow the customer

to obtain legal court authorities to ensure compliance. In addition, they may have the

opportunity to cancel the contract.

Furthermore, the directive allows member countries to maintain rules in relation to

certain contracts and insurance directives. This may lead to abuse of any loopholes if

the host country has legislation that enables manipulation of the rules of the directive.

In summary the directive goes some way to establishing cross border activity.

However, problems still need to be resolved, such as if a service provider chooses to

confirm any electronic communication via post and thus send the customer a hard

copy. This would effectively make the rules and regulations of the customer’s

country applicable, compared to that of the service provider, if electronic

communication only was maintained. This may serve to limit cross border activity

and thus legislation needs to be designed to resolve this. Indeed a full and exhaustive

set of legislation needs to be present to allow unrestricted and dynamic international

e-commerce.

45
8 Case Study: Eagle Star Direct

8.1 Background of setting up the website

Five years ago most insurance companies had an internet site that was nothing more

than a static marketing tool, advertising the company’s services and products via a

standalone website. Consequently such site did not attract the “hits” that some of

today’s website are commanding. Gradually, however, sophisticated images,

graphics, and sound were introduced to these basic websites that gathered more

interest from customers. Email further facilitated communicability and it was at this

point that insurance companies became particularly interested in the communication

possibilities offered by the Internet, as well as the ability to gather information, such

as risk and rating factors of the individual.

This latter was thought to be so efficient that perhaps one day a customer would be

able to obtain an on-line quote within a few minutes, and then consequently go onto

making an on-line purchase. This is the type of service that is now available with

companies such as Eagle Star Direct.

Bearing in mind that, on average, most companies telephone an average of 3.5

insurance companies before purchasing insurance, customers are equally likely to

approach a range of insurance companies on the Internet. A few Internet sites include

information from a number of different insurance sites in relation to obtaining

quotations.

46
Examining the Eagle Star Direct Example we see that 60% of their business is

brokered6. Thus a push style marketing that is one providing advertisement from

various third parties is vital to the success of the company. In providing insurance on

the internet it would be much more cost effective for various insurers to collaborate

on-line and set up insurance marketplaces as described earlier.

Moreover insurance is, generally, not the most exciting of purchase for the customer,

with added confusions amongst many customers as to what a product is and

terminology confusion. With this confusion comes lack of trust and consequently

branding of product becomes the key source of competitive differentiation amongst

on-line insurers. Pushing a brand name directly to a customer is difficult within the

context of the insurance industry but pull type marketing is easier. For example, a

customer buying a car could clink on a link to the Eagle Star Website and the

customer would have something of insurable value that they want to insure by

clicking on this link.

Any future strategy would have to account for the direct channel, the broker channel,

the telephone sales channel and the Internet channel. Customer segmentation becomes

paramount to determine what propositions are going to be offered through which

channel, based upon their needs, requirements and behaviour within each channel.

As mentioned previously customers will compare and contrast various products

amongst various insurers, therefore it is important to focus on what shall be important

6
Source: Eagle Star Direct Website

47
in web space. Finally initial strategy should be marketed through the medium most

suitable for the customers that are to be attracted.

8.2 Eagle Star Direct Example Experience

Eagle Star Direct exemplifies effective e-Insurance business as evidenced by over 1

million visits to the web site and over 200 000 quotes delivered7. Eagle Star Direct

initially chose a new start-up e-supplier company, as customer focus was strong and

they also offered to support Eagle Star’s existing brands and advertising campaigns.

By focusing on identifying how customers behaved when visiting the site (e.g. at what

point they left and when they hesitated and/or had problems) and also maintain the

website with regular yet consistent updates, Eagle Star were able to gain market share.

Keeping the website simple and easy to understand, yet consistent also contributes to

success. For example the television advertising campaign of an inflating tyre was also

used on the website to maintain consistency. This campaign illustrates the general

public perception of Insurance as being boring. However, the campaign challenges

this perception by inviting customers to phone to discover that insurance can actually

be quite interesting.

By use of drop-down menus and postcode rating packages that automatically enter

addresses in, inaccuracy of customer information was minimised. As soon as

customers have the opportunity to enter information for themselves, there in arises the

7
Source: SCOR Notes: Insurance & the Internet p 86

48
opportunity for errors. Moreover, the customers prefer this system themselves as it

means ease of use and less effort in completing forms, which invariably are

substantial in information required.

Having a website which allows the customer the power to obtain a quote, go away and

compare and contrast and then return to Eagle Star Direct also is another feature of

the website. This is allowed for by the way in which the design allows a 30-day

quotation save. As we have examined customer segmentation is a key source of

competitive differentiation for Insurers on-line. Eagle Star Direct have researched

that

“Generally, people who use the site are mainly from high-income families, accounting

to more than double the average for this sector. Furthermore, 4 out of 5 people who

use our site are male. More than half the users are aged between 25 and 39.8”

Eagle Star Direct have identified this information and are aware that these customers

are not only significant in these proportions but their premiums, due to their risk and

rating factors, make their premiums higher than average.

Significant market research as to when and where customers access the on-line

facilities allows business analysis and contributes to their success. Also

advertisement, whether direct or indirect, increases awareness of the site. For

example in the launch of the website in August 1997, the Financial Times did an e-

8
Source: Insurance and the Internet: Myth or Reality? p86

49
commerce feature a few days before and Eagle Star Direct as an example, was a

significant section within this report.

From Eagle Star Direct’s point of view the website has been wholly a success and

Eagle Star have been vigilant in their approach to marketing and distribution; an

approach that has paid off. Attention to continual improvement of their website in

terms of rejuvenation to maintain interest, whilst maintaining stability and brand

image, has also been a successful strategy. Finally using the logic that customers who

have purchased something of insurable value will require insurance and consequently

advertising on such websites has been the most important single contributing factor to

their success. Any e-business should look at these ideas and incorporate them into

their on-line strategy.

50
 9. The Role of the Actuary

In light of what has been discussed so far it is natural to query the role of the actuary

within the e-commerce world. Actuaries’ range of skills and attributes can be readily

exploited within this new business market. A SWOT analysis shall enable effective

evaluation of the overall impact actuaries can make within the e-commerce world.

9.1 Strengths

Numeracy and practicality being natural assets of an actuary serve to add value to the

e-commerce world. The Institute of Actuaries define an actuary as “someone who

makes financial sense of the future9”. Indeed this analysis of financial future, using a

range of statistical, analytical and mathematical tools, can be readily extended to serve

on-line business.

9.2 Weaknesses

Actuaries, however, have been reputed to be slow reacting, over precise risk averse

and weak at communicating. Whilst this is largely a myth, but it is important to

realise this mediocre attributes within the dynamic e-commerce market.

9
Institute of Actuaries website

51
 9.3 Opportunities

Actuaries’ set of skills may be exploited within the following e-commerce areas

9.3.1 Multi-disciplinary research topics

Current research topics within the world of e-commerce utilise practical, multi-

disciplinary models, using economics, finance, and statistics e.g. game theory. Within

the Insurance industry, actuaries could model customer behaviour as described within

the Chapter on Eagle Star Direct. Other areas might be to derive an on-line life table

from company data. This can then be used to more accurately predict mortality, thus

reducing risk of anti-selection.

9.3.2 Customer lifetime value

Predicting the Present Value of Future Profits (PVFP) on the basis of future cash

flows from current and future business, on the basis of an assumed current (and

possibly future) rate of mortality, interest, expenses and withdrawal rates, is a key

skill of an actuary that can be exploited on-line. Within the life insurance sector, the

long-term nature of the business deems embedded valuation techniques to be

plausible and indeed this serves to enable calculation of the potential lifetime

customer value of existing or new customers.

52
 9.3.3 Valuation of e-business

The above point could be extended to calculate the goodwill paid on acquisition of

subsidiary on-line businesses. This could be used to evaluate future business strategies

as well as websites on which to advertise.

9.3.4 Numerical evaluation of market opportunities

Actuaries’ involvement within statistics and demographics can be readily extended to

be utilised within a marketing framework, working out customer decision-making and

market segmentation analysis. This is a key source of competitive advantage on-line.

9.3.5 Non-traditional opportunities

The skills of actuaries can be readily extended to other areas of corporate interest. For

example the current strong nature of the mobile phone industry could provide

opportunities for actuaries to evaluate phone contracts and customer value, as well as

determine lapse rates etc.

53
 9.3.6 Further leverage of actuarial skills across the profession

The concept of a ‘virtual community’ and sharing knowledge on-line can provide an

opportunity for the actuarial profession to extend their knowledge and share

information for the benefit of the profession overall.

9.4 Threats

9.4.1 Lack of basic techniques

The key to using actuarial techniques in the e-commerce world is to combine them

with traditionally non-actuarial techniques. Although actuaries can quite easily

acquire these additional skills there may be barriers to them acquiring them e.g.

employers may not subsidise them as it as seen as too expensive.

9.4.2 Inability to encourage new students

The current long time taken to qualify (despite having exemptions) and poor job

market may mean that some graduates question whether it is worthwhile qualifying as

an actuary, or would it be better to seek other careers, within other interesting areas of

finance.

54
 9.4.3 Inability to innovate

Lack of diversity may make actuaries unable to see the larger picture thus posing as a

future threat.

9.4.4 Resistance to change / being complacent

Organisations may not be changing as rapidly as the very dynamic e-commerce

world.

9.4.5 Competition from other professions

Product simplification may make actuaries increasingly needing to justify their ability

to add value in comparison with other professions.

55
 10 Conclusion

It should come as no surprise that the conclusion of this project is that the insurance

industry must begin to aggressively embrace e-commerce. It has been somewhat

ironic that an industry that has focused such significant resources on the development

of information technology would be so far behind in implementing e-commerce

strategies. Indeed banks, securities brokers and investment companies all have a

strong head start on the insurance industry in implementing practical and effective e-

commerce solutions in their day-to-day activities. The Internet has made it much

easier for consumers and advisers to compare and contrast product designs and

prices/charges. This shall expose further the differences in regulatory and solvency

standards between life companies and unit trusts.

Hand-in-hand with the implementation of e-commerce shall inevitably come tougher

legislation in relation to regulation. One possible scenario to this might be that

companies in low regulated environments would have a competitive advantage over

those more strongly regulated competitors. However marketing considerations would

then require that each company display the badge of the regulator governing its

activities. At that point, regulators would effectively be in competition with each

other, which could effectively lead to the privatisation of regulation. Security and

privacy are not as weak as some believe but is a problem due to the accessibility of

the Internet from virtually anywhere. Having said that there are solutions to such

hindrances, such as data encryption, firewalls and virus protection tools. Combined

with a consistent and regular review of security policies these can be extremely

effective in dealing with the problem.

56
As the information highway becomes more extensive and efficient more links

between the supply chains will be seen. The business-to-business sector in particular

shall reap the benefits of the Internet, as it continues to expand.

Also, as the Internet continues to become incorporated into insurance companies’

activities five possible models may become apparent which are the intermediary

marketplace model, the work-site marketing model, the eyeball attractor model and

the transaction processor model. As the market incorporates e-commerce more

effectively, these models should evolve in line with it by being enhanced and refined.

Generally within the insurance industry, there shall be less of a distinction between

short and long term insurance products and product design and the pricing of such

products will dramatically adapt to come in line with Internet selling methods. This

however may affect the long term financial stability of the insurance company with

insurance companies having to lower their profit margins to compete on-line and the

dynamic nature of e-commerce having valuation, solvency and appraisal implications,

as well as affecting the actuarial control cycle.

A key source of competitive advantage has to emerge from regarding e-security as a

serious issue. Historically networks have often been the targets of attack, but with the

advent of e-commerce, this risk has been more threatening, as there is that much more

to gain from penetrating a network and obtaining sensitive information. What is

paramount is to remain updated with new security measures constantly as it is

unlikely that the risks will be able to be completely eradicated.

57
As e-commerce revolutionises business of insurance a number of new research topics

in extension of this thesis emerge. Such topics may include exploration of the

strategic drivers for insurance-based e-commerce,

“online modelling of consumer behaviour in interactive environments10 and design of

interactive customer decision making tools11”.

Indeed eventually, some form of “life-table” could be researched into and constructed

for those using on-line facilities. Inevitably, with the introduction of new technology,

such as “m-commerce” the nature of e-commerce will continue to change and open up

new avenues for generating business. Only the technologically most up-to date shall

maximise their business in this dynamic market.

10
Dreze and Zutryder, A web-based methodology for product design evaluation and optimisation,
Marshall School of Business, University of Southern California.
11
Haubl and Trifts, Consumer decision making in online shopping environments. The effects of
interactive decision aids, Marketing Science

58
 APPENDIX

Company Product type Online quote Online

request quote given
Admiral Motor y n
AA Motor N
Personal Accident N
Property N
Pet & Horse N
Yacht & boat N
Travel N
AXA Motor Mechanical N
Conwy motor policy N
Severn motor policy N
Venture liability N
Barclays Travel Y N
Chatham Insurance Home building & contents Y N
Brokers Travel & Holiday Y N
Private medical N
Working from home Y N
Churchill Motor Y N
Household Y N
Commercial Union Home Contents N
Cornhill Motor N
Home N
Wedding N
Travel N
Health N
Life N
Mortgage N
Direct Line Motor N
Home N
General Accident Motor N
Home building & contents N
Travel Y
Mortgage Payment N
Protection

59
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world (London; Prentice Hall).

Answer Financial Website www.answerfinancial.com

Bland, Richard H. 1997. Internet and Intranet technology : (Blackpool Convention)

Booz, Allen & Hamilton, March 2000, Achieving Universal Access, www.bah.co.uk

CFSI Report (1997), The Internet & Financial Services, (City & Financial Publishing).

Creadon S., (2000) June: 24-25. e-insurance - problem or opportunity for brokers?, The

Actuary

Davidan G., (2003) April: 22-23. The E-commerce Directive and Regulations., The Actuary

Dreze & Zutryder, 1998, A web-based methodology for product design evaluation and

optimisation, (Mashall School of Business, University of Southern California).

Eagle Star Direct Website www.eaglestardirect.com

The Economist www.economist.co.uk

Forrester Research www.forrester.com

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