BEST’S RATING MONITOR ' TECHNOLOGY FOCUS
`
`”raw—g: vi) ‘*u.
`
`{EEHEALTH INSURANCE EDIT
`
`
`
`CAPITALIZING
`0N FREE TRADE
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`a
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`H
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`LI:I ItHS 6i UUMMtNIAI—IT
`
`_OPINION—
`
`
`
`
`
`lb) E? SE9 @
`r-evrew
`
`
`
`GLOBAL BUDGETS WILL
`LEAD TO HARD CHOICES
`
`To the Editor:
`
`
`
`
`The circumstances of her father's final
`days highlight the difficulty of apply—
`
`ing to a loved one the kind of con‘
`
`straints envisioned in Olympia and
`the District of Columbia.
`
`When a family member’s life may
`
`be at stake, it’s painful to choose less
`
`care in favor of the greater social good.
`If we implement "global budgets,”
`
`which are the current code for price
`
`controls, we must admit that this will
`
`require us to make some hard choices.
`
`Let’s not hide behind a euphemism.
`
`Let's call global budgets what they
`
`really are—rationing.
`If our moral
`compass tells us we can’t accept ra-
`
`tioning. then we need a different form
`of reform.
`
`
`
`
`Richard M. Friedman. RHU
`Principal
`Richard Friedman 8‘ Co.
`Bellingham. Wash.
`
`INSURERS IN POSITION
`
`TO BLOCK REAL REFORM
`
`LIFEIIIEALTII IflSUMflBE EDITION
`
`PRESIDENT 5r PUBLISHER
`Arthur Snyder
`VICE PRESIDENTrr EXECUTIVE EDITOR
`Richard L. Hall
`
`EDITOR
`Mark L. Schussol
`
`SENIOR EDITOR
`Marian Freedman
`
`SENIOR ASSOCIATE EDITORS
`David Popper!
`Ruth G. Kastrud
`Catherine A. Novalt
`
`ASSOCIATE EDITOR
`Rhona L. Ferling
`ASSISTANT EDITOR
`Warren L. Meialln
`
`CONTRIBUTING EDITOR
`Blane Ferralolo
`
`ADVISORY EDITORS
`C. Burton Kellogg II
`La
`G. Mayeweltl
`Man
`d J. Nowackl
`Mlchael L. Albanese
`
`PRODUCTION MANAGER
`Pamela Loos
`
`DESIGN COORDINATOR
`Linda Albert Hochmlller
`
`PUBLICATION DESIGN
`Diane Poii Stafford. supervisor
`John Stumpf
`TYPESETTING
`F. Louise Fleming. adminislralor
`Ann H. Beloher
`Dawn M. Klirn
`Barbara A. Harino
`
`ART
`Neil Crescenll. director
`Elalne Coccaro, assistanl direclor
`Armond J. De La Bruere
`Jan Prezlock
`Jennlfor Regan
`ADVERTISING PRODUCTION
`Roslyn Taylor. coordinator
`Cecella DelBacco Green. assistanl
`RE PRINTS
`Laurle Wolfe
`
`
`
`
`
`
`
`
`
`
`
`The Washington state legislature has
`passed a health care reform bill.
`Washington, DC. is moving toward
`health care reform with much the
`same approach: universalaccess under
`“managed competition with global
`budget.” Put another way. the ex—
`pected reform package will
`feature
`competing HMOs with a cap on over-
`all spending. We had better face up
`to the fact that this equation will lead
`inevitably to something we may not
`intend—rationing of care.
`If the retooled system increases
`demand because more people will be
`part of it. limits prices and constrains
`supply (as the Washington legislature
`has done and Ms. Rodham Clinton
`proposes}. then the only variable re‘
`maining to be adjusted is the amount
`of care given to each person.
`The first lady recently was placed
`in the crux of the issue when her father
`The health and insurance industries
`died. Mr. Rodharn spent nearly three
`can block health care reform in Con‘
`weeks in the hospital after suffering an
`gress. based on their record of influenc-
`acute stroke. The average hospital stay
`ing congressional elections with cam-
`for an acute stroke is seven days, the
`paign contributions during the past 13
`maximum for which Medicare will
`years. This was the conclusion of
`reimburse a hospital. Had he not been
`Citizen Action. a Washington. D.C..
`
`the first father'in—law. Mr. Rodham
`consumer lobby in a recently released
`
`probably would have been discharged
`report "Unhealthy Money Part III:
`
`sooner. And under the system envi—
`The Health (St Insurance Industry's
`
`Best‘s Review is a registered trademark of me
`sioned by both Washingtons,
`the
`Long—Term Investment in Congress—
`AM. Best Company Inc.
`
`CONTINUED ON PAGE 103
`financial constraints on medical pro‘
`Copyrignl 1993 ID AM. Besl Company Inc.
`
`Amped Rd. Gunmen. NJ. 08858
`viders will become only tighter. As
`race} 439-2200 Fax: :9an 439-3363
`
`hospitals receive less money per pa-
`Best's RowEWmLflB’Hafllm Insurance Emint! {ISSN
`
`LOOKING AHEAD
`tient. they will not be as likely to pro-
`00059106}. Published mommy by Ihe AM. Bea! Co. Inc.
`Editorial and Hemline offices: Ambfl Rood. Oldmk. N J.
`
`vide the range and extent of medical
`08858. Telephone: (9031-1392200. Telex: SETH-I. FAX:
` In the coming months. Best’s Review
`
`
`(90614393363. Punting olfrce: Hamiuon Priming Co. Col-
`services we have come to expect.
`umbia Turnpike. Box 232. Hermann, N Y, 12m. Second
`will feature these special sections:
`One can hope the first lady‘s re-
`dmsoostage passiordmor. NJ. OSBSBanUaIaddmml
`
`mailing offices. Subscription rates: $16 {hue years 526}.
`cent experience will cause her
`to
`Single copy $4.50. Beck cooiesilwo monlhs prior] $5.50.
`
`June
`Life Insurance
`
`
`Paymenl must accompany order.
`reconsider her apparent moral certain—
`All rights reserved; reproduction-rm nude or parl mlhoul
`
`July
`Legislation} Regulation
`permissim is pron-oiled. Reprints of anicIas appearing in
`ty as to”'the wisdom of rationing.
`Best's Review are avflllaUE from me reprint editor.
`
`
`which she and her fellow lawyers on
`August
`Pensions and
`Penn-raster: Please send changed-address notices Io
`
`
`Best's Rome—W Insurance scrim. Clehrmk. Nani-1333.
`Retirement Products
`
`the task force seem certain to propose.
`
`
`
`
`
`
`
`
`
`
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`(cid:3) (cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:69)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:87)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:38)(cid:82)(cid:83)(cid:92)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:79)(cid:68)(cid:90)(cid:3)(cid:11)(cid:55)(cid:76)(cid:87)(cid:79)(cid:72)(cid:3)(cid:20)(cid:26)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:38)(cid:82)(cid:71)(cid:72)(cid:12)(cid:3)
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`Institute in the late 1970s. At the re—
`quest of the Independent Insurance
`Agents of America and with the sup‘
`port of nearly 20 property/casualty car-
`riers, SR1 had outlined a three—pronged
`strategy aimed at enhancing the com—
`petitive edge of the American agency
`system. The strategy included a pro-
`grain to help independent agencies ac-
`quire information—technology resources
`like agency—management systemsI de-
`velop insurance‘transaction standards
`
`for structuring electronic transmissions
`between agencies and carriers and cre—
`ate a shared, value-added network ser-
`vice that would provide more than raw
`telecommunications capabilities. Mes—
`sage reformatting, transmission comprise»
`sion, acceleration and deceleration, and
`standards compliance were anticipated
`as the core of the network’s value-
`added services. Although the organi-
`zation was not expected to operate the
`network or own its physical resources,
`
`it was expected to oversee the services
`delivered by one or more telecommu-
`nications providers.
`
`A SMALL N UCLEUS
`The Insurance Institute for Re-
`search, an organization whose member-
`ship comprised a small nucleus of prop-
`erty/casualty insurers, the [IAA and
`the Professional Insurance Agents of
`America. was formed in 1978 to imple
`ment SRI's concept. While pursuing all
`
`EDI Initiative Launched
`
`For Reinsurers and Brokers
`
`KATHRINE HUELSTER
`
`
`
`(it too many years ago,
`electronic data interchange
`was a novel concept. Few
`in the insurance industry paid
`much attention to it, and even
`fewer understood it. Recently,
`however, several EDI initiatives
`have focused the industry's atten—
`tion on this technology, and the
`method has gained wide acceptance
`as the standard means of corn—
`municating insurance information.
`Electronic data interchange
`enables companies to deliver infor-
`mation faster and more accurately
`and to streamline administrative
`procedures by eliminating the need
`to rekey information that is trans—
`ferred from one computer to
`another. EDI allows computers to
`exchange routine business informa—
`tion, such as claim notifications or
`technical accounts, with a minimum
`of human intervention. Information
`exchanged in this manner must be
`presented in a uniform format, and
`a number of EDI initiatives in the
`insurance industry have focused on
`developing EDI standards.
`RINET, the reinsurance and
`insurance network established in
`September 193?, is the exception
`to this rule. The nonprofit organ-
`
`ization owned by the insurance
`and reinsurance industry adopted a
`two-pronged approach to EDI. de—
`veloping internationally accepted
`standards for reinsurance, while
`providing support services for its
`members. The network’s central
`pool of resources reduces the need
`for a member to use its own tech-
`nical resources to begin exchanging
`information with trading partners.
`Although not focused exclusively
`on electronic interchange, RINET‘s
`support services are concentrated
`primarily in this arEa and are
`structured to help members begin
`the process. The services take into
`account differing levels of
`awareness of EDI and technical ex-
`pertise among participants. Support
`begins before a member connects
`with the network and continues
`after transmissions have begun.
`Within the framework of support
`services, members may choose what
`they need to suit the level of their
`EDl development.
`RINET offers its services to the
`American market through the
`combined RINET/IVANS sub-
`scriber program. The program
`allows reinsurance brokers and
`companies to take advantage of the
`reduced traffic rates offered by In-
`surance Value Added Network
`KATHRINE HUELSTER is marketing
`Services and the EDI implementa‘
`manager‘ci'f'ihe Reinsurance and insur—
`
`ance Neurotic, Brussels, Beigium. tion support services offered by
`
`RINET. IVANS has dedicated per-
`sonnel for this purpose, and
`RlNET will transfer its capabilities
`to IVANS so that local support
`may be provided efficiently. One of
`the benefits of the joint subscriber
`program is the savings in member—
`ship costs for most brokers and
`reinsurers. A one-time membership
`fee and joint annual fees cover par-
`ticipation in both networks.
`The major catalyst for the pro-
`gram has been another joint in-
`itiative, commonly known as the
`Joint Venture. which brings to-
`gether RINET. the London Insur—
`ance Market Network and the
`US. organizations Brokers 5!. Rein—
`surance Markets Association and
`Reinsurance Association of
`America, with the aim of develop-
`ing a common set of standards for
`the transmission of reinsurance in-
`formation, based on the U.N.’s
`Electronic Data Interchange for
`Administration, Commerce and
`Transport (EDIFACT) conventions.
`Designed and documented by
`RINET on behalf of the three part-
`ners, these standards will incor-
`porate the specific business needs
`of the European. London and US.
`markets and are expected to be
`released this year. The RINET/
`[VANS program has been devel-
`oped to assist joint subscribers in
`implementing such standards.
`
`68
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`
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`of the strategies simultaneously, HR
`published a request for a proposal, out-
`lining its requirements for a value-
`added network provider. The proposal
`identified three requirements: a batch,
`store-and-forward transmission capa-
`bility, interactive communications and
`support for third-party information—ser-
`vices providers. After several months
`
`forward transmission of data was the
`only way to support large volumes of
`agency/ company interface traffic. The
`difficulty with this proposition was that
`the necessary volume could be attained
`only with the broad—based implemen-
`tation of the HR/ACORD batch inter.
`face standards.
`It soon became apparent that this
`
`—t was clear that true value-added
`
`service has no boundaries or walls and that iVAN’s most important
`
`task was to assemble a critical mass of communicants, with
`
`or without the benefit of standards.
`
`of evaluation, IBM's Information Net‘
`work was selected as the network's pro-
`vider.
`Hoping to expand agency support
`for HR’s activities, producer groups pro—
`posed the merger of HR and ACORD
`Corp, another industry organizatiOn
`supported by producer associations and
`insurers. ACORD, which had demon—
`strated success in developing industry
`standards for paper forms. counted the
`major Hartford insurers among its mem-
`bers. Agents believed that the merger
`would increase participation and pro-
`vide the additional funding and larger
`revenue base necessary for leveraging
`discounts from the network’s provider.
`Following the merger of the organ-
`izations, IIR/ACORD continued the
`implementation of the three-pronged
`strategy. But in return for their par-
`ticipation in the new organization, a
`few of ACORD’S large member com-
`panies required that
`lIR/ACORD
`relinquish responsibility for oversight
`of the network. Almost all of these in-
`surers had been operating extensive
`proprietary network facilities in which
`they had made significant investment.
`As a result of the divestiture proviso,
`lVANS became a separate business en-
`tity in 1933, and John Folk, the presi-
`dent of llR/ACORD and former vice
`chairman of Reliance Insurance Co.,
`became the organization's first president.
`
`THE TROUBLE WITH STANDARDS
`
`Some participants, however,
`believed that the development of stan-
`dards by [IR/ACORD and their imple-
`mentation by insurance carriers and
`agency system-‘vendors was critical to
`the network’s success.
`It seemed to
`these observers that batch, store—and—
`
`70
`
`would not happen for two reasons:
`First,
`insurance companies viewed
`technology as a way to distinguish
`themselves from their competitors, and
`the development of standards repre—
`sented a threat to their exclusivity. Sec-
`ond, inertia typified many of the larger
`and more influential insurers whose
`proprietary technologies were deeply
`embedded and had yet to be amortized.
`In addition, the resources for other in—
`surers were lacking even though they
`were willing to support the standards.
`
`NO BOUNDARIES OR WALLS
`
`The comforting notion of crisp,
`wellvdefined boundaries had become a
`fiction. It was clear that true value—
`added service has no boundaries or
`walls and that lVANS’s most impor—
`tant task was to assemble a critical mass
`of communicants, with or without the
`benefit of standards. Unable to wait for
`their development, IVANS established
`itself as an economical provider of ad
`hoc. interactive communications. Al-
`though more costly, from a purely com—
`munications perspective,
`than the
`store-and-forward approach to elec-
`tronic data transmission,
`this mode
`capitalized on existing technologies in
`the company environment and the pro-
`liferation of microcomputer platforms
`in agencies.
`In a fortunate turn, several life in-
`surersI indifferent to the need for stan-
`dards and oblivious to the politics of
`agency/company interface, joined the
`network in 1986. IVANS resources
`were focused for some time thereafter
`on recruiting life insurers to generate
`the desperately needed traffic. Other
`firms, notably information services pro—
`viders, were quick to perceive the net-
`
`work‘s potential as an electronic mar-
`ketplace and subscribed soon afterward.
`However, the network needed to do
`more than achieve a critical mass of
`communicants; it needed also to be ac—
`cessible. In its formative years, IVANS
`was limited largely to the switching
`centers provided as part of the IBM/IN
`infrastructure. Because these nodes had
`been established to serve large popula—
`tion centers, remote agencies and com-
`panies had significantly higher com—
`munications costs. To reduce costs for
`these agencies, IVANS embarked on
`an ambitious program to add nodes
`and extend the network. By early 1987,
`the network achieved a substantial
`reduction in communications costs,
`and because of the steadily decreasing
`cost of communications platforms,
`more agencies became participants.
`The decision to support interactive
`traffic and expand the network geo—
`graphically mandated that IVANS be-
`come aggressive in its dealings with
`lBM/lN. The organization wagered
`that it would produce the traffic re—
`quired to sustain a highly—competitive
`discount schedule. The pricing strat—
`egy, which anticipated initial shortfalls
`in traffic commitments, was supported
`by a safety net funded by member as—
`sessments.
`It was a sound bet. In 1992 the net-
`work had more than 45,000 users. Of
`these,
`almost half participated in
`IVANS’s core services, which support
`property/casu alty agency/company in
`terface. Over the past five years, the
`discounts on voice and data telecom—
`munications services to members ex-
`ceeded $60 million. In 1992 the net-
`work had a 30% increase in data net—
`work revenue, while a 32% increase is
`projected for 1993.
`
`NOT ALWAYS EASY
`
`The network has come a long way
`since its creation, but the journey was
`not without difficulties. IVANS's core
`business still is to support insurers and
`intermediaries that operate as part of
`the American agency system, but the
`network also supports other organiza'
`tions Much of IVANS’s revenue is
`derived from inrracompany traffic and
`voice communications services, which
`now are provided by three vendors:
`Advantis, an organization formed by
`the merger of IBM/ IN and the Sears
`network, ATSLT and MCI.
`In the immediate future, the net-
`work's greatest growth is expected to
`occur in the life/ health business. This
`
`EIEST'S FIEVIEW
`
`
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`91993Be‘xlAtlantic
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`1i
`
`s1
`
`official forum for industry participa—
`tion. Other networks. notably the Lon—
`don Insurance Market Network and
`the Brussels-based Reinsurance and In‘
`surance Network, exist within the
`boundaries of the European Economic
`Community. Given the international
`nature of insurance, it is inevitable that
`these markets will become more close-
`ly linked electronically. Already,
`RINET and lVANS are offering a joint
`membership for U.S.-based reinsur-
`ance companies and brokers.
`The first decade for IVANS has
`been characterized by growth in the
`face of adversity and the network’s
`ability to adapt strategies to the dy-
`namics of the insurance marketplace.
`In 1934,
`IVANS’S first full year of
`operation, program revenues totaled
`$2.3 million. This year. revenues are
`likely to exceed $475 million.
`
`MEMBERS REAP DISCOUNTS
`
`While these numbers are impres—
`sive, the benefit to members and sub-
`scribers lies in the ever—deepening dis—
`counts leveraged by [VANS from net-
`work providers. in 1983 the average
`member discount amounted to 28.5%;
`currently it is 43%. Although the in-
`crease in subscriber discounts is less
`dramatic, many of these participants
`receive as much as 40% off standard
`rates. Savings on voice and data com—
`municarions for members over the past
`10 years exceed $72 million, but the
`more telling figure is $65 million, the
`amount participants saved in the last
`five years.
`Several problems, some of them
`cosmic in nature, continue to challenge
`the network's growth. The industry is
`under great pressure as the agency pop-
`ulation declines, commissions diminish
`and expenses increase. Moreover, the
`political climate for insurers is poor at
`best, while low interest rates have re-
`duced investment income and the will—
`ingness to invest in technology. Agents,
`in particular, perceive only marginal
`value in increasing their technology
`investment.
`
`Despite these difficulties, lVANS’s
`existence is no longer a tenuous affair.
`Adherence to the principal of critical
`mass as fundamental to economic de-
`velopment has proved a viable strategy.
`At a time when the insurance industry
`has little to boast about, [VANS is a
`success story: The network is an indus-
`trysponsored initiative that has reduced
`the delivery cost of goods and services
`without regulatory coercion.
`BR
`
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`sector, which supplies more than
`30,000 users, likely will outstrip proper.
`ty/casualty users this year, primarily
`because of the enrollment of many Blue
`Cross/Blue Shield organizations. The
`participation of these organizations’
`
`nologies with those of others. A largeI
`pervasive value-added network can
`provide a hedge for an insurance com—
`pany that deals with multiple trading
`partners.
`.
`Although economic necessity in—
`
`m mad-based implementation would increase
`trafl‘ic for IVANS. Ironically, APT is undertaking who: might have
`
`been done years ago by ilR/ACORD, if the IVANS
`
`divestiture had not occurred.
`
`trading partners 'and the discounted
`cost ofservices add to the network's ap-
`peal. Although 30% of the network’s
`new members were other than proper-
`ty/ casualty insurers in 1992, only the
`property/casualty industry continues
`to be represented on IVANS’S board.
`It will be interesting to see whether the
`life/ health constituency will seek a
`greater voice in determining the organi'
`zation’s direction.
`
`THE ENORMOUS EDGE
`
`Because interface support costs are
`significantly higher in a proprietary en-
`vironment. it would appear that the
`network has no major competitors.
`While other networks may be moti—
`vated by profit. IVANS measures its
`success in terms of cost reduction, giv-
`ing the organization an enormous edge.
`Its competition today exists chiefly in
`the form of organizations committed to
`a proprietary solution.
`If there is a cloud on the network’s
`horizon, it is likely to appear not in the
`form of competition but in the form of
`technology. Because the pace of change
`in information technology is frenetic,
`IVANS must
`lay its strategic plans
`carefully. The rate of change, in some
`cases producing overnight obsoles-
`cence. is a serious problem for the net—
`work's members. which invest substan—
`rially to stay on top of technology
`trends. Because a bad choice is difficult
`to amortize, making the right
`tech—
`nology decision is critical.
`To conserve capital and hedge
`their
`technology investment, many
`firms subscribe to a leapfrog approach,
`investing in one of every three
`technology "waves.” When a company
`deals in a relatively closed environ‘
`ment, these pioblems are minimal, but
`firms that deal with outside trading
`partners must synchronize their tech—
`
`72
`
`itially dictated that IVANS earn its
`keep where it could and industry
`politics separated it
`from hands—on
`standards involvement, several events
`have served to regenerate interest in
`standards development. Chief among
`these is the Alliance for Productive
`Technology, an organization dedicated
`to building the interface engines re-
`quired to support property/casualty
`agency/company interface. Supported
`by more than 20 companies and a half-
`dozen insurance agency system ven-
`dors, APT's responsibility is to develop
`agency and company software modules
`that would work with the ACORD
`batch, store-and—forward, and interac-
`tive standards in the IVANS network
`environment.
`
`This approach eliminates the need
`for each company and vendor to inter—
`pret, develop and implement the inter-
`face software and standards individual-
`ly. In theory, all agency and company
`systems would contain a uniform
`module that interfaces with internal
`systems and IVANS. Broad—based im‘
`plementation would increase traffic for
`IVANS. Ironically, AFT is undertak—
`ing what might have been done years
`ago by IIR/ACORD. if the IVANS di—
`vestiture had not occurred.
`
`GLOBAL lNTERCHANGE
`
`Another factor serving to refocus
`attention on the development of stan‘
`dards is the interest of the United Na-
`tions, United States and other govern—
`ments in electronic data interchange.
`This interest, particularly in the U.N.‘s
`program for Electronic Data Inter—
`change for Administration, Commerce
`and Transport
`is supported by a
`worldwide infrastructure. The United
`States has declared its support for the
`UN/EDIFACT program and desig—
`nated the ANSI X-lZ committee as the
`
`SAP 1014
`IPR2014-00414
`Page 8 of 8
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