The Inevitable Virtualization of Insurance and

1. 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 • Insurance and financial markets : transactions and informations as product • The end of the “Earning Game” era • Revolutionary technics and revolutionary consequences : e-business or out of business • Timelag in between technological, business, social and political developments : increasing gap • From value chain management to value networking :Coases call and the inevitable virtualization • 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 • Digital processes, the new business models and organisational structures : stranded assets • E-Business means E-Transactions, E-Information, E-Knowledgetransfer, E-Learning • 10. Case studies : Turn arounds, cultural changes and the hidden rules • 11. 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

2. Query „virtual insurance „ Result : 683‘000 documents

3. 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

4. From value chain management to value networking Missing critical key value drivers or critical succes factor ( csf ) Produkt- design Claims Data- aggregation Risk selection Assets Distri- bution Servicing, Costumer Relations 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 approach and reasonable expectation theory – followed by stronger regulations. Winning ... Will be about shaping and owning the right pieces at the right time and putting them together in new ways Geis, Digital Deals, p 7 Servicing Customer relations Prof. Dr. R. Schaer www. legalnet.ch

5. The Different Levels of Virtualization Winning ... Will be about shaping and owning the right pieces at the right time and putting them together in new ways Geis, Digital Deals, p 7 virtual company Assetmanagement Servicing and Customer Relation Management Administration , IT and HR are not CSF they are CFF Critical Failure Factors Steps of Process Outsourcing Distribution Productdevelopment and Riskselection Dataggregation and - Mining Claims Handling and Subrogation Towards a virtual company Prof. Dr. R. Schaer www. legalnet.ch

6. 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

7. 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 financial Services – 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

8. Megatrends and their effect on value chains Turbo- or Casino- capitalism Socialization and Individuali- zation Digitalization and Virtualization Regionalization vs. Globalization Reregulation The traditional value chain in insurance business Prof. Dr. R. Schaer 2002 www.legalnet.ch

9. Peer to Peer ApplicationConsumerpower Napster as a model for new selfrentention or even Insurance groups ? Prof. Dr. R. Schaer www. legalnet.ch eCompany, August 2000, 65

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

11. 1. „ Finance is a pure information processing game „ • 2. „ Information increases in value the more people • use it „ • „ As the market becomes more efficient, the size and • organizational complexity of a firm becomes • uneconomic “ • „ Dematerialization of a product leads to • outsourcing or outtasking to the best of class „ • „ the new approach is technology-push „ • „ The desire to serve the customer , not the desire to beat • the competitor or the desire to play the Earning Game • is the driver „ • „ e-servicing and e-transactions or out of business „ Prof. Dr. R. Schaer www. legalnet.ch

12. Modern Megatrends in Insurance and Financial Services … Dematerialization of the product The strategic positioning of Supervisory Systems ? Disintermediation of Distribution Fragmentation of merged business parts Deconstruction of the value chain Virtualization of the Business Re-Mutualization and Social Dimension

13. BPO or Business Prozess Outsourcing : There is no Alternative Allfinance under Pressure Spinoffs and Transforming expenses Into investments 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 Lost Insurance Knowledge Combined ratios over 100% Focusing on CSF (critical success factors ) Technology as Enabler

14. 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

15. „ 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 business 40 are insolvent The most prominent example : Equitable Life lost a test case on guaranteed annuity policies

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

17. 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 • - • -

18. Gordon Moore Killerapplications and the Law of Disruption Metcalfe Moore‘s Law Metcalfe‘s Law Coase‘s Law Evans Law Coase Prof. Dr. R. Schaer www. legalnet.ch

19. 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 E-Commerce The failure of one-click contracts in insurance and financial Services the missing warm lead Informations communication transactions Selfportraits of CEO and Companies ( the roadshow- syndrom ) 1995 2005 2001 Paralleled by e-Government Prof. Dr. R. Schaer July 2002 www.legalnet.ch

20. Richness The Trade-Off between Richness and Reach of Flow of Informations Reaching a lot of customers with low level informations; Informations- and Servicelevel Reach Customers Prof. Dr. R. Schaer www. legalnet.ch

21. Richness The Trade-Off between Richness and Reach of Flow of Informations Or Reaching few clients with full services, high Level of informations: Informations- and Servicelevel Reach Customers Prof. Dr. R. Schaer www. legalnet.ch

22. The Blow up of this Trade-Off deconstructs value chains and organizations Richness When rich information can be exchanged without limitation there will be no old fashioned distribution channels, no hierarchical structures, no asymmetries of iInformation and therefore no bounderies for corporations Informations- and Servicelevel Reach Customers Prof. Dr. R. Schaer www. legalnet.ch

23. Turn back office processes into front office values ! Outsource to the customer : e-customer approach is a CSF Customer assets High value Relationship Improvement Opportunity CSF Basis for identity and brand CSF Customer value Performance Improvement Opportunity CSF Operational Management CFF Customer liability Low value Company liability Low value Company assets High value Company value CFF : Critical Failure Factor CSF : Critical Success Factors Brings little, but kills you if you failif you achieve you win

24. Overview of all insurance policies Bill presentment and bill overview ( the insured controls The bill before payement is made ) History of all claims Online Doctor expertsystem with instant messaging support Transactions bidirectional ... Coverage under the different contracts, Online Lawyer Prepared letters and legal remedies, law, legal informations, court decisions in insurance law and commentaries Compass the 164 common problems in health insurance and their solution Prof. Dr. R. Schaer July 2002 www.legalnet.ch

25. Frequency of Customer Contacts per Month parallels Internet Growth • 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 is Key driver for long term Customer relationship Prof. Dr. R. Schaer July 2002 www.legalnet.ch Computer Buyer, July 2002

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

27. 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 THE CONSEQUENCE: Concentration on CSF leads to a new remodelled industry Reconstructed value chain Traditional value chain Commodity Player Management/Tools Employees Pension Player ProductDesign Loss Prevention Advice Distrib. Under-writing AssetMgmt. ClaimsHolding Systems, Admin., Infrastructure Balance Sheet Player Capital Pension and Balance Sheet Players will act internationally, Commodity players regionally core competence ( key success factor ) Prof. Dr. R. Schaer July 1999 www.legalnet.ch

28. The Different Levels of Outsourcing Efficiency Supervision of SLA‘s as one of the new tasks AM Shared Services (Custodian) Assetmanagement Processliability and Assetliability – Management Servicing and Customer Relation Management ? Products, Distribution And Riskselection Distribution Productdevelopment and Riskselection Dataggregation and - Mining Data Services and Claims Claims Handling and Subrogation Organisational symplicity Prof. Dr. R. Schaer www. legalnet.ch

29. 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 AM Not existing controlling functions and outsourcing of responsability

30. 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 …

31. 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

32. Business Process Outsourcing must be backed up by a Business Process Supervisory System Prior approval system for SLA Solvency And Business Process Supervisory System No double outsourcing Reengineering Of Supervision No outsourcing of responsability Cut through liability ( group and management ) And in a deconstructing world forget the artificial product of „ the business“; focus on layers, functions and information flows

33. Virtualization = BPO = TINA There Is No Alternative ! Winning ... Will be about shaping and owning the right pieces at the right time and putting them together in new ways Geis, Digital Deals, p 7 virtual company Assetmanagement Servicing and Customer Relation Management Steps of Process Outsourcing Distribution Productdevelopment and Riskselection Dataggregation and - Mining Claims Handling and Subrogation Towards a virtual company Prof. Dr. R. Schaer www. legalnet.ch