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The rapidly growing Internet economy has raised numerous questions and issues regarding
government policy with respect to the electronic marketplace. Insurance markets, while similar
in many respects to markets for other goods and services, also present unique issues and
requirements that need to be considered in the formation of e-commerce policy. In this paper,
several governing principles are proposed to guide and assist policymakers as they define the
role of government in e-commerce generally and specifically as it applies to the business of
insurance.

    

The Internet economy is continuing to grow at an unprecedented rate. Online retail sales to
consumers in the U.S. totaled $36.6 billion in 1999 ? 120% above 1998 sales ? and are expected
to exceed $61 billion in 2000. European online sales grew even more rapidly in 1999 ?
increasing over 200%, to £3.5 billion ? and are expected to reach £9 billion in 2000. Consumer-
based e-commerce is only part of the total e-commerce picture. Business-to-business Internet
transactions worldwide totaled $145 billion in 1999, and are expected to reach $7.3 trillion by
2004.

The insurance industry is rapidly establishing its presence in the electronic marketplace. E-
commerce insurance sales in the U.S. are expected to total $2.1 billion in 2001. Sales of life
insurance products and personal lines property and casualty coverages are expected to grow most
rapidly. By 2005, 10% of all personal lines insurance purchased in the U.S. and 5% of all
personal insurance in Europe will be purchased online. Significant growth in commercial
insurance areas also is expected.

    



The emergence of the electronic marketplace appears to be causing much less dislocation
throughout the economy than previously expected. Rather than simply shifting business away
from traditional "bricks and mortar" operations to Internet-based operations, e-commerce appears
to be generating a significant amount of entirely new economic activity -- activity that would not
have occurred without e-commerce. In retrospect, this fact is not surprising when one considers
two of the inherent benefits and advantages of e-commerce -- increased access to markets
bringing more buyers and sellers together, and more and better information available to buyers
describing competing products and services. The Internet is often lauded as an educational tool
because of the way it provides expanded access to seemingly unlimited information on virtually
any subject. The Internet appears to be having a similar beneficial effect on the economy by
providing a new marketplace where consumers have more options and more information to assist
them in making economic decisions. Additionally, because the electronic marketplace is often
more efficient than traditional markets, buyers and sellers can benefit from lower prices and
lower costs.
]hat then should be government policy toward the Internet economy? As with the medical
profession, the first requirement should be to "do no harm." Any potential involvement in the
electronic marketplace should be carefully examined to ensure that the impact of government
involvement is fully understood. Following this basic rule, government policy toward e-
commerce should be based on the following broad objectives:

?Y protecting the integrity of the system;

?Y promoting competition by providing open markets; and
?Y ensuring regulatory efficiency and supporting efforts to maximize system efficiency.

Specific issues within each of these broad objectives are discussed below, with special emphasis
on implications for the insurance industry and efforts underway to ensure sound public policy in
the area.

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Electronic signatures should have the same legal effect as written signatures, and electronic
documents should have the same legal status as written documents.

The future of the electronic marketplace depends on the unquestioned legal validity of electronic
transactions. Digital signatures and other forms of electronic authentication can provide greater
security and certainty regarding the identity of individuals and the content of important
documents than traditional written signatures and printed documents. Unless electronic
signatures and electronic documents are given the same legal status and effect as their physical
counterparts, future development of electronic commerce will be severely hampered.

The insurance business relies extensively on the use of contracts and the exchange of
information, including information used in the insurance application, underwriting, and claims
management process. Everyone involved in or affected by insurance, including consumers,
agents and brokers, underwriters, and claimants, can benefit from the use of e-commerce
technology to accomplish tasks formerly requiring written communication and documentation.
The benefits of electronic commerce and insurance, however, will be limited unless electronic
signatures and electronic documents can be used in processes where written signatures and
physical documents are currently used, and unless the parties involved are confident that
electronic signatures and electronic documents are legally valid.

The National Conference of Commissioners on Uniform State Laws (NCCUSL) recently

adopted a model law, the Uniform Electronic Transactions Act (UETA), which would make
digital signatures and electronic documents legally equivalent to written signatures and physical
documents in those states that enact the model. UETA does not mandate electronic commerce or
the use of electronic signatures. It does, however, acknowledge the legal validity of electronic
signatures and electronic documents when all parties involved have voluntarily agreed to their
use. If enacted strictly as drafted by NCCUSL, UETA provides a sound foundation for the future
development of electronic commerce. To ensure that insurance consumers, agents and brokers,
underwriters, and others benefit fully from UETA's provisions, it is critically important that no
exceptions are made for insurance transactions as UETA is enacted by the states.

The U.S. Congress recently enacted the Electronic Signatures in Global and National Commerce
Act, establishing the legal equivalency of digital signatures and electronic documents to their
physical counterparts. This new law, which is largely consistent with UETA, provides a solid
foundation in federal law for the future development of electronic commerce. The continuing
challenge will be to ensure that the states do not enact laws or regulations that depart
substantially from the UETA model, and undermine or conflict with the new federal law.

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Electronic storage should be recognized as an acceptable alternative to the storage of written

documents.

Many businesses are required by law to retain specific documents. These requirements typically
are intended to ensure access to information for auditing purposes and to provide answers to
important questions related to past events or transactions. Storing written documents and
maintaining the ability to retrieve specific information from those documents can be costly. The
cost of storage can be greatly reduced, however, if electronic versions of written documents are
recognized as equivalent to the original documents. Current technologies involving the scanning
of written documents and images can ensure the availability and security of electronically stored
documents. The ability to retrieve historical documents and information contained in documents
can be greatly enhanced through the acceptance and use of electronic records. It is important to
note, however, that merely allowing records to be stored electronically is of little real value
unless the requirement to maintain written records is eliminated at the same time.

Insurers are subject to extensive document retention requirements. For example, most states
require carriers to retain written documents related to claim investigations and settlements for at
least 2 years. Allowing carriers to maintain electronic versions or copies of these documents,
where it is possible to do so, and allowing for the disposal of written documents could save
insurers and insurance consumers tens of millions of dollars annually.

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Businesses responsible for protecting the confidentiality of e-commerce customer information

should have maximum flexibility to implement solutions that are best suited to their particular
needs and requirements. Federal and state regulations in this area should be consistent and
should promote flexibility in responding to potential security threats.

]ould-be thieves of confidential consumer data are constantly testing database security systems
to identify weaknesses that would allow unauthorized access to the information they seek. A
critical factor in the fight against unauthorized access to confidential data is the ability to revise
and upgrade security systems and procedures frequently, as new and more effective systems and
technologies are developed. Policymakers should avoid adopting regulations that unduly
interfere with internal business decisions about what steps will be taken to protect confidential
data.

Financial modernization legislation recently enacted by Congress mandates the adoption of

regulations designed to safeguard the personal information of customers of various financial
institutions, including insurance companies. These regulations would apply to information
generated through electronic commerce as well as by traditional means. Federal regulations
should allow and encourage businesses to develop and implement database security systems that
are best suited to their specific needs and requirements. Assuming appropriate federal regulations
are adopted, it is critical that the states avoid actions that conflict with federal regulations or
involve the duplication of significant regulatory requirements.

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Fraudulent electronic business practices should be prohibited and prosecuted in the same manner
as non-electronic fraud.

A significant percentage of the general public does not believe that conducting personal business
over the Internet is safe. They question whether adequate safeguards exist to protect against
fraud and outright theft. Demonstrating the safety and security of electronic commerce is a
critical issue for future development of the e-commerce marketplace. A widespread perception,
whether accurate or inaccurate, that e-commerce is unsafe and insecure could do more to
undermine the development of e-commerce than any other single factor. Fraud committed over
the Internet should not be viewed less seriously than other fraudulent behavior, and it should be
investigated and prosecuted with the same vigor and purpose as other types of fraud. The effort
to prevent and prosecute e-commerce fraud, however, can be a double-edged sword. Efforts to
police the Internet should not "throw the baby out with the bath water" by imposing onerous and
stifling regulations and requirements. Policymakers must balance the need to combat fraud with
the importance of preserving the basic strengths of the e-commerce marketplace.

The novelty of the Internet and the belief that many e-commerce consumers and businesses may
be poorly equipped to guard against fraud may encourage criminal Internet activity. As insurers
explore and pursue new opportunities to participate in the e-commerce marketplace, specific
attention should be devoted to combating insurance fraud. Fortunately, technology
developments, in addition to providing the new e-commerce marketplace, also have provided
new tools for identifying potentially fraudulent behavior. Policymakers should support the use of
these fraud-fighting tools.

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Consumers and businesses should be allowed to use the strongest forms of encryption available.

One of the most important existing tools for ensuring e-commerce safety and security is
encryption. Today's strong encryption options are virtually impossible to breach. Strong
encryption technology, however, is a problem for law enforcement agencies unable to monitor
and decipher encrypted communications involving suspected illegal activities. However,
prohibiting or restricting the use of strong encryption technology, as has been proposed by some
federal law enforcement officials, would undermine e-commerce security and discourage
participation in the e-commerce marketplace.

At this time in the development of electronic commerce, it is important to take every opportunity
available to assure the public of the safety and security of electronic commerce. Taking away or
restricting the use of an important tool designed to increase security would likely reduce, rather
than enhance, public confidence in electronic commerce. The insurance industry would be
impacted in much the same manner as other industries, if restrictions were placed on the use of
strong encryption. Federal legislation now being debated in Congress should be aimed at
increasing access to strong encryption tools.

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Business-to-business e-commerce transactions, including commercial insurance transactions,

should be unregulated. No additional regulations should be imposed on electronic personal lines
insurance transactions.

As reported earlier, Internet-based business-to-business e-commerce transactions totaled $92

billion in 1998. By 2003, the value of business-to-business transactions will top $2 trillion. There
is no public policy basis for government intervention in a business-to-business commercial
transaction simply because the transaction is conducted electronically. Therefore, government
regulation of business-to-business transactions should be avoided.

Insurance regulators and legislators countrywide are realizing that the buyers and sellers of
commercial insurance products are better watchdogs of their own interests than government. As
a result, many states have deregulated major aspects of the commercial insurance business.
Taking a similar stance with respect to electronic transactions involving commercial insurance
transactions will help promote development of e-commerce and insurance. ]ith respect to
personal lines insurance, no additional regulations should be imposed.

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No individual or business should be denied the benefits of electronic commerce in order to

protect or promote non-electronic forms of business.

Electronic commerce is expected to fuel additional economic activity, and not simply shift
business away from traditional markets. Nevertheless, some traditional markets may experience
dislocations as formerly paper-based transactions are executed electronically. As often occurs
whenever an important technological innovation is introduced, there may be efforts to protect
traditional markets by erecting regulatory barriers to e-commerce. History has shown time and
again, however, that protectionist policies hurt consumers by raising prices and limiting choices.
Such policies should be avoided in this instance.
Electronic commerce is likely to have a significant impact on current insurance marketing and
distribution systems. Although traditional systems will continue to play an important role in the
industry, many resources formerly devoted to paper-based systems will be released to support
electronic commerce or pursue new opportunities to service insurance clients. Efforts to address
any dislocations that may occur from this process should not include erecting regulatory barriers
intended to protect traditional ways of doing business.

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There should be a level playing field for all industries and businesses with respect to e-commerce
regulatory requirements.

One of the biggest potential obstacles to an open and competitive electronic marketplace is a
regulatory structure that unfairly favors one competitor, or type of competitor, over another.
Ideally, a market works best when consumers are able to choose freely among competing
products, services, and providers. Consumers choose a desired product, service, or provider
based on information they possess regarding price and the ability of the product, service, or
provider involved to meet their specific needs. Regulations applied to some competitors, but not
all, will increase the price of the affected competitor's product or service or reduce the quality or
value of their product or service, relative to the products or services offered by competitors.
Because information in the electronic marketplace travels quickly and widely, a regulated
competitor whose product or service is more expensive or less responsive to consumer
requirements, because of regulation, can quickly be forced out of the market. As a result,
consumers will have fewer choices and the market will become less competitive and less
responsive to consumer needs.

This issue is of critical importance in the financial services industry, where competitors with
different regulatory traditions are competing with one another, and consumers enjoy more
options and opportunities than ever before. ]ithout a level playing field, competition will suffer
and consumers will not enjoy the wide range of options provided by multiple businesses
competing for their patronage. As financial services and electronic commerce continue to
develop, efforts should be focused on ensuring that no participants in this new marketplace enjoy
unfair advantage simply because of unique regulatory requirements avoided.

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Taxes on all goods and services should be technology-neutral; therefore, there should be no
unique Internet taxes. In determining whether to implement and administer a sales tax on Internet
transactions, the difficulty and costs involved in adopting such a system should be weighed
against the likely benefits.

The rapid growth of electronic commerce has raised major issues involving taxation. In many
cases, sales taxes are not paid when goods and services are purchased over the Internet. Some
observers warn that electronic commerce is likely to cut deeply into the tax revenues of state and
local governments, although the evidence related to this claim is mixed. Nevertheless, the ability
to impose and collect taxes on Internet sales is problematic from a practical perspective, where
the seller and buyer may be difficult, if not impossible, to identify in terms of physical location
and where no structure currently exists for the collection and transmittal of tax payments.
Policymakers should carefully compare the likely benefits of an Internet taxation system with the
costs and practical difficulties in administering such a system. In any event, there should be no
unique tax on Internet transactions solely because of the electronic nature of the transaction. This
principle was adopted recently as a major "theme" by the Advisory Commission on Electronic
Commerce, which was created by Congress to advise it on electronic commerce taxation issues.

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The use of electronic commerce in global business transactions should be encouraged and
supported by every nation and by the ]orld Trade Organization.

Every nation can enhance the benefits they receive from world trade by creating and maintaining
a regulatory environment that encourages and supports electronic commerce. ]ith the number of
people worldwide with Internet access expected to reach 1 billion by 2004, electronic commerce
can be an effective tool for promoting world trade.

Industry generally and insurers specifically face many of the same e-commerce issues
internationally as they do on the domestic front. Insurance industry participation in bilateral
negotiations with individual trading partners and multilateral efforts, through the ]orld Trade
Organization, to enact a continued global moratorium on duties assessed on Internet
transmissions or products purchased on-line should continue. Insurers also should work to ensure
that foreign governments do not impose unnecessary regulatory or bureaucratic barriers to
electronic commerce or discriminate against any specific electronic commerce technologies. The
global insurance industry and its customer base will benefit most if electronic commerce is
allowed to flourish in competitive, open markets throughout the world.

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Issues of regulatory jurisdiction should be resolved in a manner that best serves the needs and
interests of the e-commerce customer. ]herever electronic commerce is regulated by multiple
jurisdictions, there should be uniformity and minimum duplication in regulatory requirements.

]ith electronic commerce, it may be difficult to say with certainty where a commercial
transaction actually takes place and which jurisdiction may have regulatory authority over the
transaction. Decisions regarding regulatory jurisdiction should be based primarily on economic
efficiency and other practical considerations. The worst possible scenario would be for multiple
jurisdictions to assert jurisdiction and for each jurisdiction to impose unique regulatory
requirements.

The ultimate success of e-commerce and insurance will depend in part on the ability of
regulators in state jurisdictions to avoid over-regulating e-commerce insurance transactions and
to adopt uniform regulatory requirements where regulation is determined to be necessary.
Insurance regulators must devise approaches to accomplishing legitimate regulatory objectives
that preserve and enhance the benefits to consumers and insurers that e-commerce provides.

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The development and maintenance of e-commerce communication and data transmission

standards should be led by the private sector. Technical e-commerce standards should be
implemented voluntarily and should be reviewed and updated on a regular basis.

The success of electronic commerce also will be determined, in part, by the ability of all
participants in the e-commerce marketplace to exchange information and transmit data
efficiently. The efficient exchange of information is enhanced by the availability and use of
standard data definitions, transaction formats, and other technical standards aimed at providing
uniformity in how e-commerce participants communicate with each other and exchange
information. Although government is now and will continue to be a direct participant in the
electronic marketplace, the private sector always will account for most e-commerce activity. The
development and implementation of technical e-commerce standards, therefore, should be guided
primarily by the needs and requirements of private sector users. Similarly, electronic commerce
is growing rapidly, as more and more businesses and consumers find ways to participate.
Participation will be encouraged by allowing businesses and other participants to make
independent decisions regarding the use of e-commerce communication standards. Mandatory
use of any standard should be avoided.

The insurance industry has for many years participated in standard-setting activities involving a
wide-range of industry groups, including ACORD and the American National Standards
Institute. Private sector standard development efforts should continue and perhaps be accelerated
in anticipation of the likely growth of e-commerce insurance. As with industry generally, the use
of technical e-commerce standards should be a voluntary matter.

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New issues undoubtedly will emerge that have not been identified in this paper. The necessity
and nature of any government action responding to those issues should be determined in light of
the broad objectives identified earlier:

?Y protecting the integrity of the system;

?Y promoting competition by providing open markets; and
?Y ensuring regulatory efficiency and supporting efforts to maximize system efficiency.

The electronic marketplace promises extensive benefits for all participants, assuming
government can refrain from intrusive involvement in the market. By adhering to the above
principles, government can play a positive and beneficial role in the electronic economy of the
future.

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