The internet will accelerate the change of the traditional, vertically-integrated insurance business model. Financial products will be sold in addition to traditional insurance products. As a result, the product economics of the industry will also change.
But while the internet and related technologies create the possibilities for change, the industry has significant hurdles to overcome if it is to avoid cannibalisation of the business sold through existing networks.
For a variety of reasons, sales of insurance online are expected to be minimal. A recent report from Forrester Research found that less than 1% of consumers had actually bought insurance online – 76% of those sales were of car insurance. However, the impact that the internet and related technologies will have on insurers' organisational and business models is likely to be substantial. Forrester Research expects policy purchases researched online to jump from $10bn (£7.04bn) to $41bn (£28.8bn) by 2004. Actual sales are expected to increase even more dramatically, from $1bn (£704m) to $14bn ($9.8bn) by 2004.
Net gains
Key areas of impact and benefit that the wider use of the internet in the insurance industry is likely to introduce include:
Production – sharing information among partners allows companies to anticipate changing customer needs and the level of demand for new services.
Customer acquisition – though the internet represents a substantially cheaper medium for reaching new and existing customers more efficiently, the marketing spend this necessitates is likely to be considerable.
Lower distribution costs – however, some of the qualifications that are required to process certain policies (i.e. medical examinations for life policies) discount the potential savings available through online distribution of policies.
Service – online policy renewal, claims processing and so on are all potentially available at a lower cost by using online solutions.The challenge for the industry will be to harness these changes in such a way to maximise return on investment and/or shareholder value.
There are several key components of the value chain that the internet will change:
Sales and marketing – the internet allows for rapid communication of sales and marketing data. This can be used either to complete a transaction electronically or to support the effort of another channel, such as the tied agent or independent broker.
Risk selection – the improvement of online databases allows for cheaper, more accurate selection and pricing of risks. The price transparency the internet makes possible means consumers can compare tariff rates more easily. In the absence of any value-added aspects of a product, the consumer is most likely to choose the cheapest tariff available to cover a risk. Therefore, rate competition is likely to intensify. The insurer will no longer be able to rely so much on tariff inefficiencies and customer ignorance/inertia to make super-normal profits on certain risks.
Claims handling – the internet can reduce claims handling costs in two ways: a fully automated claims processing platform, replacing a paper-based system, cuts down on time and expense involved in settling claims, and the internet can improve insurance settlement costs by giving access to better price information for replacement goods and services.
Internal processes – in both life and non-life insurance, the internet has the capacity to reduce operating expenses through automating processes.
Staff development and product knowledge – web-based e-learning solutions allow staff and field agents to be kept up-to-date.Having set these solutions in place, what are the benefits to be enjoyed?
There is the cheaper acquisition of new business. Typically, acquisition costs of direct channels can be half the level of physical structures, such as tied-agency networks. Also, the productivity of traditional sales forces can rise as paper-based communications are replaced by electronic versions. It will also see more productive policy management and administration through the automation of internal processes.
Cheaper claims settlement as productivity gains will theoretically be compounded by the insurer's ability to buy replacement parts and services more cheaply over the internet. Over time, insurance companies may become major participants in B2B online markets. In addition, more productivity investment management with access to greater financial data resources will improve investment performance.
Consider outsourcing
When compared to the US, the insurance industry across the European region is still highly fragmented. Many insurers lack economies of scale in their core business activities. The advent of the euro and the impact of the internet – accelerating cross-border competition – are forcing insurance companies to re-evaluate their core activities and to consider outsourcing business functions that fall outside those reappraised core competencies.
Outsourcing using internet technologies could help insurance companies focus on their core activities. Specific functions include:
Independent distribution – a tied agent is an outsourced distribution channel, which may produce better expense performance. However, the greater price competition generated by the internet means that a company geared towards distribution through independent channels is more likely to be prepared to offer selectively competitive rates to maintain its market position.
Risk management – reinsurance is an outsourced form of this. However, much reinsurance is used by primary companies to rebalance the risk they carry, rather than to transfer it to third parties. For most insurers, particularly non-life, risk management is a core operation and it would be surprising to see this element outsourced by the industry. However, over the course of time, certain groups may find that their expertise lies more in asset management or product development than risk selection. This could lead to certain players ceasing to be insurers in strict terms.
Asset management – while insurance companies have historically had large balance sheets, their expertise has been more in liability and asset/liability management rather than active management of investments, particularly equities. An insurer can either develop this operation in-house in an already highly competitive market pay for a successful in-house manager, or it can outsource the activity altogether.
Claims/policy management – including non-life assessment, adjustment and settlement and life claims management and settlement.
Policy design, marketing and administration – as with risk management, this is a core operation for an insurers. However, a company that finds it has better skills in distribution or asset management may, ultimately, redefine its core business and spin off product development to a specialised third party.For the insurance industry, its embrace of the internet has been relatively slow but, even so, the internet looms large in the minds of insurance executives. Change is constant, change is inevitable.
Les Fraser is regional sales manager at Cisco Systems.
