April 2000
Making a Market
Net markets can ease business transactions for insurers by creating online sales hubs.
by Gates Ouimette
Markets Evolving
N
et markets, also known as busi- ranties, stop loss and aggregate cov-
ness-to-business exchanges, ers, and treaty and facultative covers. Building community is the single
are expected to be one of the Late last year, Catex revamped the most important aspect to any net
highest growth Internet segments over technology behind its trading op- market because it helps attract and
the next four years. In a report pub- eration, and in the first month of retain participants. VerticalNet Inc.
lished in February, Forrester Research the Catex 2000 Trading System, (www.verticalnet.com) achieved a
predicted that by 2004, net markets subscribers posted risks and offers to market capitalization in the billions
would capture 53% of the $2.7 trillion provide more than $1 billion of cov- of dollars based on the concept of
in U.S. business-to-business e-com- erage from more than 80 cities around building vertical trade communities
merce transactions. the world. for more than 50 industries, including
Net markets are built to promote Other initial insurance net markets insurance, manufacturing and food
electronic commerce between busi- have been focused on marketing service. But initial community suc-
nesses through transaction-based Inter- applications. For example, Benefit- cess alone does not dictate who will
net hubs—central locations where mall.com matches insurance brokers build the most successful—and en-
potential buyers and sellers converge. and carriers with small-business own- during—net markets.
While some have noted similari- ers seeking group benefits for their As Internet technology has in-
ties between electronic data inter- employees. In addition to providing creased in sophistication, new net-mar-
change and net markets because they access to a portfolio of products, Ben- ket applications, such as trading
are both focused on easing business- efitmall (www.benefitmall.com) auto- engines, have emerged. Beginning with
data communications between firms, mates key sales and service functions vendors such as OpenSite Technology
there are notable differences. Net and provides a community for insur- Inc. (www.opensite.com) and Moai
markets, which are built upon Inter- ance brokers and small-business em- (www.moai.com), the first generation
net technology, can offer a much ployers with industry news, employ- applications were typically an auction,
lower cost of entry to participants, ee-benefits education and other where a single seller attempted to rid
are much more f lexible and mal- value-added services. themselves of excess assets to multiple
leable to use and offer almost imme-
diate access to anyone interested in
participating. Net markets help com-
panies conduct business faster, buy
or sell excess inventory or capacity
more easily and allow them to more
easily and less expensively increase
their universe of buyers and sellers.
One of the longest-running insurance
net markets is Catex (www.catex.com),
a business-to-business exchange for
insurance, reinsurance and risk man-
agement. Begun in 1996 to facilitate
the swapping of catastrophe expo-
Illustration by William Waggoner
sures between interested parties,
Catex transactions now include tradi-
tional premium indemnity, second-
event covers, industr y loss war-
Gates Ouimette is a business-to-
business e-commerce consultant
based in Medfield, Mass.
1 BEST’S REVIEW • APRIL 2000 • REPRINT
Copyright © 2003 by A.M. Best Company, Inc. All Rights Reserved. Reprinted with Permission.

NET MARKETS
buyers. As these initial vendors en- Streamlining the Process Application vendors are moving into
tered the market, the auction became Insurers could benefit by using net that space, as evidenced by the acqui-
more sophisticated, primarily through markets to streamline their internal sition of TradingDynamics, a dynamic-
the creativity of the vendors and business processes. The insurance pricing model, by fixed-pricing Ariba
their clients. industry spends an estimated $121 bil- Inc. (www.ariba.com), which focused
Over the past year, trading engines lion on distribution costs alone. As initally on prenegotiated pricing. The
have evolved and are typically built much as 20 cents of every insurance acquisition, which closed in January,
upon XML (extensible markup lan- premium dollar is spent on paper- was announced less than a month
guage), which allows structured data based distribution. An insurance net after TradingDynamics released its first
to be transferred from any application market built on XML and offering software application.
in a standard, consistent way. value-added services such as work-
While their predecessors typical- flow-process definition, integration Setting the Standards
ly had applications built to solve a and management could decrease those Another emerging area for net mar-
specific business problem, new costs significantly. kets is self-governance. In the proper-
firms such as TradingDynamics Inc. While traditional insurers have ty/casualty arena, an international pro-
(www.tradingdynamics.com) and begun the process through the use of fessional membership organization
Tradeum (www.tradeum.com)— intranets and extranets, they have yet known as the Insurance Industry
which VerticalNet recently acquired to take advantage of the benefits of Internet Standards Task Force
—are being built by theorists who are net markets. (www.I3STF.org) has had a slow start.
savvy in diverse areas, such as auction This is likely to change if some pre- Its goal is to encourage property/casu-
science, game theory, mathematics dictions about the future of the indus- alty insurers, brokers, attorneys and
and economics.As a result, their appli- try come true. Gary Craft, e-finance re- technology vendors worldwide to
cation suites are flexible enough to search analyst and managing director focus on standards, education and pol-
support new revenue models such as of Deutsche Banc Alex. Brown, has said icy issues as they relate to the use of
reverse auctions (one buyer, many that insurers providing one-stop shop- the Internet in the communications of
sellers), exchanges (many buyers, ping will give way to businesses that insurance claims and policy data. The
many sellers) and negotiation (one focus on the various facets of the insur- task force’s February 1999 white
buyer, one seller), in addition to auc- ance process, including originating paper, Towards Internet Standards
tions. In turn, businesses have the policies, underwriting, investment, han- For Insurance Claims Data & Trans-
opportunity to design new net mar- dling claims and product development. fer…Task Force Structure Sequence
kets, incorporating theoretical model- Alton Cogert, founder of Strategic & Organization, provides a good
ing augmented by their specific Asset Alliance, a consulting firm that background for both property/casual-
industry expertise and implemented focuses on insurance investment man- ty and life/health professionals.
through these newest trading-engine agement, is in the planning stages of a Finally, other benefits—and new
applications. net market where insurers, reinsurers businesses—will result from insurance
What can this possibly mean to the and intermediaries can buy and sell net markets and, in turn, further sup-
insurance industry in the future? insurance risks. His plan includes port them.These market-support roles
Like in most industries, the first building a community for senior insur- will include:
net-market entrants from the insur- ance executives to exchange ideas and • information available on the net
ance industry were primarily market- information. market or resulting from trading on a
ers. Despite some “cannibalization” of net market, such as the closing prices
business from other distribution Pricing Options on reinsurance transactions that
channels, overall revenue potential Net market pricing processes is Catex posts;
should increase for sellers in these evolving to encompass dynamic pric- • trust, or the ability to guarantee
types of markets just by gaining ac- ing—which is used during auctions, identity, transactions or performance;
cess to many new prospective cli- reverse auctions, exchanges and negoti- and
ents. For example, with Benefit- ations—as well as fixed pricing, which • infrastructure to help move prod-
mall.com, the increased access is to does not involve negotiation. Fixed- ucts and information, such as that pro-
small businesses. There are 1.6 mil- pricing markets can involve one buyer vided by eCredit.com, which connects
lion businesses in this category with and one seller, catalogs (either many businesses to financing partners and
annual sales between $500,000 and buyers to one seller or one buyer to global information sources so credit and
$50 million. many sellers) and aggregated catalog financing decisions can be processed in
Net markets also might help partici- hubs (many buyers to many sellers). real time at the point of sale.
pants to reduce distribution costs, but Markets with different pricing mod- Integrated or individually, any of the
this depends on the fees and costs els are often handled separately, but above will offer benefits to the insur-
associated with doing business online future net-market winners will sup- ance marketplace and will provide the
and the impact on existing distribu- port both spot markets with dynamic core element for future valid insurance
tion channels. pricing and fixed-pricing markets. businesses. BR
2 BEST’S REVIEW • APRIL 2000 • REPRINT
Copyright © 2003 by A.M. Best Company, Inc. All Rights Reserved. Reprinted with Permission.