Magazine article Risk Management

The New Marketplace: Online Risk Exchange

Magazine article Risk Management

The New Marketplace: Online Risk Exchange

Article excerpt

The potential is there, but will the vital interest build quickly enough to keep the premise from sinking?

The waterways intersecting Thailand have facilitated its people's commerce since ancient times. In the floating markets that remain, merchants still paddle along the klongs (canals) in long, open ruilla pai (boats) loaded with produce and steaming dishes to barter and exchange.

Jump now to the opposite end of the imagery spectrum, to an evolving marketplace that is not so different from the crowded floating markets of ancient Thailand, except this exchange is not on the flowing waters of natural rivers and man-made canals, but the interconnected electricity of the Internet.

The online exchange--part of the new e-marketplace family--is another new hope in the promise of Internet wonders. An online exchange offers a "place" where risk managers can put their risks to market for insurers and brokers to bid on. Like the canals of Thailand, an open market allows for transparency and, thus, honest prices. But whether or not the online exchange can deliver on its promises of increased efficiency and savings--or companies offering these facilities can survive--remains to be seen. The potential is there, but will the vital interest build quickly enough to keep the premise from sinking?

Potential for Savings

The numbers look great. According to Forrester Research, Inc., based in Cambridge, Massachusetts, sales from online business-to-business marketplaces (of all kinds and for all industry sectors) will grow from the $50 billion tallied in 2000 to $1.4 trillion in 2004. The Gartner Group and Goldman Sachs have calculated similar growth.

For the insurance industry specifically, A.T. Kearney, a Chicago-based consulting firm, estimates that between 10 percent and 25 percent of the $250 billion of the industry's costs (excluding claims and losses) could be saved through the use of online exchanges. That amounts to between $25 billion and $62 billion in savings.

This potential--referred to as such since the industry has not yet hit close to that mark--is based on the age-old business management mantra: time efficiency. Some exchanges are promising upward of 50 percent reductions in the amount of time it takes the consumer, such as the risk manager, to search for products. And all insurance industry specialists are targeting an attack on the administrative costs of brokers and carriers.

What makes these exchanges likely to succeed in such generous dollar amounts is a shift in focus. The exchange approach reverses attention from internal high-tech solutions to the external spaces between corporate cultures, business processes and networking and information technology environments.

"This technology is bringing about the most significant structural change in business since the industrial revolution," says Mark Hoffman, CEO of Pleasanton, California-based Commerce One, a software producer.

Case Study

Lyondell Chemical Company, based in Houston, is the kind of company that encourages its employees to incorporate new technology solutions to fix old business problems. "A lot of the things that we do in terms of how we conduct business are radical," says Mark Wilson, assistant treasurer for insurance and risk management. Lyondell manages plant operations online to improve performance and uses trading platforms to trade its chemical products with others.

So when the time came to find a solution to the redundancy and paperwork of the insurance supply chain, it was a natural fit for Wilson to choose an online exchange. "It was clear that there are real opportunities, longer term, for the use of an e-commerce exchange in the insurance acquisition business that would improve efficiency and complement the approach we already use," says Wilson. "In risk management, we're trying to keep up or catch up. If the procurement people can buy pipes and pumps and vanes, there's no reason to think that we can't successfully purchase insurance policies over the Net the same way, with similar efficiencies. …

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