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.
Key areas of impact and benefit that the wider use of the internet in the insurance industry is likely to introduce include:
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:
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.
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:
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.