SAN FRANCISCO (www.redherring.com) - For the most part, insurance is still a face-to-face business. Consumers taking out life insurance policies, for instance, want to talk with a flesh-and-blood person who is willing listen to questions about life-and-death issues and long-term financial goals. They're not likely to find reassuring answers to these questions over a keyboard and modem.|
For medical and sometimes life coverage, insurers typically require the applicant to get a physical examination and blood test. Even for homeowners' protection, insurers often want to inspect a property for fire hazards before they will write a policy. Insurance companies appear to be having a tougher time than their banking and stock brokerage counterparts combining a solid Web presence with profitability. Insurers' Web pages serve mainly as advertising vehicles and agent referral tools. In some cases they offer rate quotes. But few are true e-commerce engines capable of completing transactions online.
But the long-term potential for Web-based efficiencies in the sale of property and casualty insurance, especially automobile coverage, is big. "It's a market of commodity products where prices are all over the place," says Forrester Research analyst Todd Eyler. "You have to call multiple places to get a good price." He sees inefficiencies in the agency system employed by most insurers. Forrester's studies show that most people under 45 have less allegiance to agents and are more likely to turn to the Internet for direct purchases.
Mr. Eyler expects the agency system will gradually die off as the importance of old brand-name recognition loses its luster. An annual Forrester survey of 100,000 consumers shows that only about one-third of them still prefer a traditional brand. Another third prefer a contemporary brand name, and the remaining third are brand-neutral.
Automobile insurance shows the most promise of delivering the goods over the Web. Customers who complete an online form with information about their car, driving record, and credit card number can have a new insurance policy or renewal almost immediately. Those policies are subject to verification of data, and customers still need to print out, sign, and mail in a copy of the contract. But in November, when digital signatures become legally binding, even these little annoyances will disappear.
Forrester estimates that last year about 700,000 U.S. households bought $500 million in car insurance online. Forrester expects that number to leap in 2004 to 10 million households buying $11.8 billion in auto insurance. For homeowners' insurance, Forrester's 2004 outlook is much more subdued, with 3 million households purchasing $1.2 billion in coverage.
Geico, the largest direct seller of personal insurance lines, is currently building a stronger Web presence than most. Geico is also fortunate to have auto insurance as the backbone of its business.
Other big insurers such as State Farm and Allstate must take a more cautious approach on the Web to avoid alienating insurance agents. If forced to compete with a Web site, these independent agents will lose enthusiasm for drumming up new customers and serving old ones. Agent rebellions could have devastating consequences for an insurer. Reflecting the industry's conservative nature, the most complex transactions taking place on most insurers' Web sites are merely referrals of potential customers to agents.
Web-based agencies don't appear to be the way to make money in the industry's slow move to the Web. A couple of publicly traded agencies, Insweb (Nasdaq :INSW) and Quotesmith.com - a small fraction of their 52-week highs.
Insweb currently is in transition from being a referral service to an agency, but analysts still aren't too optimistic about its prospects. The company's stock was recently blasted when State Farm declined to renew its contract with Insweb. Those in the industry say State Farm made the move to protect its agents. Another problem is that both of these companies appear to be spending an absurdly high portion of their money on marketing.
"It's the classic quandary of an Internet startup," says Gomez analyst Greg Davies. "You have to toot your horn but it's a prohibitively expensive process to build a consumer brand."
Insurance companies on the Web face hurdles similar to those of financial services companies. Consumer financial service firms are having mixed success at serving customers and profiting from the Web. Some are not good at either, and doing both is rare.
Trading stocks on the Web is an example of how Web businesses can more cheaply and efficiently serve customers than their brick-and-mortar counterparts. But aside from Charles Schwab, which also has a big footprint in the brick-and-mortar world, most online brokerage firms still haven't figured out how to turn a profit.
Banks still have a long way to go before offering full services online. Juggling money between accounts is one thing, but don't expect to download cash and run freshly minted bills off your laser printer any time soon.
Pure-play Internet banks have been burning mountains of money on marketing just to stay alive and investors are trying to cauterize the bleeding. For instance, Wingspanbank.com has been a drag on its Bank One parent. American Banker reported that Bank One plans to merge Wingspan into the bank's retail operations in hopes of saving $30 million a year. The few banks with potentially profitable online efforts, such as Wells Fargo, moved quickly to the Internet yet still conduct the bulk of their business in branch offices.
It will be interesting to see whether a new breed of direct online insurers will have more success than the Web agencies. At least a couple of new Web-only insurers, Esurance and eCoverage, are trying to make a dent in the auto coverage market. Although small, these companies are not agencies. They underwrite their own policies but have rather unusual capital structures. Esurance, for example, effectively "rents" its license and capital backing from Argonaut Group, a holding company of insurance and real estate businesses.
"The industry as a whole has too much capital," says Esurance CEO Jean-Bernard Duler. "They are looking for ways to deploy their capital."
Esurance's Web site offers quotes from various competitors and attempts to beat those prices. Mr. Duler argues that in the brick-and-mortar world, 15 percent of a policy's first-year premiums and 10 percent of the following years' go toward paying agents. He claims his customer acquisition costs are less than the first-year agents' fees.
It's still hard for a small company to establish a brand name. So Mr. Duler has already linked up to provide services through the Quicken.com consumer finance site. He's currently trying to set up relationships with banks, credit card companies and auto leasing companies.
It's too early to say how all this will pan out. Through December of last year, Esurance raised $39 million in two rounds of venture backing. The company hopes to close another round within the next few months but is currently working on bridge financing, an indication that Esurance, with 155 employees and 25 contract workers has nearly burned through the $39 million.
Esurance is currently operating in 24 states. In geographical terms, rival eCoverage is a bit behind, but the company plans to announce soon a rollout into all 50 states.
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