Industry Integration & Increased Use of Technology Recommended to Improve Efficiency

February 1, 1999 - Industry integration of technology combined with the increased use of the Internet to handle insurance transactions could prepare the Excess and Surplus (E&S) lines industry to compete more efficiently and effectively, according to a new report recently completed by KPMG LLP (KPMG).

These were some of the findings summarized in the NAPSLO Information Technology Research Project report, which will be presented by KPMG representatives on February 12 at the NAPSLO Mid-Year Educational Workshop in Rancho Mirage, California.

As part of the study, KPMG surveyed E&S insurance companies, wholesale brokers, and independent retail agents to understand what industry shifts are likely to occur over the next 3-5 years. Respondents expect to expand their distribution channels to include toll-free numbers and the Internet. Respondents also expect to experience a shift from regional to national focus, while offering more products and more payment options to customers.

The report compared the use of technology in the E&S industry to the standard lines industry. The report also includes a self-assessment tool to help firms interpret the results of the study for their internal use.

Industry Context

Over the past few years standard line companies have increasingly written products previously written by the surplus lines industry. According to the KPMG report, companies that can efficiently reach the insured pose a competitive threat to the E&S industry. Standard line companies are well positioned to compete within the E&S market because of their higher customer retention rates, better use of technology, and strong brand name recognition.

The report outlined the Strengths, Weaknesses, Opportunities, and Threats facing the surplus lines industry.

Industry strengths include established relationships with business partners, underwriting experience, and emphasis on customer service.

Weaknesses cited by the report include a lengthy, and therefore costly, distribution system, and limited capital, which constrains industry investment in technology.

Opportunities that present themselves to the E&S industry include increasing the use of the Internet for product delivery, and partnering with other companies.

Threats outlined were entrance of standard lines companies, deregulation, continued soft market, consolidation, and growth of self-insurance.

In order to overcome perceived weaknesses and threats, KPMG recommends that E&S firms:

• Achieve process efficiencies through technology by applying appropriate technology;
• Improve product development process;
• and Develop communication links with business partners to enhance relationships with customers.

Business Findings

KPMG interviewed a number of NAPSLO member insurance companies, wholesale brokers and independent retail agents in its research. Among the key business findings were:

• The E&S business has become more profitable than the standard lines market and consequently becomes more of a target of the standard lines companies;
• The E&S market is expected to become softer over the next 3-5 years;
• Revenue per wholesale broker employee appears to be decreasing when adjusted for inflation;
• and The distribution process contains many redundancies and inefficiencies, thereby increasing product costs.

Technology Findings

The KPMG report cites that increased use of technology could help the E&S industry compete more effectively in the future by reducing costs and making the distribution system more efficient. The report pointed out that the more technology risk a company assumes, the more advanced its systems can be. KPMG also found that NAPSLO members tend to be risk averse and conservative in their use of technology. Other technology findings include:

• The Internet is recognized as a technology that could have the most impact on the E&S industry over the next 3-5 years;
• Electronic Data Interchange (EDI) could play a significant role in increased industry efficiency and effectiveness;
• In order for process efficiencies to be fully realized, there is a need for standardization across the E&S distribution chain (from insurance company to wholesale broker to independent retail agent);
• and The technology applied across the E&S distribution chain must be complementary to enable industry integration.