Technology's Effect on Property–Casualty Insurance Operations

• Published date: 01 March 2010
• Date: 01 March 2010
• Author: Robert Puelz
• DOI: http://doi.org/10.1111/j.1540-6296.2009.01175.x

C

Risk Management and Insurance Review, 2010, Vol.13, No. 1, 85-109

DOI: 10.1111/j.1540-6296.2009.01175.x

PERSPECTIVE ARTICLES

TECHNOLOGY’SEFFECT ON PROPERTY–CASUALTY

INSURANCE OPERATIONS

Robert Puelz

ABSTRACT

The post-Glass–Steagall era has presented insurers with new opportunities and

risks during a time when information flows and business processes are be-

ing impacted by changing technology. In this article, we explore how insurers

use and perceive current technology to carry out their operations by report-

ing results from a sample of insurers that includes some of the nation’s largest

property and casualty insurers. We find among insurers in our sample that an

online channel is having a significant impact on customer retention and rev-

enue enhancement, but a lesser impact on cost reduction. Interestingly, about

two-thirds of our sample has experienced an increase in their overall number

of transactions following the adoption on an online channel. Moreover, while

the Internet is perceived as giving marketing benefits it is not being used as a

substitute for agents. Wefind that 65 percent of respondents have used technol-

ogy to integrate customer data across functional areas and another 23 percent

plan to do so in the next 3 years. Nearly 71 percent of respondents have or plan

to adopt service-oriented architecture in their technology infrastructure.

INTRODUCTION

One of the tasks of insurance academicians is to help stakeholders and students of the

industry understand the functioning of insurance markets, the risk transfer that takes

place, and the business proposition of how one can maximize the wealth of an insurer’s

owners. Structural shifts in business occur for reasons attributable to knowledge, cre-

ativity, and vision; technology is often a catalyst that nurtures new ways of thinking.

The following encapsulates one insurance executive’s thinking about the industry:

Among the student body are many who will be in the next generation of leaders in

the insurance industry.They can look forward to a career with even more stimulating

challenges than the industry offers today.There will be fewer people doing things that

machines can do and more people doing those important things that only people can

Robert Puelz is the Dexter Professor of Insurance, Edwin L. Cox School of Business, Southern

Methodist University, Dallas, TX 75275; e-mail: rpuelz@mail.cox.smu.edu. I am grateful to Jerry

Johns of the Southwestern Insurance Information Services, and my communications with David

Repinski of Cunningham & Lindsay, Mike Reid of Liberty Mutual, Jim Snikeris of Farmers, and

James Lankford of Texas Farm Bureau. Finally, thanks to Robert Quirk and Henry Wyche for

research assistance. This article was subject to double-blind peer review.

85

86 RISK MANAGEMENT AND INSURANCE REVIEW

do. The most challenging aspects of these electronic methods are the human rather

than the mechanical—the decrease in routine tasks; the varied new skills which are

needed for the new jobs created; and the growing importance of research, analysis,

organization, and planning. There are truly interesting years ahead for all who are so

interested in insurance.

The quote appeared a half-century ago in the Journal of Risk and Insurance and its ap-

plicability today is remarkable. Indeed, it could be argued that some insurance firms,

caught in a managerial stasis of thought, would do well to heed the call by Bagby about

the “growing importance of research [and] analysis.” For some insurers their internal

structure has remained settled over the years with the areas of pricing, underwriting,

and claims the predominant functional areas that define this business form. Taking

an appropriate risk for a given price then honoring the contract when a loss occurs

is the essence of value provided by insurers. While we know risk transfer is as old

as the “contract of Bottomry” included in the Code of Hammurabi, the recent changes

in the legal environment and unprecedented technological innovation present oppor-

tunities not seen by insurance managers of the past.1Gramm–Leach–Bliley (Financial

Services Modernization Act of 1999) has given a structural opportunity to other financial

institutions to enter the insurance business and vice versa. Optional federal chartering

of insurers as an alternative to state regulatory regimes is an idea that has not yet gained

significant traction in Congress but affords the opportunity to create an insurance envi-

ronment with more flexibility, choice, and competition.2Relaxing legal strictures offers

the potential for an unencumbered, more diversified financial environment. Perils exist

for current management, however, since stakeholders expect more flexible thinking.3

Staid and mature insurers and their management teams are not likely to exist in a more

traditional form as new competitors enter their market; consequently, insurers ought to

be ripe for new ideas that develop profitable lines of business and control costs. How

an insurer has used technology to enhance a functional area or its integration with

other operational components likely reveals the wisdom of management in enhancing

shareholder value.

The process of managing workflow is part strategic, part administrative. While the Inter-

net may be used to receive marketing inquiries, some companies with exclusive agency

arrangements weigh the benefits of direct marketing communications against disenfran-

chising the existing distribution channel. Thus, for example, TexasFarm Bureau, which is

a rural insurer with about 180 offices spread throughout Texas, takes an Internet inquiry

and feeds it to a member of its captive agency force.4Once the application is taken, the

process is automated with technology beyond the Internet playing a role. Agents submit

1A contract of Bottomry dates to Babylonian times where loans were forgiven if a ship suffered

a robbery loss while in transit. If the ship’s journal was uneventful, the interest charged on

the loan was higher than normal market conditions; in other words, it included an insurance

premium (see Trenerry, 1926).

2Optional federal chartering of insurers has been studied for life insurers (see Bair et al., 2002),

and England (2005) has provided a more general synopsis on the topic that includes numerous

references to the work of Grace and Klein (2000) and Harrington (2002).

3The academic literature is turning in this direction, too. Skipper and Kwon (2007) include a

chapter dedicated to the issue of financial services integration in their recently releasedtextbook.

4Thanks to James Langford of TexasFarm Bureau for sharing the operational process of his firm.