Dotcom mania started leaking a year ago and has finally sunk. Reality and its business correlate, profit, eventually must be served. But are there residual Internet delusions in the insurance world? Are some or many of us operating on misapprehensions? And what is a realistic view?
In the next few pages, I'll suggest where many industry observers, consultants, and prognosticators have gone wrong about insurance and the Internet. Then I'll propose a view that makes more sense (to me anyway) and what this view might suggest for agency and company Web strategies - and their connection with customers and out-facing services.
Monkey see, monkey do
As the popularity of Amazon.com waxed and threatened local bookstores and brick and mortar chains, it was a short jump to imagine that insurance, especially personal lines and small commercial lines would also be sold directly through the Internet. Agents would starve and companies that couldn't make the jump to hypertext would be absorbed into aggressive first movers that saw the light.
Several business models seemed obvious candidates for application to the insurance space based on their success (or at least appearance of success) in other industries. Insurance portals would direct consumers to insurance retailers, making money on ad-vertising directed at the eyeballs coming to their site and clicking through e.g., Yahoo! Comparative quoting and information sites would mimic comparative airline fare and travel booking sites, such as Travelocity or Expedia.
Traditional insurance companies would sell direct through the Internet in competition with their agency channel - "bricks and clicks"- as Progressive and Travelers do. New virtual companies and agencies would dispense with the overhead of the brick and mortar world, do business in an efficient and rational way, and displace the "they-just-don't-get-it" dinosaurs of the traditional insurance industry - Internet pure plays, such as eCoverage. Insurance exchanges would connect insurance buyers and sellers through reverse (sellers bid) or forward (buyers bid) auctions, such as Priceline and eBay.
For each apparently successful Internet business model in the retail world, entrepreneurs with business plans and PowerPoint slide shows created insurance correlates and sold them to their boards or to venture capitalists who were loathe to miss out on the next big thing. After all, insurance accounts for nearly one-seventh of the world's economy.
Not all precincts have reported in, but so far it appears clear that not one of the new Web-based insurance consumer services is a success. In fact, not a few have spent their wad, been sold, or closed their doors. And, it appears, many of the businesses these insurance start-ups mimicked have fallen on hard times and have uncertain futures.
Why did something so obviously right turn out to be so wrong?
Let's look at each of the business models we've described above and identify some weak points.
Insurance portals: A good idea from the consumer's point of view, theoretically, but how do you make money at it? People buy insurance rarely and find it a necessary, but deadly boring, process. Marketing costs to drive visitors to an insurance portal site will almost certainly exceed the advertising dollars that could be earned based on the number of visiting eyeballs.
Insurance comparative sites:
A good idea from the consumer's point of view, theoretically, but shoppers won't pay for the quotes, and the marketing and technical expenses won't be recouped by advertising. Charging a referral fee to agencies or companies for leads supplied will only work if this extra expense (another layer in the distribution system) pays its way. It's not obvious that enough real leads will be generated (shoppers get educated at the expense of the site, but don't see the process through) that can be sold at a profit.Insurance companies selling direct: This may work to some extent for a handful of companies, but won't have much impact on the distribution of insurance as a whole. Of the (maybe) 1,500 P&C companies in the U.S., only a few companies have recognizable brands. Imagine all deciding to sell direct. Total chaos.
A more serious problem for direct sales is that it will be years, if ever, before most of the population actually wants to buy insurance through the Internet (without a local contact). People shop for insurance on the Internet, but then don't buy. Com-panies that create competition with their agents by also selling direct may confuse the public and drive away their agency sales force. Some companies, like Allstate, are trying to provide an integrated multi-access approach in which an agent is always available - and also gets a piece of the action. That may work.
Internet pure-play insurance distributors: They must spend a good deal to be visible on the Internet - unless they are affiliates with another, powerful site that has already spent billions building a brand. More importantly, the pure-plays must deliver special value to the consumer - or why should the consumer bother? What is that value? Is the premium at least 20% lower? (According to a McKinsey report, consumers need a 20% reduction in premium to buy on-line.) I'd be very surprised if pure plays could deliver that consistently. Are they likely to provide better service than a good traditional agency/company pair? Not likely.
Auctions/exchanges: The industry already operates through exchanges: they're called independent agents. These exchanges may be very small or quite large, but each mediates between buyers and sellers, not in the theoretically perfect way a frictionless marketplace might, but in a practical manner that actually works. Would it make sense for 1,500 insurance companies to participate in an insurance exchange with 20 million businesses and 90 million consumers? Looks like incipient madness to me. Neither eBay nor Price-line sellers need to underwrite the potential buyer before making the sale. An insurance policy isn't an airline ticket.
Obviously the situation is more complex for each of the five business models described above than I've allowed. And there are variations as well as other insurance business models. Any or all or the above may sputter along, some perhaps profitable and successful for that particular company, but none of these models, at least for now, will bring the kind of revolutionary change once considered (by some) inevitable.
When you have a hammer, everything looks like a nail
Why hasn't the Internet turned the distribution system upside down? Why are the traditional players, the dinosaurs, still standing? The principal reason, I believe, is that the Internet is a national medium and the distribution of insurance is, to a great extent, a local business activity. (Clearly, there's a long discussion needed to defend this point. There's the state regulation of insurance, the agency's connection to its customers and community, the fact that insurance is in some ways a professional service, not just a product, and the desire on the part of the insured to hold someone local accountable. We'll save the details for another time.)
The Internet may be the first information medium that is inherently national. Newspapers, radio, and television are regional, though they may include nationally distributed content. Because the Internet makes it possible for a seller to reach everyone in the United States (that uses the Internet), it suggests business models with low distribution costs selling nationally and overwhelming local and regional competition.
The fallacy behind most of the investment in insurance distribution on the Internet is that it has confused the availability of a tool (the national Internet) with the solution of a problem (improving local insurance distribution). When you have a hammer (the Internet), everything looks like a nail (a national distribution problem). In fact it would be better first to acknowledge the problem (improved local distribution) and then look for a solution. When you have a nail, everything looks like a hammer is a better operating model than the reverse.
The company role in the Internet world
A few companies may succeed selling direct through the Internet without agents. But it would be ludicrous for most companies to even consider the possibility. Agents bring companies business. Only the most expensive marketing will bring most companies business through the Internet. Without agents, most companies don't have a prayer of surviving. That's why I think it very peculiar that companies are constantly being berated for not getting with it and selling through the Internet. It's obvious to anyone who thinks about it that it makes no sense.
So why are companies lambasted for not getting into e-commerce in a big way? When in doubt, follow the money. It's in the interest of consultants and technology suppliers to convince companies they have a big problem the experts can help them solve, ergo the characterization of companies as hide-bound and backward needing immediate help.
What should companies do with the Internet?
Mainly support their agents.
Every company should make it easy for consumers who visit the company Web site to find relevant agents and their Web sites. All companies, with agency user groups and ACORD should cooperate to create a useful national agency finder.
Every company should have a company identity page their agents can link to or copy and include in their Web site. The page should focus on answering the few questions an insured is likely to have about them.
Every company should provide some kind of on-line rating their agents or comparative rating mediators can interact with to provide out-facing customer and in-facing agency services. With rating as a first step, the company should evolve to a complete once-and-done environment that agents can link their customers to, use internally, and make available to vendors to aggregate into multi-company, once-and-done environments. Similarly, companies should provide claims, service, and other direct and in-direct (through vendors) transaction support.
As it agrees with their business plans, companies should work with their agents to design niche products and the Web-based services to support them.
What should agents do with the Internet?
First on my list is to begin deploying out-facing services on their Web sites. A substantial amount of content, whether forms or text is already available. Transaction model ASPs are providing end-to-end solutions for claims, certificates, and many other transaction types.
Smart agents are broadening or deepening their reach by specializing in areas like high-tech companies, HR/benefits, and business solutions (creating teams of lawyers, accountants, HR people, business consultants, and the like to solve problems for their clients). A great variety of benefits and other ASP services and content is available for agents to use on their Web sites and use internally.
Agents need to encourage their user groups to cooperate with companies and ACORD to create a national agency search facility on the Internet. They should also insist that their companies begin providing Web-based services they and their insureds can use - services that can be aggregated by vendors into multi-company suites.
As software tools like Groove and other peer-to-peer environments (the future of Windows?) become available, agents should take the initiative to sponsor collaborative networks among customers, producers, CSRs, underwriters, and other relevant parties.
The Internet and re-intermediation
Good agents all over the country are finding ways to add value to what they provide their customers and they each do so based on the personality of their agency, their resources, and the opportunities they see. Agents that succeed and prosper are the ones that evolve and extend what they do.
As someone pointed out to me recently, agents and companies really aren't in the same business. Companies have a product focus. Agents have a service focus. Agents will quickly and creatively evolve to provide what their customers want. They'll survive because their owners will make certain they do. Companies will never be as flexible as agents: that's not their business - insurance products are. Companies should do everything they can to help their agents in general - now through the Internet - sell and service the companies' products.
*With apologies to Charles McKay and his fascinating study by the same name.
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