Rasmusson & Janssen (1997) cite that the Internet was first recognized as a means of data transmission. Abrams and Joyce (1995) argue that in the current world, the Internet has penetrated into the business environment whereby many organizations use it in their day-to-day activities. The insurance firms use the internet to market their services as well as provide information to their customers (Keen 2000). This paper seeks to explain the operational risk that insurance firms have and how this risk is related to electronic commerce as well as how the insurance firms manage to mitigate it.
Dayal, Landesberg & Zeisser (2003) and Pavlou, Gefen & Tan (2003) explain that in the field of electronic commerce, operational risks arise due to a default or failure in the information technology system. Chervany & McKnight (1996) and Grandison & Sloman (2005) comment that an insurance firm is prone to operational risks when the system operators fail to manage the use of the Internet technology and its application. This is because the insurance firms rely heavily on the technological application and networks.
The information technology infrastructure of an insurance firm can face some problems in handling the increased traffic or have difficulties in processing large volumes of transactions (Turban, Chung, Lee, & Chung, 2000). Another problem is that technological infrastructure might not be scalable in the sense that it can lack the ability to expand as well as to scale down (Langheinrich, 2002). Kim & Benbasat (2003) argue that accessibility and compatibility are another issues in the sense that the system might not be accessible or compatible in all the markets or it can lack security due to external and internal disruptions.
To mitigate operational risks, the insurance firms ensure that they have appropriate policies that deal with the issues related to contract negotiations and specifications, procurement as well as contract management (Goldberg, Wagner, & Brewer, 1997). The firms ensure that they have skilled manpower in the fields of information technology and project management able to deal with insurance-Internet problems (Hartman, Flinn, Beznosov, & Kawamoto, 2003).
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