Personal Auto is as commoditized product as it gets in the Insurance space. It always surprises me that this space still endorses an agent driven non internet model.
We still have large carriers like State Farm , Nationwide ,Liberty Mutual , Farmers , Mercury Insurance , AAA and a significant number more driven completely by traditional agent channels. In fact my understanding is that policies sold via the agent channel account for 70% of all policies sold in US.
While there are a few direct Insurance carriers like Geico , 21st Century and esurance, there are not nearly as much as I would have expected for a simple product like personal auto.
Also note that internet driven agent channels like insweb , insurance.com are not as successful as compared to such agents in the travel industry like Travelocity and expedia.
Here is my take on why it is this way.
1. Canabalizing the Agent Channel
The official reason you get from Carriers to not go to Direct Channels is that they do not want to canabalize their existing agent channel by offering lower prices over the web.
Selling via online agents like insweb and insurance.com is still OK for these carriers as the internet agents get the commision.
This story line is really a case where once the mould of traditional agent channel is broken this story will no longer be told. This happened in the travel industry and is now also happening in real estate in a different manner. We have to see what form does it take for the Insurance Industry
2. Technology readiness of the insurance carriers :
Internet Channels really work well if you can close the deal in one interaction. ie. you come in to the website , get a quote , make a payment and you are ready.
The reality of the technology capability of insurance carriers is that most of them do not have straight through processing capabilities. These carriers generally are not able to complete the full transaction of quote ---> buy ---> Policy in one transaction. Because of their batch job based nature of systems , these carriers generally have a different system doing quoting and a different system doing policy binding and issuing. As a result of this they run into scenario's where the premium calculated by the policy issueing system is different from the quoting system.I have seen numbers to the tune of 15% to 20% quoting failures in large P&C carriers that lead to premium change.
While these kind of failures are easy to manage in a human agent based environment they certainly do not fly on the internet.
3. Hype is ahead of reality
With the .com boom in later 90's there was a lot of hype about things moving completely to the web and eliminating the middleman. With the success of travelocity and expedia in the travel industry people expected same to happen in the Insurance industry. A bunch of companies like insweb and insurance.com came online with a lot of speculation on the markets and aggresive market capitalization timelines.
These companies did not do as well as the market had expected . In general the hype in the .com era was ahead of the reality and that is the reason we had .com burst. As a result of the .com burst the traditional insurance carriers embraced the agent model even more and went about a route of telling the world that the agent is their relationship manager with the customer and they would always use agents. Smart carriers like progressive insurance continued their dual channel strategy and went about selling direct and agent. (It is a case study of how they are able to sell via both the channels by using technology that makes life simpler for the agent and better underwriting giving compelling rates to the demanding customer)
Most of the carriers continued with the agent strategy and did not really embrace the direct channel.
This led to the classic chicken and egg problem where customer who want to buy the policies on the web do not have enough choice and carriers are not moving towards a direct channel because they think there are not enough customers for internet channels.
What lies ahead
The above being said websites like insweb and insurance.com are still in business .Progressive direct is growing faster compared to it agent channel. So the way I look at the industry is that the move to internet channels is eminent. I cannot predict the timing for this to achieve critical mass , but it will happen when carriers upgrade their technology and allow accurate quotes over technologies like webservices and SOA.
Note that the word I use is "internet channels" and not "direct channel". Internet Channels in my view include Internet based agents and direct sellers.
Internet Channels is where the future lies. There will be online agents that act as a Auto Insurance shopping malls and there will be direct carriers selling on the web. The difference in the two channels in price is probably going to nominal. Just like the travelocity.com charges $10 over delta.com for a flight but still does excellent business as a result of the choice it gives to the customer. Note if travelocity started charging 15% of the ticket value as commision no one would come to their website.
The way the agent model evolves for the insurance industry is what is to be seen.
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3 comments:
Interesting Analysis.
Here is what Bruce Marlow - CEO 21st Century Insurance has to say about the the issue
http://insurancenewsnet.com/article.asp?n=1&neID=20070227560.2_51a30730a8b18a9d
BRUCE MARLOW: I am not an economist doing his PHD thesis. I can only kind of speculate on it, but the reality is there is pretty significant barriers to entry. First there is State Regulation, and to comply with all the state requirements, the capital requirements, the reporting requirements, that's a problem, so, if you're a start-up company, if you're a start-up -- if you're a start-up community in a web site, boy, you don't anything like the kind of regulatory requirements that you do if you want to start an insurance company. Second thing is to do a -- to be a direct to consumer company, you have to have a state of the art computer environment. The consumer wants to have realtime operations. They want to be able to ask a question. They want an answer. They expect the web site to be able to do that, and there is no off the shelf systems that you can go out and buy, the way you can go buy off the shelf web,sites and all the basic web tools that have created, so you have to build this operating environment. We've already done that, but it took us many years to do it, and it was well over $100 million capital investment to do it.
You then have the staff that you need to provide service, and more importantly the staff you need to handle claims. We have an incredibly experienced claims staff average ten years over nine years. You don't have that kind of experience, you're just not going to handle claims in a cost effective manner. Of then when you have all of those components, you then have to start your marketing program, and while you don't need to spend GEICO's over $500 million on marketing, you do have to spend something, and it takes a while to get that to start. So there is just a lot of capital barriers, as well as time, because you can't do these things in a six-week time frame or three-month time frame. So, I think a lot of people look at this and say, good idea, but can't make it work.
What's really fascinating is that even the web sites that offer shopping really haven't done that well, so we're not even in the Expedia Travel kind of situation to where you can be an effective broker, because the best companies really don't allow their rates to be commoditised out on the internet. If you want a State Farm rate you have to go to State Farm. If you want a 21st rate, have you to go to 21st. As you suspected, there just are significant barrier to say entry, and it means there is just not going to be a lot of new direct to consumer companies out there, which means that the existing franchises really have an incredible opportunity, because the share for direct to consumer companies is only in the about 15% of market share, and that means there is a lot of potential to grow in the future.
Please refer to another post on the demand side equation for internet channels.
http://www.gandalf-lab.com/blog/2007/04/irony-in-insurance-space.html
Added this link to complete the discussion above
Niraj
Hi
Great Post.
Canabalizing the Agent Channel???
I thinks that this is a wrong reason.
You can see alternatives in idit-tecnologies.com solutions for:
Direct Insurance System
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