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2010: The Year of a US Insurance Exchange?

Source: Datamonitor

Posted on 17 Jun 2010

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Property and casualty electronic insurance exchanges have never been very successful, despite the apparent fit for an industry that consists entirely of information and process flows. Ovum does not think the latest entry, launched in late 2009 by the US CIAB and LexisNexis, will work either, unless the participants on the other side of the supply-and-demand equation agree it is of financial value.

Although it seems inherently reasonable that the US commercial property and casualty (P&C) market, an industry that consists entirely of information and process flows, would conduct its transactions electronically, arguments regarding the customization of underwriting data requirements, fears of commoditization, and an unwillingness to shoulder the costs put forward by insurance companies, have constantly thwarted agent attempts to create exchanges.

US insurance brokers are nothing if not persistent

However, decades of unsuccessful attempts have not stopped insurance brokers from trying to find the winning formula. The latest attempt to create a P&C insurance exchange, a partnership between the US Council of Insurance Agents and Brokers (CIAB) and LexisNexis, appears to be the strongest initiative to date.

The CIAB is a significant player in the US P&C insurance industry, representing insurance agents and brokers that distribute approximately 80% of the commercial P&C business in the US. LexisNexis, meanwhile, brings strong information resources used extensively in the US P&C insurance industry, as well as a suite of policy administration capabilities, to the partnership. The LexisNexis website states that although the exchange "will initially concentrate on commercial lines, it will expand over time to encompass all lines of property and casualty insurance, as well as life, health, employee benefits and reinsurance." This is a demand-side attempt to convince insurers to consider participating in the exchange.

However, the partnership realized that it needed capabilities that neither organization could offer the exchange and so, in February 2010, the CIAB and LexisNexis selected FirstBest to automate the insurer distribution workflow. FirstBest provides a software-as-a-service solution that enables the agents or brokers to submit insurance applications in a real-time process. This process includes giving the agency's customer service representatives and home office underwriters the same view of where the application is in the acceptance or rejection process, and allowing them to see what information is still needed in order for the underwriters to make the final decision. Ovum believes that FirstBest provides a strong underwriting management system solution, but is concerned about the apparently small number of insurance clients it has garnered since it launched in June 2007.

The exchange has not stopped in its search for additional partners. It is in discussions with other technology firms that provide agent and broker authorization information that would enable it to operate legally in the US by reassuring it, and participating insurance companies, that the agents placing P&C business in the exchange are legally authorized to conduct the transactions. Furthermore, if the technology firm could feed this information in real-time when authorization issues arise throughout the business acquisition and agent compensation processes, the exchange would be able to operate in a straight-through processing manner.

Will insurance companies join the party?

Ultimately, the CIAB and LexisNexis exchange faces the same fate of oblivion as previous attempts unless it can prove its financial value to insurance companies. Insurers will expect to maintain the actuarial freedom to require the data items for their underwriting, even if those data are different from what other insurers ask from insurance agents. Insurers will strive to conduct business with agents that have a history of placing profitable business and will expect the exchange to be revenue-positive from their perspective. Finally, insurers will want to ensure that the new exchange does not turn their company into a commodity entry in a broker matrix. In the end, Ovum believes that the exchange will only be successful if the participants on the other side of the supply-and-demand equation (the insurance companies supplying the capacity to cover the risks) see its financial value.