What's New in Cybertalk?

by Jean Gora
July 1998

Note: CyberTalk is a column that appears monthly in LOMA's Resource, the magazine for insurance and financial services management. To see more contents of the magazine and to see how to subscribe, click on Resource.

Bancassurance, Automated Underwriting, and the Web

Today, the Web browser is a tremendously important front end to insurance applications. So much so, in fact, that browsers can now support distribution through a multiplicity of channels. They are no longer limited to direct distribution to end customers through the public Internet. In the past, this column documented numerous examples of the use of the Internet, intranets, and extranets by insurance companies supporting agent distribution.

Banks distributing insurance can also employ a browser plus the Internet or an intranet to support the distribution process. They can do so in several ways—by offering direct insurance purchases through their public Internet sites or home banking services, or by supporting branch or call center sales representatives engaged in insurance distribution. Browser access to insurance sales applications is highly intuitive. When those applications include an automated underwriting system, the entire insurance sales process can speed up dramatically.

FMS, an original software manufacturer based in Ireland, has developed a suite of insurance sales automation products—called Allfinanz—that include browser access and are backed by an automated underwriting system. The Reinsurance Group of America (RGA), the life reinsurance subsidiary of U.S. insurer General American, has entered a joint venture with FMS to market FMS’s Allfinanz E’Life and E’Underwriter to RGA’s life insurance company clients in the U.S. and elsewhere. RGA provides the underwriting rules for the products.

FMS and RGA are particularly interested in offering the products to insurance companies attempting to distribute through banks. Banks can opt to use the products to offer distribution through one or more of the channels named above, including their public Web sites, home banking services, call centers, or branch offices. Products in the Allfinanz series include E’Life, E’Retire, E’Health, and E’Branch. Insurers can use the same products in similar ways, including on their Web sites, in call centers, and to support agents. E’Agent is specially targeted at agent distribution. Future products will cover loans. The chief focus of FMS and RGA at present is on bancassurance—insurance distribution through banks.

At a recent FMS conference in Shannon, Ireland, Alan Hobbs, RGA vice president of institutional markets, showed why insurers should be interested in bank distribution and an automated underwriting system with a browser front end, such as the Allfinanz product suite by FMS. His remarks shed new light on the costs associated with traditional insurance distribution.

Distribution is Expensive

Distribution of life insurance to individuals is under great pressure right now because of the costs associated with the traditional, hugely inefficient distribution process. A McKinsey study showed that for every 100 leads followed by a superior agent, the agent generates 32 appointments and only 11 sales. The performance of an average agent is worse. For every 100 leads followed, the average agent generates only seven appointments and one sale. The costs associated with this inefficient sales process has made life insurance less attractive than competing asset accumulation products. As a result, the number of individual life insurance policies sold in the U.S. dropped from about 17 million in 1985 to about 12 million in 1996.

The U.S. insurance industry has made concerted efforts to bolster the efficiency of its sales process. Approximately 70 percent of the costs of a traditional insurance company are distribution-related. Close to half of that share represents agent compensation, and over one-third of it represents field expenses. Even with strenuous efforts to cut distribution costs, the industry has been able to reduce the average cost per dollar of new business from $1.36 in 1990 to only $1.27 in 1995. Thus, even if streamlined, the traditional agency distribution process remains highly costly.

In traditional insurance distribution, the money spent on distribution typically goes to four major activities: about 38 percent to prospecting, another 38 percent to needs assessment and advice, another 20 percent to sales fulfillment, and about 4 percent to post sales service. Use of the bank channel can sharply reduce prospecting costs because the bank’s customer base generates prospects. Use of technology (in this case, automated underwriting plus a browser front-end) in the bank channel can impact the other costs. According to Hobbs, technology can have this impact by improving both the conversion rate and the "pass underwriting and paid for" rate. The conversion rate is the rate at which individuals contacted for purchase actually file an application for insurance. The "pass underwriting and paid for" rate is the rate at which individuals who apply for insurance are actually granted it and pay for it.

High conversion and "pass underwriting and paid for" rates affect distribution costs in dramatic ways. The results of a study by the Mitchell Madison Group show how. If every individual contacted for purchase actually purchases and pays for insurance, the distribution cost should be equal to the cost of the initial contact, about $29.80 for the sale. If, however, only a fraction of the individuals contacted actually apply for insurance (the conversion rate) and if only half of those who apply actually pass underwriting and pay for policies, the cost per policy sold rises dramatically. At a one percent conversion rate and a 50 percent "pass underwriting and paid for" rate, the distribution cost per policy sold rises to $5960.

How Technology Can Help

Technology can impact both the conversion rate and the "pass underwriting and paid for" rate by dramatically compressing the time it takes for the prospect to get answers about policy provisions, prices, and underwriting results. The automated underwriting system delivers a rapid underwriting decision, and the browser front end to insurance sales guarantees ease of use—whether by the prospect on the Internet, by a call center employee or by the bank branch sales representative.

In life insurance cases requiring no medical underwriting, such as term insurance policies below $100,000, the entire application and underwriting process takes about 25 minutes instead of the several weeks the process typically takes. When the sale occurs in a branch, the branch sales representative can administer a saliva test. RGA’s saliva test checks for AIDS, cocaine, and smoking. The branch representative mails the test to a lab that transmits test results electronically, and the turnaround time for underwriting is only two days.

RGA has found that individuals who receive immediate insurance coverage at the time of application are most likely to complete the sales process and become buyers. Thus, a delay associated with saliva testing has a potentially negative effect on sales. To counteract this effect, the insurer can provide immediate accidental death coverage that converts into life insurance coverage as soon as the results of a favorable saliva test are known.

Automated Underwriting and Bancassurance

FMS brings important credentials to automated underwriting systems in the bancassurance arena. It developed the first version of its automated underwriting engine initially for Direct Line Life. Direct Line is one of the most interesting European bancassurance ventures. Direct Line is an insurance subsidiary of the Royal Bank of Scotland. It began operation in 1985 as a direct auto insurer and now holds 12 percent of the U.K. auto insurance market.

Respondents to Direct Line’s solicitations call a sales center and supply information that is fed into an expert underwriting system that generates quotes. Underwriting is immediate. Premium payments are collected electronically. Because it has no local offices or agents, it pays no agent commissions and can, therefore, charge low rates and advertise heavily. Its expense ratio is 11 points under the industry average.

After the success of its direct auto insurance operation, Direct Line sought to transfer this approach to the life insurance arena, and FMS provided the automated underwriting engine. In mid 1997, Direct Line and Scottish Widows, a U.K. mutual insurer, formed a fifty-fifty joint venture, Direct Line Life, to sell life insurance and pension products directly.

Direct Line Life offers customers both execution-only sales and advice options. Initial products include mortgage life, term insurance, and an individual retirement product. Scottish Widows also has a 30 percent stake in Royal Scottish Assurance, a Royal Bank of Scotland subsidiary. The automated underwriting engine now offered by FMS as part of its Allfinanz product line represents the third generation of the system initially developed for Direct Line.

FMS is in the process of opening a U.S. office. Descriptions and demos of its products are available at its Web site: http://www.fms.ie.