October 1 - 3, 2000, The Westin Providence, Providence, R.I.

Analyst Says Even Online, Insurance Selling Is About Branding
Caroline Saucer, saucerc@ambest.com

Established insurers serious about pursuing Internet initiatives, such as Progressive Corp., carry long-term advantages that can't easily be overcome, even in the new world of online selling, Adam Klauber, managing director of investment firm Cochran Caronia's research department told insurers.

Both Progressive and Allstate, which recently launched a $1 billion technology initiative, have an advantage that the smaller insurance-oriented dot-coms lack: brand identification, Klauber said. "Progressive is doing significant volume through the Internet and showing it can work," he said.

Over the next several years, the industry will see more dot-coms being merged into or acquired by traditional insurance companies, Klauber predicted. "It's a brand game," he said. "If they can have the same ease of use [of the Internet] as the dot-coms, I'd have to give them the nod."

Klauber spoke at "E-Fusion: Where Insurance and Technology Converge," a conference sponsored by A.M. Best Co., held Oct. 1-3 in Providence, R.I. Full coverage of the event is available online at http://www.ambest.com/e-fusion.html.

The war for customers will be won or lost in marketing, Klauber said. While direct writers such as Geico, Progressive and USAA have lower expense ratios, an ongoing study by Cochran & Caronia so far shows that direct writers carry higher acquisition costs than companies that sell through agents. "It's not a sustainable advantage," Klauber said of many of the early strides made by some companies pursuing Internet-oriented insurance selling.

If a company hopes to sell insurance online, it first must realize that it can't be all things to all people. An e-commerce company should focus on one function and one segment of the market rather than overextend itself, Klauber said.

Klauber's example of focus: Hartford Steam Boiler Inspection & Insurance Co., recently acquired by American International Group Inc. "It has insured steam boilers and machinery for 100 years. It has a 40% market share and a return on equity of 15% to 20%--double what the industry did in the last 10 years," he said.

The field of insurance-related online competitors has exploded in the past few years, but it has become "too crowded too quickly," Klauber said. He estimated that some 100 to 150 have been "winnowed out."

Banks have been able to do business in "real time" for more than a decade, while many insurers struggle with tasks such as selling the same auto product in two separate states at the same rates, Klauber noted.

Klauber's recipe for online insurance success requires two to four years for any company to establish itself online. Other ingredients include having significant technology in place, actual customers, realistic revenue models and a solid and stable funding base, he said.

April's meltdown in technology stocks has cut into the funding bases available, by reducing venture capitalists' appetites for investing in online start-ups. "The biggest ripple effect is that funding has been cut off at several points. Most had planned on going back to the market 12 to 16 months after they went public, but now that's not possible," Klauber said.

Increased scrutiny of e-commerce means companies--some for the first time--will focus on profit margins and growth characteristics, and will put more pressure on the Internet-based companies to watch their bottom lines, he said.

Another market ripe for the Internet is commercial insurance coverage, which he said is an area that's "begging for an e-commerce solution." It can take up to 60 days to bind a commercial policy--a process than can be streamlined easily with a technology-based approach, he said.