Copyright © 2003 Business Insurance

"Electronic Clearinghouses Improve Efficiency" June 2, 2003

by MICHAEL BRADFORD

Electronic clearinghouses are creating efficiencies and savings as they replace traditional, mail-based processes in some insurance transactions.

An electronic clearinghouse is a "centrally located entity that links together different trading partners" that exchange information in a business transaction, explained Linus C. Ogbonna, director of EDS*SEND, a unit of Plano, Texas-based Electronic Data Systems Corp.

Mr. Ogbonna was a member of a panel that discussed clearinghouses at the annual conference of the Assn. for Cooperative Operations Research & Development in Orlando, Fla., last month. The panelists agreed that the clearinghouse model is an easier and more cost-effective method for completing transactions than the more cumbersome process of envelope stuffing and mailing.

Frank S. Lent Jr., director of property systems at the USAA Information Technology unit of USAA Group in San Antonio, explained how a clearinghouse arrangement works in transactions between his company and financial institutions that lend money to car buyers.

"When you buy a vehicle and finance it with an institution, they have a need to know if that vehicle is insured or not," said Mr. Lent. That means that for every vehicle USAA insures, it has to notify the lienholder that coverage is in place. Notifications also must be sent if policy changes are made on an insured vehicle.

"It's a process that's imposed on the insurance company, and we are required by law to make that notification," Mr. Lent said.

In 1994, USAA turned to EDS for help in simplifying the notification process, which the insurer was handling through mailings.

Through the EDS clearinghouse, notifications are gathered by PDP Group Inc., a Hunt Valley, Md., company that handles document-tracking duties for insurers and delivers electronic notifications from the clearinghouse. "Our business is to make sure that the insurance remains in force on the car," said Matthew W. Hopkins, senior programmer analyst with PDP.

USAA's clearinghouse arrangement has taken a burden from its staff and saved the company money, according to Mr. Lent. "When you have your folks who were previously printing, stuffing, mailing, routing and doing all these type things" freed from those duties, "you are able to get more work done with the same amount of people," he said.

"Obviously, if you are delivering a document electronically, it's going to be cheaper than if you're delivering that via (regular) mail," Mr. Lent said. "So the more documents we can deliver electronically, obviously, it's better for us."

On the receiving end, lenders see similar benefits from electronic delivery.

Mr. Hopkins explained that lenders receive documents from hundreds of insurers writing auto policies. If those documents arrive in the mail, they have to be opened, sorted and stored until they can be processed. Employees have to be trained on data entry to enter information from the documents into the financial institution's computer records.

If the documents are processed electronically, all of that work-and the potential for data-entry errors-goes away, Mr. Hopkins said. Lenders, like insurers, get greater efficiencies with less human involvement.

Implementing a clearinghouse is not as complicated as it once was, Mr. Lent pointed out. When USAA became the first insurer to replace paper notices to lienholders with electronic delivery, "it was considered a pretty complex process," he said.

Ronald Dudley, vp-standards at Pearl River, N.Y.-based ACORD, called it "one of the easiest implementations there is." While working with an insurer, Mr. Dudley helped the company make the transition to an electronic clearinghouse.

"It was a painless process to set up the entire operation," and merely involved supplying some information to EDS, which handled development of the clearinghouse, he said.

Mr. Lent predicted that clearinghouse transactions would continue to grow. "I think we would agree that we are seeing more and more demand for electronic exchange of data to simplify and find ways of doing things cheaper, better and faster," he said.

And, doing more with fewer employees is a kind of "mantra these days as far as businesses are concerned," Mr. Lent said. "Everybody is trying to find ways to do more with less."

Mr. Dudley told conference attendees that "if you are ever looking at putting in a cost-saving implementation that will really pay benefits in the long run, it's a simple one. I would encourage you that if you're not doing it, to take a look at it and take advantage of the clearinghouses. It will certainly help your process and it will help your bottom line."

© Copyright Business Insurance 2003