The internet has caught the imagination of the country. News programmes carry stories on how the internet is changing the face of society, businesses are investing billions of pounds to get on-line, and the Government has announced a number of major initiatives to create a connected country to compete in "the new knowledge economy".

Growth of the internet has outstripped any technology in man's history. It took almost half a century for 50 million people to have a phone, a couple of decades to have television, but only a handful of years for there to be 50 million internet users. And that growth is showing little sign of slowing, with the population of cyberspace doubling approximately every 100 days. In the UK alone there are an estimated 10-12 million users, or a quarter of the population.

For the insurance intermediary this represents a market far larger than the local markets they are so often used to dealing in. However, the opportunity goes far beyond simple scale of market. The internet enables the intermediary to push much of the work undertaken by staff on to the client and thus reduce their own operating costs substantially.

For example, a prospect can log on to a web site and spend 10 or 20 minutes obtaining a motor quotation. They key their own details into the site and produce their own quotation. There is no need for a member of staff to ask the prospect questions, or key their answers into a system.

There are other opportunities to reduce operating costs, from using e-mail to notifying clients of renewals to clients being able to perform their own mid-term adjustments. All of these options reduce operating costs dramatically.

Barriers to entry

Much has been made of the "low cost of entry" into the on-line market. For a few hundred pounds, we are led to believe, a business can set up a web site and start trading. Trade, yes, but compete?

When a client enters the offices of a high street broker they are reassured that the company they are dealing with exists. They can see staff, watch computers at work and experience the realness of the business for themselves.

The move to telephone-based insurance broke this link between the client and physical, placing an extra emphasis on the brand. The consumer needed to be reassured that the company at the end of the phone line existed and was going to pay their claims if the need arose. To meet this demand, companies like Direct Line have invested, and continue to invest, millions in their brand image.

Brand is vital on the internet as well. Web sites can come and go, but the client has to be reassured that the company they are dealing with via e-mail is legitimate, that their personal information will be treated with respect, and that their credit card will be handled securely.

An intermediary, used to promotion in the local market with a combination of newspaper ads, Yellow Pages, mailshots and perhaps cold-calling, will face new challenges in trying to create a national brand that can be trusted.

The internet market also has to be called in to question. Only a third of on-line consumers have purchased on-line, reducing the potential market from 12 million to four million. Furthermore, reaching those consumers who may be willing to buy is more difficult than placing an advert in the "Echo" and waiting for the money to start rolling in! On-line advertising methods, such as banner advertising, produce results of around one per cent.

Insurance products are also very difficult to sell on-line due to the information gathering demands. Obtaining a quotation on-line for a motor insurance may take between ten and 20 minutes. Many of the questions asked have little relevance to the prospect's perception of what the insurer needs to know to insure their car. As a consequence there is a high "drop out" rate amongst the on-line quotation engines.

This creates a heavy demand for investment. The technology costs for implementing a full self-service system that works across the internet could be more than £500,000. Adding associated costs in year one, such as bringing onboard IT staff, upgrading existing hardware and potential disruption to the business and the cost for creating the capability to deal across the internet could reach seven figures.

There are other costs involved as well. Building a brand the consumer feels comfortable with requires investment. The rule of thumb often used with e-commerce is that for every pound spent on the technology, three pounds should be spent on marketing, with that money split roughly evenly between on and off-line advertising sources. An intermediary who is serious about e-commerce may not see change out of £4m in year one.

Approaches to e-commerce

These barriers do not mean the intermediary should not consider finding ways of exploiting the internet. Over the next five years it is likely that not having some e-commerce capability will seem as nonsensical as not having a telephone is today.

Unfortunately the course that many intermediaries seem to take is to have a web site brochure, a site which simply informs people they exist and invites the prospective client to e-mail or phone for service. Furthermore, often these sites are hosted in the "free space" that is offered by the likes of Freeserve or This gives the intermediary a web address of, which projects an image to the internet user of a company that is not serious about the internet. The equivalent in the real world would be to use letterheaded paper that had come from an insurance company with the company's logo and address crossed out and the intermediary's written by hand. This is clearly a practice which no professional intermediary would accept.

In an on-line world where consumers can buy goods, manage their bank accounts and service all their needs from a web browser the insurance industry has elected to focus on the internet as a source of new business. There are many quotation mechanisms available, ranging from simple forms to complete where the data is re-keyed and the quotation e-mailed back to the client, to fully interactive quotation engines which provide the consumer with a means to obtain a quotation and go on cover in exchange for ten to 30 minutes of keyboard work. However, in almost all instances the resulting business is then administered in the normal manner.

This negates the real benefits of e-commerce, where the client is in control of their own experience and the intermediary's costs fall dramatically. When the client is able to administer their own policies, doing anything from a quotation for temporary cover to performing a mid-term adjustment, the cost to the intermediary fall to between one tenth and one twentieth of the cost of managing a client in the real world. The client benefits from being able to administer their own policies when it is convenient to them, whether that is at 2am in the morning, or sat at the office desk.

Self-service has other benefits as well, particularly in terms of document production. While motor insurance will remain firmly established in the world of paper, other classes of insurance can benefit from electronic delivery of documentation. Policy wordings and schedules can be maintained on-line, negating the need for printing or postage.

With self-service it also becomes easier to lock the client in to a relationship with the intermediary. This is in part due to the investment that the client would need to make in terms of time and effort in order to move their business elsewhere, protecting the revenue that the intermediary can draw from them. It may make more sense for intermediaries with a large client base to review offering self-service before business origination in order to reduce operating costs and improve profitability.

Business development

Providing the client with such a high level of functionality clearly requires a massive investment, and that investment has to pay off. Without the investment in technology and branding the intermediary is likely to become another "me too" player in an overcrowded market, much as they are today on the High Street.

To recover the investment, the on-line intermediary needs to have a business development plan aimed at increasing the income per client rather than pure volume. This goes beyond the traditional premium hikes which appear to occur every few years and focuses instead on adding value to the relationship between intermediary and client. In turn this will require the intermediary to fundamentally shift the way they perceive their business.

First and foremost, intermediaries will need to become customer-centric. At present most intermediaries focus on their product range, and particularly on the price of those products.

Few know who their most and least profitable clients are, what needs these clients have or what trends are emerging from their client base. For most clients the only contact they have from their intermediary is at renewal, at which point they are asked for money.

Second, intermediaries need to understand their clients are not clients – only customers. A client is someone who will do business with a supplier because they value the relationship. In the past the relationship between broker and client may indeed have been on that basis, but today the commoditisation of insurance in to a product bought purely on price has eroded that relationship.

The final aspect to consider is that being customer-centric and focusing on the needs of true clients will lead the intermediary into offering new products outside of insurance, or finding ways of reaching customers through non-insurance channels. For example, an intermediary with a strong presence in the "cornershop" trade may seek to boost its relationship with those clients by offering an on-line accountancy and financial planning service, while an intermediary with a specialism in equestrian insurance may seek to establish partnerships with on-line Pony Clubs.

As the approach to e-commerce starts to emerge from this questioning it is important to plan for the future. There is a temptation to put together a "quick and dirty" solution to sell a product to a niche market. While creating a business strategy may seem like increasing up-front costs, those costs are more than recovered as the move to the internet gathers pace. Without clear thinking from the outset there is a danger that the "quick and dirty" solution will not scale to meet the needs of increasing numbers of on-line consumers, whether that is in sheer volume or in relation to the services that they expect.

Key messages

There is a great temptation to rush to the internet and offer the same services as the competition. While this may produce minimal short-term benefits, over the longer term the business will be unable to evolve their offerings to match their competitors (or preferably leap-frog them) and become "me-too" players. What is required is a clear and well structured strategy that is driven by the business, not the capabilities of technologies.

The internet does offer a substantial opportunity for the intermediary, but it requires investment. That investment needs to come not only in the form of technology, but also investment in the intermediary's brand as this is what will provide the customer with enough confidence to want to deal with them via the internet.

While business origination currently attracts the most attention from the insurance industry, it is not the most effective use of the internet. Providing the client with the ability to manage their own policies can reduce administration costs to one tenth of what they are using traditional means, and protect revenues by strengthening the relationship.

Intermediaries must break out of their "we sell insurance" culture and look to start forming valuable relationships with profitable customers. By shifting attention away from selling products to satisfying customer needs they will identify new ways of raising more revenue from existing customers, and keeping their loyalty.

Perhaps the most important message of all is to plan carefully when approaching e-commerce. Start from the customer's viewpoint, consider the future size and functionality of e-commerce and focus on improving revenues or profits, not playing a "me-too" strategy.