After the Gold Rush: Insurance Dot-Coms Shift increasingly Toward the Agent

In the “stake-your-claim” environment of Internet insurance, any attempt to define trends and categorize business models can be an exercise in frustration.

However, in some ways the dot-com gold rush is slowing down and certain nuggets of truth are emerging from the silt. Not the least of which relates to the role of an agent in online insurance transactions.

Contrary to what might have been thought even recently, those agents are not merely still important in the scheme of things, they may represent the most intrinsic ingredient of the successful business model of the future.

Defining the territory
“Our challenge was how to redefine what is a pretty chaotic market,” said Elizabeth C. Malone, managing director of research for Friedman Billings Ramsey & Co. Inc. (FBR). “It isn’t just about the Internet insurance, it’s about technology…We tried to define the industry as broadly as we could, and we tried to define the technology as broadly as we could.”

FBR produced a study in June 2000 entitled e-Insurance, The Convergence of Insurance, Technology and Capital, which divides the marketplace into five segments.

Out of the 40 market participants in the report, most were entered in the “Employee Benefits” segment. The remaining four segments are described as being involved in the streamlining of the insurance process. “Manufacturers” (such as Esurance) are those companies that are more commonly known as direct marketers. The “Enabler” category (i.e. AMS, Applied Systems) encompasses those companies which “primarily provide technological development services to insurance providers and distributors both on and off the Internet.”

The “Aggregator-Lead Generators” are companies described as “essentially direct writers that gather leads for the agent.” Participants in this category are further described as having sought to “minimize risk up front with a fee structure.” The report notes that weak results and high costs associated with these companies have resulted in carriers backing away from the model, as illustrated by State Farm withdrawing its support from InsWeb.

The category “Aggregator-Broker” is described as an offshoot of the Aggregator-Lead Generator category. However, Aggregator-Brokers, which are also closely modeled after the traditional broker, provide one crucial element that the Aggregator-Lead Generators do not: they provide customers with support through the application process. As a result, the report notes that this category has achieved “higher rates of converting applications to policy sales.”

Malone emphasized that many of the companies listed in one of the five categories overlap others or migrate from one place to another. “That makes it confusing—it seems like a lot of companies are migrating towards enabling,” she said. “Generally the mood of the report is positive on these companies, although we come to the conclusion that the Aggregator-Lead Generators model is not as sustainable in curent market conditions as some other models.”

One company listed in the Aggregator-Lead Generator category is Intuit, whose products include QuickenInsurance. In describing the site’s efforts to grow and expand upon its auto insurance offering, a major goal cited was that of providing choice and convenience to the customer.

Jennifer Blackmore, a senior analyst for International Data Corporation (IDC), commented on some of the findings in the global research company’s recently published report, Personal Property and Casualty Insurance Online Premium Volume Forecast and Analysis (2000-2004).

“We found that 55 percent of consumers, overall, in e-commerce (and for insurance and financial services, especially insurance, we expect that it would be even higher) prefer to purchase online from brand names that they know and trust,” Blackmore said. “If you look at the people who are providing insurance online today, a lot of them are sort of start-up dot-coms…Maybe consumers do not have a pre-existing relationship with them. Intuit is probably the best brand name out there who is selling insurance online.”

Slawek Ligier, vice president and chief technology officer of QuickenInsurance, emphasized that offering choice to the customer—from choice of carriers to choice of how to do business online—is of paramount importance at QuickenInsurance. “[Customers] can purchase the policy while they are online,” he said. “If they feel more comfortable speaking directly with a person, they then have the option of purchasing through the insurance agent affiliated with the company or through the call center.”

Agents stake their claim
Regardless of what model various sites started out with, a distinct leaning on the part of many of them toward using agents or extending their use of agents is becoming increasingly apparent.

“A lot of talk in the insurance industry has gotten brokers up in arms,” Blackmore said. “They talk of the trend of disintermediation.What we’re saying at IDC is the carriers need to adapt a multi-channel strategy. Not everybody is going to want to purchase a policy online. Some people simply will not feel comfortable putting in their personal driving record information or their home information. People need the broker in some cases, especially with home applications.”

Rob Davidson, co-founder of the online storefront InsurePoint, commented on some of the changes he has seen over the past several years. After the advent of InsWeb, he noted, another generation of companies called “e-agencies” arrived.

“I can only imagine that the term disintermediation was so widely used in the e-commerce B2C environment that it inundated their thinking and infected their thinking,” Davidson said. “They thought, ‘Oh well, we can do this in the commercial insurance environment …disintermediate the agent. We’ll go ahead and write the insurance coverage for the world. Well, I don’t think that strategy was very prudent.”

Davidson indicated that InsurePoint was started with an agency force behind it, a force that there are now plans to extend. When that process is completed, and InsurePoint II is officially launched as a site, it will move from being a single carrier storefront to becoming an aggregator-broker with multiple carriers serving the small business marketplace. Davidson said the move will create a more neutral, independent platform that can work with agents throughout the U.S., without a conflict of interest. “We think we have to empower the agency force to become Internet-enabled and to understand how you use these new mediums to market and build relationships,” he added.

Another company that has made use of lessons learned is the online B2B marketplace InsureZone.

“We have spent a tremendous amount of time building a customer service unit, which includes professional, licensed agents,” explained Rusty Reid, president of InsureZone. “Even in the best case scenario, most people in the small business insurance arena are very comfortable in entering their data to get a quotation online, but they always want to speak with a professional agent to support them in making their buying decision.”

According to Reid, InsureZone’s model enables customers to do that by phone, by fax, by e-mail or through an IP chat functionality, and also incorporates a remote agent initiative. “In general, I believe we’ll continue to see M&A activity that will take the numbers down from the independent agents,” Reid added. “But I’ve also spent a tremendous amount of time dealing with the various insurance carriers across this country. Many of them, even though they might be changing components of their distribution system, still rely very heavily on an agent as being part of that distribution system.”

IDC’s Blackmore noted that while at some level disintermediation is probably inevitable, “if the carriers that you represent don’t put it online, someone else will put it online…There is a whole range of products which are undersold and unsold by live brokers because simply the margins are not that high…These types of products will go online if the carriers have technology that they can empower the brokers with.”

Using the tools of technology
Peter Taffae is president and CEO of recently launched e-perils.com, which he describes as a blend of the traditional wholesaler with the efficiencies of the Internet. Taffae said the insurance industry would benefit from following the technological precedent set by other industries, such as entertainment and securities firms, which are maximizing Internet technology.

“One of the most inefficient industries [the insurance industry] could benefit the greatest from the efficiencies of the Internet,” Taffae said.

According to the IDC report, in 1999 only .4 percent of overall personal p/c policies were bought directly online. While 37.6 percent went on to contact an agent or called someone on the phone to complete the transaction, 62 percent abandoned the process.

“People get very frustrated [applying for insurance online],” Blackmore said. “It crashes computers sometimes. But we think that technology is going to improve, especially with the major players coming in now…Eight out of the top 10 major carriers already have pilot programs to sell insurance online. By the end of this year we’re going to see the beginning of a new kind of environment.

“We’re expecting that by 2004…people who go online, shop for insurance and buy online will be about 6.3 percent,” he continued. “It’s still going to be a small number of people who actually want to buy online. And 65.8 percent are going to call a broker, be it captive or independent, and only 28 percent are going to abandon.”

Davidson explained another important change InsurePoint made early on after it noted the percentage of customers that would come online and create an application, only to abandon the process before completion. After conducting a survey of those customers that didn’t bind, InsurePoint changed its electronic application to make it more dynamic in terms of the question relevancy to the particular risk that was incoming.

Mike Mayo is executive vice president of e-commerce at the B2B Internet company Superior Access Insurance Services Inc. (SAIS), whose website, SuperiorAccess.com, emphasizes ease-of-use as a key element for success. “[Agents] can come to us with a restaurant or a contractor or a work comp and get a quote completely underwritten…in less than five minutes that they get behind, bind and make money off of,” Mayo said.

D.R. Rowson, president of the newly launched InsureTrade, which facilitates end-to-end transactional activity via the Internet for all parties associated with a commercial insurance transaction, said that the biggest problem associated with insurance and technology is that most carriers are wanting for a strategy.

“Some of the larger ones are throwing millions of dollars at a strategy that says, ‘We will create a portal by which the individual agent can transact business with us and interface directly with our legacy system,'” Rowson said. “The problem with that is that if you’re a non-appointed agent, you have no interface. If you are even an appointed agent who doesn’t have an agency management system that is of a certain level, you cannot interface…What we feel the industry has been wanting for a long time is an easy across-the-board interface with disparate systems on both sides, both the legacy side of the carrier and the p/c side associated with the agencies.”

In addition to agents’ fears of disintermediation, a long-standing apprehension on the part of many carriers has been that insurance technology will ultimately commoditize the insurance product.

According to William Bolton, chairman and CEO of Bolton & Co., which has been one of the dominant forces behind the InsurePoint effort, while that may already be happening, the companies that join InsurePoint will reap the benefits of getting a large volume of business. “It’s going to put you into a fairly good mix of business and you’re going to still do what you do best,” he said. “You’re going to find your level of appetite.”

InsureZone’s Reid concurred, stating that many of the carriers InsureZone is working with “are very excited about the opportunity that this presents with online sales. The fact that we support our private label partners and we actually have professional, licensed agents within our customer service unit, they feel that is the model that will be successful in the future.”

All that glitters
Mayo of SAIS described what he perceives as a problem for carriers with respect to some insurance dot-com models. “Somebody will approach [a carrier] and say, ‘We want to put you on our website. You’ll be side-by-side with six other carriers. Wherever you’re the lowest price you can have the quote. The problem with that is it starts a price war, and eventually the carrier’s not making any money…If they are getting the business it’s because there’s some class of business they’re willing to write that others aren’t, and they get adversely selected. So the models are flawed. We only offer one carrier for one line of business.”

Mayo says commoditization is happening to some degree in cities where there are large numbers of agents with multiple market appointments and consumers can get comparative quoting. However, it’s a different story in rural and suburban areas, where agents may have more control over their accounts.

“It’s not always about price,” Mayo said. “There are some models out there that do commoditize insurance, particularly in personal lines…We don’t believe those models will survive long-term because they do not benefit all participants.”

In Mayo’s opinion, in order for an e-commerce offering to be successful, all participants in the initiative must benefit, whether through a reduction in costs or an increase in profit. “If you are a carrier in a comparative rater, you will not benefit from increased pricing, in fact you will have to have ever-lower pricing in order to get any business,” he said. “Some national carriers refuse to even participate in a comparative rater.”

A golden future
IDC estimates that by 2004, 37 percent of all personal p/c premiums purchased will be influenced by the Internet.

“I’m taking sort of a bullish stand—we’re estimating roughly 11 million sales in 1999,” Blackmore said. “By the end of 2000 we’re predicting over 200 million. Some industries don’t grow that fast…You have to remember the industry overall is huge…A 10 percent slice of something that large is still very big.”

QuickenInsurance’s Ligier maintained that there is a huge demand for shopping and buying insurance on the web. “Last year we delivered over 1.2 million real-time quote sets, representing growth of over 320 percent,” he stated.

InsurePoint reported that to date from July 1997, it has had 2,600 created applications, 2,000 submitted applications and 1,000 bound applications. Total premium generated by those 1,000 bound accounts is about $1.5 million.

“We’re right now running at close to $100,000 of bound premium a month…compared with last year at $510,000 bound premium for the year,” Davidson said. “The closure rate between the submitted accounts and the bound accounts is running at almost 50 percent…Our retention level is running at a very strong 97 percent. Those numbers compare favorably with traditional business that’s sort of offline business, traditional brick-and-mortar business.”

InsureZone, which to date has followed a private label business model, has been averaging a close rate of 20 percent. “When I talk about an average close ratio of being 20-25 percent, that’s an average in a universe that varies significantly [depending on] what we’re doing for what particular partner,” Reid said. “We actually see it improving based upon the partners that we work with. The financial institution partners or where you have a portal that’s very specific to supporting the small business owner, as an example, you’ve already got a predisposition of that individual when they’re coming online. They’re serious at that point to find assistance in regard to the insurance, and they’re not just a casual shopper.”

Mayo, who described SAIS’ sales as “astronomical,” estimated that its first quoting and underwriting program, which started on Jan. 1, 1999, has since generated $30 million of profitable premium. Mayo added that SAIS, which is now up to 30 programs, works with 5,800 agencies, adding an average of 65 a week, representing the largest agency distribution system in California.

“What model we see emerging over time by the end of 2003…the diversified financial services model, will begin to impact the market,” Blackmore said. “Someone [that] is able to provide brokerage, banking, insurance, all of these products, with simple one- or two-click applications.”

As far as the dot-com “gold rush” is concerned, even if the initial frenzy may be over, there is still enough glow and promise of better things to come to keep participants in insurance dot-coms optimistic.

What does it feel like to jump into the fray now?
“It’s like somebody dropped me in candy store and I’m seven years old,” said e-perils’s Taffae. “The energy level is great. Things are moving very fast.…It’s really a fun time to be in the business.”

And perhaps the best news for agents is that nobody currently expects the independent agent system to become obsolete anytime soon. “The competition is simple really—he who enables agents to the greatest extent will win,” Mayo said. “Those models that enable agents to do their jobs better in their own communities are going to be the ones that succeed.”

Topics Trends Carriers Agencies InsurTech Tech Market Property Casualty