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Role of Internet in the insurance sector
Kashi M Memani
Insurance companies have often been considered to be quite slow in embracing e-commerce. In a survey carried out by Forrester Research in 1999 (and quoted by Industry Standard), only 12 per cent of insurers sell online. The research estimates that the industry will deliver about $4 billion of sales over the Net by 2003 but that would account for only 2 per cent of the overall market. This is despite the fact that many insurers did create a presence for themselves on the Internet at a fairly early stage by providing product information or actuarial calculators etc.Traditionally different factors have influenced the insurers' reluctance to sell on the Internet. These include the following:
The fear of antagonising the traditional Direct Sales Force (DSF) channels. The DSF channel often contributes the maximum to insurance production specifically across life offices. The strong belief that "insurance is always sold, never bought". Hence the belief that except for mandatory insurance businesses, such as auto insurance, customers will not actively seek insurance solutions and will have to be prospected aggressively by the DSF. n Product complexity. Insurance selling does involve a fair degree of customisation as solutions need to be designed to meet the specific needs of customers. It is often believed that these solutions are best designed after understanding the needs of customers in a "face-to-face" selling situation.While these factors may have inhibited the insurers' acceptance of selling over the Internet, a different set of factors is increasing the pressure on insurers to offer sales over the Internet. These factors include the following. The financial services industry has been quite aggressive on adopting Internet based business models. Banks for example allow customers to access their accounts over the Internet and low cost stock broking services are also readily available. Some specific low commission insurance products could potentially become large sellers such as products related to stakeholders pensions in the UK. The Internet can be a powerful application for controlling distribution costs across such products. Customer knowledge, specifically for simple products such as term insurance and motor insurance is quite high in competitive markets. Shopping for such products does not need very sophisticated advice and the Internet could be a convenient, cost effective channel for them. Customers would like reliable advice on financial planning and insurance commitments are a significant element of the financial planning process. The Forrester Research indicated that 27 per cent of the people surveyed would like to gather information on insurance products over the Internet.Such factors are increasingly leading to insurers ensuring that they have some sort of "Internet presence" and the extent of e-commerce offered varies across insurers. Typically the ability to offer simple Internet-friendly products that do not require high levels of complex pace with which insurers have offered products on the Internet.In the UK, Eagle Star and Direct Line sell personal insurance over the Internet. Halifax is planning to offer private motor and household insurance through ensure.com. While we have discussed the insurers' response to the Internet so far, the other category of operators for whom the Internet play is extremely significant is insurance distributors. Traditionally, insurance intermediaries or distributors are classified as "agents" who are tied to one insurer and cannot procure business for any other insurer and "independent advisors" or "brokers" who represent the customer and can therefore select the insurers whose products they feel best meet the needs of their customers. To an extent the agent's ability to use the Internet is contingent on the degree to which the company to which the agent is tied uses the Internet. The broker who is an independent intermediary can however use the Internet in many ways. The broker can offer quotes for insurance products of different insurers and enable the customer to compare them. The insurance space has witnessed aggregator such as InsWeb and Insure Market. The latter is a licensed broker that works online and receives a commission for every policy sold by carriers through this site. While the low costs of transaction over the Internet and the neutrality of the intermediary are obvious advantages, the online intermediaries do face some issues such as the following. Building online brands is difficult and expensive. The brand has to be strong enough for customers to trust and divulge personal information on financial matters. Managing the cost of customer acquisition will hence be a challenge. The online stock broking experience clearly indicates a downward pressure on commissions for the intermediaries as trading volumes and competition increase. The insurance intermediaries may also feel a similar pressure on commissions.In conclusion, therefore, the insurance space is likely to witness a lot of investment from both insurers and insurance distributors in the near future and the industry could try to make up for its slowness in responding to the Internet so far. Within the world of Internet-based business it is quite risky to make predictions, as the business space could change dramatically even within a short duration of three months. For insurance industry the one prediction that can however be safely made is that the quantum of Internet play within the industry will only increase in the immediate future and as has been witnessed in other financial services product categories, some newer and different ways of offering products and transacting business online may emerge within this industry as well. -- The author is chairman, Ernst & Young Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.
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