The Inevitable Virtualization of Insurance and Financial Services and the Impact on Supervision by Prof. Dr. R. Schaer ( )

The Inevitable Virtualization of Insurance and Financial Services and the Impact on Supervision

by Prof. Dr. R. Schaer ( www.legalnet.ch )

focus will be directed on modul 5, 7, 9 and 11 1. Insurance and financial markets : transactions and informations as product2. The end of the “Earning Game” era 3. Revolutionary technics and revolutionary consequences : e-business or out of business4. Timelag in between technological, business, social and political developments : increasing gap5. From value chain management to value networking :

Coases call and the inevitable virtualization 6. The only remaining key value drivers : long-term customer relationship and sound capital structure 7. Back office processes as front office assets : outsource to the customer 8. Digital processes, the new business models and organisational structures : stranded assets 9. E-Business means E-Transactions, E-Information, E-Knowledgetransfer, E-Learning10. Case studies : Turn arounds, cultural changes and the hidden rules11. The different steps of virtualization : supervising SLA‘s as new task 12. Turbocapitalism, the Internet and consumer power : social dimensions and the backswing 13. Future earnings, deffered costs, adequacy of reserves and assets, ART : accounting rules after 2002 14. Reregulations and state supervisory tendencies 15. Framework of a modern insurance law : the 28 fundamental principles 16. The big picture : marketstructure and settings in 2010

http://www.legalnet.ch/





Query „virtual insurance „

Result : 683‘000 documents

Virtual Insurance

it‘s not just about a new distribution channel, it‘s not about e-commerce it is

about

Outsourcing or Outtasking

partially or even totally the business processes of an insurance company, breaking up the value chain

From value chain management to value networking Missing critical key value drivers or critical succes factor ( csf )

Data-aggregation

Riskselection

Produkt- design

Assets Distri-bution

Servicing, CostumerRelations

Claims

No csf no csf no csf no csf no csf csf no csf

Especially in the consumer insurance coverage becomes a commodity,heavily influenced by public policy – affordability and availability of insurance coverage - and growing consumer protection – the economic approachand reasonable expectation theory – followed by stronger regulations.

ServicingCustomerrelations

Winning ... Will be aboutshaping and owning the rightpieces at the right time and putting them together in new ways Geis, Digital Deals, p 7

Prof. Dr. R. Schaer www. legalnet.ch

Dataggregation and- Mining


Productdevelopment and Riskselection


Claims Handling andSubrogation


Servicing and Customer Relation Management



Distribution

Assetmanagement Assetmanagement

The Different Levels of Virtualization

Towards a virtual company

Steps

of P

roce

ss O

utso

urcin

g

Steps

of P

roce

ss O

utso

urcin

g

virtual

company

virtual

company


Administration , ITand HR are not CSF they are

CFF Critical Failure Factors

Virtualization of Insurance Business

• Instead of a definition the vision of an existing one :

• "We use the Internet not only as a distributional channel, but also the whole organization of the insurance business will be done online. We are a real Insurance corporation with concrete Insurance products.“

• While this company concentrates their work on the operation of the core insurance business, other aspects were consequently outsourced, starting with the operation of data processing all the way to damage assessment. Also, in place of internal organizational units, legal and marketing departments, the company has relationships to partner companies both domestic and abroad.

• Prof. Dr. R. Schaer 2002

Outsourcing and Outtasking

Outsourcing :is the total transfer of non core processes based on Service Level Agreements (SLA ) including responsability. The supplier has the freedom of reengineering the processes, even using third parties to deliver the services ( double outsourcing ) .

Outsourcing without adequate measurements always ends in a disaster …

Regulated businesses – including insurance and financialServices – have a high degree of standardization and will in the future leverage their costs (economy of scale) through outsourcing. This leads to virtual companies with different levels of virtualization.

Outtasking :Is just contracting a third party without transfer of responsability, giving instructions and making inspections

Prof. Dr. R. Schaer 2002 www.legalnet.ch






Megatrends and their effect on value chains

Digitalization and Virtualization

Digitalization and Virtualization

Turbo- or Casino- capitalism

Turbo- or Casino- capitalism

Socialization

and

Individuali-

zation

The traditional value chain in insurance business

Reregulation Reregulation

Regionalization vs.Globalization

Prof. Dr. R. Schaer 2002

www.legalnet.ch






Napster as a model fornew selfrentention or evenInsurance groups ?eCompany, August 2000, 65Prof. Dr. R. Schaer

www. legalnet.ch

Peer to Peer Application Consumerpower

Insurance and Financial Services : the new approach

„ When transactions and information are the product, there’s no real competitive advantage inherent in the actual product itself. And when the internet can deliver transactions and information without the appearant need for people, the advantage has to be created out of the relationship to the customers … “

Pottruck/Pearce


1. „ Finance is a pure information processing game „

2. „ Information increases in value the more people use it „

3. „ As the market becomes more efficient, the size and organizational complexity of a firm becomes uneconomic “

4. „ Dematerialization of a product leads to outsourcing or outtasking to the best of class „

5. „ the new approach is technology-push „

6. „ The desire to serve the customer , not the desire to beat the competitor or the desire to play the Earning Game is the driver „

5. „ e-servicing and e-transactions or out of business „


Dematerialization of the productDematerialization of the product

Disintermediation of DistributionDisintermediation of Distribution

Fragmentation of merged business partsFragmentation of merged business parts

Deconstruction of the value chainDeconstruction of the value chain

Virtualization of the Business Virtualization of the Business

Re-Mutualization and Social DimensionRe-Mutualization and Social Dimension

The strategic positioning of

Supervisory Systems ?

The strategic positioning of

Supervisory Systems ?

Modern Megatrends in Insurance and Financial Services …

BPO as survival guide

- reduce and control operating cost - exchange investments with expenses - access lost capabilities - reduce operating risk - stabilize an unstable situation - outside changes - bundle lost knowhow - transfer responsability and process ownership

BPO or Business Prozess Outsourcing : There is no Alternative

Allfinance under Pressure

Spinoffs and Transforming expensesInto investments

Allfinance under Pressure

Spinoffs and Transforming expensesInto investments

Lost Insurance KnowledgeCombined ratios over 100%

Lost Insurance KnowledgeCombined ratios over 100%

Focusing on CSF (critical success factors )

Focusing on CSF (critical success factors )

Technology as Enabler

Cycles of Insolvencies : closely linked to pricewars ( growth strategy )focus on investment results ( Earning Game )And loss of know how ( sales force vs. claims handling )

Cycles of Insolvencies : closely linked to pricewars ( growth strategy )focus on investment results ( Earning Game )And loss of know how ( sales force vs. claims handling )

GB at the beginning of the 90‘s

Prof. Dr. R. Schaer July 2002

www.legalnet.ch






„ FSA believes small insurers will „ wither „

Financial Times , 28/06/2002, 25

812 authorised insurance companies in UK ( 595 general insurance, 161 life and 56 composites )

276 of these insurers no longer accept new business40 are insolvent

The most prominent example : Equitable Life lost a test case on guaranteed annuity policies

Mergers, Ring Fencing, Spinoffs, Demerger,Reverse Stock Splits : the only functioning perpetuum mobile ? or tripling the exposure through liability ?


Bullish calls on telecommunications and the IPO „Spinning „ Game ...The star researcher at Salomon Smith Barney, a unit of Citigroup Inc ( Wall Street Journal, (8/16,2002,A1 )

Some clouds over the insurance sky

-reserve adequacy -discounted reserves -unsufficient IBNR -guaranteed annuities-future reserve requests ( EU ) -cat losses -run off situations -Derivative risks

-double gearing -cumulative risk taking as insurer and investor -future solvency request (EU )-goodwill and other intangible assets associated with mergers

-guaranteed profit earnings in single life -third party (insurer) financing single premium life

-activated defferred acquisition costs-activated future earnings -asset adequacy

- incentive plans ( options ) as expenses --

--

Gordon Moore

Metcalfe

Coase

Killerapplications andthe Law of Disruption


Inf o

rmat

ion

s -u

nd

Ser

vice

lev

el

Anzahl Kunden

RichnessRichness

ReachReach

Wisse

ns-und

Knowhow-Tra

nsfer

Das Entweder „hoher Level/wenig Kunden „ oder „ tiefer Level/viele Kunden „ gibt esbei der digitalen Kommunikation nicht mehr


Moore‘s LawMetcalfe‘s LawCoase‘s LawEvans Law

The Internet in Insurance and Financial Services

from a selfportrying tool , to a selling tool without the needed warm lead, to a digital communication tool enabling the customer to do the job himself

The Internet in Insurance and Financial Services

from a selfportrying tool , to a selling tool without the needed warm lead, to a digital communication tool enabling the customer to do the job himself

1995

Selfportraits of CEO and Companies ( the roadshow- syndrom )

2001

E-CommerceThe failure ofone-click contracts in insurance andfinancial Servicesthe missing warm lead

Informations communication transactions

2005

Paralleled by e-Government


www.legalnet.ch






Inf o

rma

tio

ns

- an

d S

ervi

cel

eve

l

Customers

RichnessRichness

ReachReach

Reaching a lot of customers with low level informations;


The Trade-Off between Richness and Reach of Flow of Informations

Inf o

rma

tio

ns

- an

d S

ervi

cel

eve

l

Customers

RichnessRichness

ReachReach

Or Reaching few clients with full services, highLevel of informations:


The Trade-Off between Richness and Reach of Flow of Informations

Inf o

rma

tio

ns

- an

d S

ervi

cel

eve

l

Customers

RichnessRichness

ReachReach


The Blow up of this Trade-Off deconstructs value chains and organizations

When rich information can be exchangedwithout limitation there will be no old fashioned distribution channels, no hierarchical structures, no asymmetries of iInformation and therefore no bounderies for corporations

RelationshipImprovementOpportunity CSF

Basis foridentity and brand CSF

OperationalManagement CFF

PerformanceImprovementOpportunity CSF

CFF : Critical Failure Factor CSF : Critical Success FactorsBrings little, but kills you if you fail if you achieve you win

Company liability Low value

Company assets High value Company value

Cu

sto

mer

val

ue

Cus

tom

er li

abili

ty

Low

val

ue

Cus

tom

er a

sset

s

Hig

h va

lue

Outsource to the customer : e-customer approach is a CSF

Turn back office processes into front office values !


Overview of all insurance policies

Bill presentmentand bill overview( the insured controlsThe bill before payement is made ) History of all claims

Transactions bidirectional ...

Coverage under thedifferent contracts,

Compass the 164 common problems in health insurance and their solution

Online LawyerPrepared letters and legal remedies, law, legal informations, court decisions in insurancelaw and commentaries

Online Doctorexpertsystem with instantmessaging support


www.legalnet.ch






Frequency of Customer Contactsper Month parallelsInternet Growth

Computer Buyer, July 2002

Strategic Conclusions :

-Online Doctor as a new HMO-Model -Digitalized Symptoms evalution tool in combination with automatic instant messaging with a doctor in critical steps

-not upfront rabates, but deffered participation system

-

Frequency of Contacts isKey driver for long termCustomer relationship


www.legalnet.ch







www.legalnet.ch






THE CONSEQUENCE: Concentration on CSF leads to a new remodelled industry

1 2 3 4 5 6 7

Commodity Player

1 2 3 4 5 6 7

Pension Player

1 2 3 4 5 6 7

Balance Sheet Player

1 2 3 4 5 6 7

Management/Tools

Employees

Systems, Admin., Infrastructure

Capital

ProductDesign

LossPrevention

Advice Distrib. Under-writing

AssetMgmt.

ClaimsHolding

core competence( key success factor )

Prof. Dr. R. Schaer July 1999www.legalnet.ch

Traditional value chain

Reconstructed value chain

Pension and Balance Sheet Players will act internationally,Commodity players regionally










Distribution


The Different Levels of Outsourcing

Supervision of SLA‘sas one of the new tasks

Data Servicesand Claims

Data Servicesand Claims

Products, Distribution

And Riskselection

Products, Distribution

And Riskselection

AM SharedServices

(Custodian)

AM SharedServices

(Custodian)

?

Pro

cess

liab

ility

and

Ass

etlia

bili

ty –

Ma

na

gem

en

t

Effi

cie

ncy

Organisational symplicity

Lessons learned : Failed Promises

the story of Mission, Integrita and Transit Casualty Insurance Company

Points of criticism : - Managing general agents with binding power, claims handling, premium collecting, risk evaluation and profit earning contracts - Mismanagement ( accounting gimmicks, false reports …) -- excessive use of reinsurance

Not existing controlling functions and outsourcing of

responsability

AM

Lessons learned : total outsourcing is illegal

Supreme Court of Switzerland 26.07.2002

It is against the nature of the social health insurance coverage to outsource the basic business processes of this risk transfer system . This is a fortiori the case when the outsourcing partner is profit oriented …

Lessons learned : double outsourcing in financial

services is illegal

Directive of the Swiss Banking commission , 26 August 1999,

On Outsourcing of Business Processes

Principle 1 : Clear definition of the outsourcing business part

Principle 2 : cura in eligendo, instruendo et custodiendo

stays with the bank

Principle 3 : No outsourcing of responsability

Principle 7 : comprehensive revision is possible at any time

Principle 8 : Reinforcing these rules by crosscountry outsourcing

http://www.cfb.admin.ch/d/publik/rundsch/99-2.pdf













Prior approval system for SLA Prior approval system for SLA

No double outsourcing No double outsourcing

No outsourcing of responsability No outsourcing of responsability

Cut through liability( group and management )

Cut through liability( group and management )

Solvency And

BusinessProcess

SupervisorySystem

Solvency And

BusinessProcess

SupervisorySystem

Ree

ng

ine

erin

gO

f S

up

erv

isio

n

Business Process Outsourcing must be backed up by a Business Process Supervisory System

And in a deconstructing world forget theartificial product of „ the business“;

focus on layers, functions and information flows










Distribution


Virtualization = BPO = TINA There Is No Alternative !

Towards a virtual company

Steps

of P

roce

ss O

utso

urcin

g

Steps

of P

roce

ss O

utso

urcin

g

virtual

company

virtual

company


Documents

The Inevitable Virtualization of Insurance and Financial Services and the Impact on Supervision by Prof. Dr. R. Schaer ( )