Links

"What The Internet Has In Store"

Quicken InsureMarket

Sale Closure

The Opportunity of Virtual Underwriting and Immediate Issuance

Like mail order and in-person advertising and solicitation, use of the Net enables prompt, even immediate closure and consummation of an insurance sale transaction. Given current technology, a customer can positively identify herself, complete a questionnaire/application, review disclosures and choose between various options while "on line." As the customer does this, an insurer's "virtual underwriter" software can access databases for additional information about the customer, confirm (or contradict) the customer's statements, and utilize decision support software to determine the acceptability of the applicant and the proper price and format of the product, all while the customer is still on-line, reviewing disclosures. On satisfactory completion, the system can generate a binder, even an entire policy, that the insured can store and print locally, or a firm quote, for her consideration and later decision. The system can solicit and accept authorization for immediate or future payment through a credit card or bank fund transfer, or initiate an automated billing routine.

What distinguishes these capabilities from current direct mail, telemarketing and in-person solicitation is the dramatic cost advantages offered by the Net. Using the Net, once programmed for the insurer's Web Underwriter, the entire transaction can be done by unattended machines handling multiple users simultaneously and utilizing the insured's own data entry.

Some of the potential application of the Net to cutting cost and increasing efficiency in the back office was explored in a March, 1996 article in Business Insurance "What The Internet Has In Store" found on the Net at http://rmisweb.com/rmisartc/031196.htm. According to Doug Helm of Strategic Concepts, Inc. "The Internet offers tremendous potential for operating cost reduction.'' He estimated that a substantial percentage of the personal lines market will be sold electronically because of insurers need for cost control. That article also quoted James Little of Fremont Pacific Insurance, regarding the threat that banks may take business from insurance agents: "The threat will come from the fast-moving software makers that will allow the sophisticated 20th century consumer to bypass all of us.''

For a very practical example of a system that is today collecting applications, quoting policies for issuance and premium collection in an unattended, online manner, just visit Intuit's Quicken InsureMarket at http://www.insuremarket.com. Intuit's ability to offer this online underwriting is facilitated by their acquisition in 1996 of Interactive Insurance Services, Inc., a technology company focusing on these technological developments.

This capability and cost advantage presents startling issues regarding the likely future of certain jobs in the field of insurance. It also raises new practical and legal issues regarding identification, authentication and privacy in cyberspace.

Links

Steiner Cartoon

American Century

Froomkin Paper

Bowen Paper

Utah's DigSig Law

Dept. of Commerce IPNII Paper

Viacrypt PGP

Verisign

PGP

Sale Closure

Identification, Authentication and Security
(Herein "Digital Signatures" and "Certification Authorities" )

"Spoofing," or the holding oneself out as another person, is commonplace on the Internet, as is activity in an anonymous or pseudonymous role. Bad enough in a social context, this behavior is unacceptable in electronic transactions for future performance. Unless the transaction is one for immediate service in exchange for immediate payment in cash equivalents, one needs the ability to reasonably verify with whom one is dealing. Traditionally, prima facie identification of a party in a commercial transaction has been by manual signatures, sometimes attested to by witnesses or state-licensed notaries, and sometimes accompanied by some identity token (e.g. a picture ID or major credit card).

Current popular concerns over the "anonymity" of Internet users may slow the utility of online commercial transactions. Technology offers a solution to the challenge it created, in the form of digital signatures and public key encryption tools. With such tools, properly used, one can determine the identity of a party, protect the content of a communication from third parties, and demonstrate the authenticity of a communication with greater security than could be obtained in a "face-to-face" paper transaction.

As evidence of the impact of consumers' perception's of Net security on their willingness to use it for major financial transactions, we can look at a recent survey of 1400 investors that indicates that consumers will increasingly use the World Wide Web to get information about mutual funds, fund account balances, and to buy and sale fund shares.

Leading funds are responding to user's expressed privacy concerns by requiring use of Web browsers that support encryption technology, according to a copyrighted story reporting on the study by Twentieth Century Mutual Funds & Benham Group (now know as American Century). The story appeared in the December 19 issue of Investor's Business Daily (page B3).

American Century's Director of Electronic Commerce, Mary Witner, was quoted by IBD as comparing consumer's use of the Web to their early use of bank ATM machines. Use of ATMs increased dramatically following their introduction, despite unfamiliarity and security concerns. They are now indispensable. IBD quotes Ms. Witner as saying "As sites get better and investors begin to realize the convenience offered by the Web, usage should increase."

The research indicates that there is a large gap between what buyers *want* to do, and what they *can* do on the Web, given what is offered to them now. The study indicates that experience on the Net leads to greater use of online financial services. Participants were asked to rank their likely use of an online fund service. The story reports the following:

• Would check prices 43%
• Would check balances 40%
• Would download a prospectus 30%
• Would buy or transfer shares 11%
• Would sell shares 10%

Transactional features received lower rankings because of user concerns about account privacy, according to the report. Over two-thirds of participants were extremely concerned about security provisions and the possibility of theft.

Twentieth Century's representative reported on the steps that fund has taken to address those security concerns with use of Twentieth Century's site. Users must first use phone or mail to pre-authorize the option, establish a personal access code and must use a secure Web browser that relies on encryption technology.

(According to IBD, the Elrick & Lavidge study phoned 1385 fund investors to identify 250 individuals that owned funds and have Net access. It reports that the findings were significant within plus or minus 5% at a 90% confidence level.)

Digital Signatures and Public Key Encryption

The use of public-key encryption will be fostered by a channel of legal development now under way. In the forefront is the consideration or adoption of "Digital Signature" statutes in various states, which recognize the legal validity in commerce of digital signature technology, including public-key encryption and state-licensed certification authorities. Digital signature laws are intended to foster commerce via computer communications by providing recognized methods of authenticating identity of both parties and their execution of communications intended to be binding. The increasing use of computer communications in retail commerce, banking and securities sales are likely to contribute to the growth of a customer population who are familiar with and prepared to utilize digital signatures in insurance transactions.

Alan Asay, "The Don of Dig Sigs," drafted the first digital signature legislation for Utah and set up legal and technical guidelines for authentication. According to an item in Wired 5.02 (Feb. 1997, p50), Asay, a lawyer formerly with the Utah Administrative Office of the Courts, says: "The lack of legal infrastructure is largely the reason this technology has been around for 10 years -- an eon in techno time -- but hasn't really gone anywhere."

In his comprehensive 1996 work "The Essential Role of Trusted Third Parties in Electronic Commerce," Prof. Michael Froomkin of the University of Miami School of Law addresses many of the technical and legal issues of encryption, digital signatures and certification authorities as well as the potential of the Net to become "Fraud's Playground." www.law.miami.edu/~froomkin/articles

For other comments regarding digital signatures and potential legal issues, see the sidebar comments by Atty. Barry Bowen attached to his article "The Law and the Net." featured in the May 1996 issue of Sun World Online. www.sun.com

Utah's digital signature legislation was the first, and continues to be a standard against which others are measured. Information about Utah's Digital Signature Law and its implementation are available at that states' web site at http://www.commerce.state.ut.us, where you can find the Act itself and the proposed Administrative Rules.

Other digital signature resources include:

• Georgia's Digital Signature Taskforce
• Washington Digital Signature Act
• Digital Signature Guidelines from the A.B.A.

Further reading on Certification Authorities and CyberNotary:

Organizations are now gearing up to fill the necessary role of certification authorities, with the financial capacity to stand behind the commitments that they make. For further information on one such organization, refer to information on Verisign, Inc. at http://www.intermarket.com/ecl/

The Department of Commerce, in 1994 issued "Intellectual Property and the National Information Infrastructure," The body of the Report points out that:

"The law dealing with electronic commerce is not clear ­­ especially for totally paperless transactions. On­line contracting and licensing raise a number of concerns about the validity and enforceability of such transactions. The NII will not be used to its fullest commercial potential if providers and consumers cannot be confident that their electronic agreements are valid and enforceable."

Quoting from its Executive Summary on the use of encryption technology:

"Recognizing the important role of encryption technology in fostering a secure and useful NII, the Working Group supports efforts to work with industry on key­escrow encryption technologies and other encryption products which could be exported without compromising U.S. intelligence gathering and law enforcement. Proliferation of such technology will enable U.S. industry to meet the needs of the international marketplace for these products and continue to lead the development of the GII." http://www.uspto.gov/web/ipnii/execsum.html

Note:
     "NII" refers to the National Information Infrastructure.
     "GII" refers to the Global Information Infrastructure.

Further information on public key encryption.

A discussion of public-key encryption is beyond the limited scope of this paper, although it is an area with which one working in this field should be familiar. For a commendable explanation of public key encryption, the interested reader may consult a paper on the Website of Viacrypt, licensor of PGP, the most popular public key encryption tool.

Electronic Policy Delivery

From the S.E.C. Proposed Rules at http://www.sec.gov/rules/proposed/33-7233.txt

"Those providing information also should take reasonable precautions to ensure the integrity and security of that information, regardless of whether it is to be delivered through electronic means or paper, so as to ensure that it is the information intended to be delivered."
Id. At Page 7.

State law requires the delivery of a written policy of insurance to the customer, and customers frequently identify timely and accurate delivery as a key element of satisfaction with their insurer. The technology utilized by the Net enables an insurer to assemble and deliver a policy to the insured electronically, in a format that can be printed out by the insured to look exactly like that which might be produced in the insurer's offices. Many leading firms, such as IBM, Xerox, and Hewlett Packard, are improving existing means of electronically delivering to consumers data that will generate paper documents. As we've noted with the SEC rules, consumer's interests favor electronic delivery of documents, and insurance regulations will need to soon address such possibilities.

Unlike paper documents, ordinary electronic documents and messages in "plain text" or word processing files are susceptible to alterations that are essentially undetectable. This raises a risk that an unscrupulous party to a policy contract (insured or insurer) may try to alter in its favor the terms of any application or policy after the fact.

Fortunately, the same encryption technology used in digital signatures can be used to "digitally seal" a document so as to protect it against alteration after being "digitally signed" by its issuer. Improved technology tools designed to prevent alteration of a document are in the works, motivated by the needs of copyright owners to protect their creative works from misappropriation by unlicensed persons. Such technology may also assist in the prevention of after-issue alteration of electronic insurance policies, certificates of insurance and other associated documents.

These methods enjoy some controversy among commentators, and are discussed in the Commerce Department's Paper at http://www.uspto.gov/web/ipnii.

Sale Closure

Collection of Premium via "Electronic Money"

A highly motivated consortium of banks, software companies and technical experts have been working behind the scenes for several years to develop systems alternatively known as "electronic money," "ecash" and "cyberbucks." Electronic Funds Transfers and wired federal funds are presently common for movements of substantial values between financial institutions. Current developments in software and financial systems are improving the cost and ease of electronic cash transfer, so that it becomes practical in ad hoc consumer transactions.

For example, in January 1997, Microsoft, Intuit and Checkfree jointly announced creation of a unified technical specification called Open Financial Exchange that they expect will enable easy and secure exchange of financial data between institutions, businesses and consumers over the Net. More detail is available at www.microsoft.com/finserv, www.intuit.com or www.checkfree.com

While the world's money center banks are in the forefront of development of electronic cash methods, the open and international nature of the Net provides an opportunity for market entry by such organizations not previously dominant in finance. Until such time as regulations and legal precedents develop from experience, professionals in the insurance industry may find it valuable to watch closely developments in this field. The new methods and related legal rules may substantially alter or expand the commercial law of bills, notes, letters of credit and cash transactions.

The development of electronic money and the organizations that will use and exploit it are discussed widely on the Net. See, e.g., Global News Network, "Network Money, The Future of Banking and Commerce on the Internet." This includes an informative "Introduction to Electronic Commerce" by Jason Solinsky and "You Ain't Seen Nothing Yet: An Interview with Allan Schiffman" Mr. Schiffman is Chief Technical Officer of Enterprise Integration Technologies (EIT), which specializes in transaction security on the Internet. For a higher level view, See "Madcap Markets: Light Speed Money," Forbes ASAP August 26, 1996, in which is discussed increasing competition for traditional financial institutions from organizations that are highly information savvy, computer smart and financially liquid. Organizations like Microsoft, for example.

It is not difficult to foresee that the sale of insurance on the Net, particularly personal lines policies, and the immediate electronic delivery of a policy, will be accompanied by the ability to immediately collect part or all of the premium, either through a credit/debit card charge or a transfer of some other form of digital money. These facilities will increase the need for confirmation of identities through Digital IDs and security of communications through public key encryption discussed above. Payment methods in personal insurance are already regulated by insurance law in many states.

Similar issues and opportunities may arise as digital money transfers are used to pay indemniity to insureds and claims service vendors, speeding transactions and reducing the millions lost each year to claims fraud.

States may be wise to move promptly to adopt pertinent regulations or interpretations to facilitate and regulate such use of digital money for insurance premium and claim payments.

Net Nuggets
(links and informal notes about Life, Law and the Net)
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