Insurers Step Gingerly Into Cyberspace

The dilemma: How to work the Web without alienating agents

Robert Sanchez always thought his car insurance was a ripoff. The 38-year-old locomotive engineer has never had an accident, hasn't gotten a ticket in four years, and only drives his 1982 Volkswagen Rabbit 14 miles round-trip to work in San Luis Obispo, Calif. Yet he paid a pricey $880 last year for insurance. He whittled his premium to $480 this year by calling different agents, but hunting down savings on the phone was slow and frustrating. "They all wanted 20 minutes of my time," Sanchez says. So he went online, found InsWeb Corp.'s Internet site, and got a $286 bid from General Electric Co. "I don't think it took more than 10 minutes," Sanchez says. A bonus: At the lower price, he has more coverage.

The sleepy old insurance industry is getting an Internet wake-up call. Net upstarts such as InsWeb, eCoverage,, and are fighting to grab a fat slice of the $250 billion Americans spend each year to insure their cars, their homes, their health, and their lives. The Net upstarts figure the Web has the potential to cut the costs of insurance and make the experience of buying insurance more pleasant. "Most people would rather have a root canal without novocaine than spend three hours with a commissioned insurance salesman," says Inc. President Robert S. Bland.

These companies may be on to something: Forrester Research Inc. projects that online insurance sales to consumers will jump to $2.1 billion by 2001, from $250 million this year. Allstate Corp. thinks the opportunity is big enough that on Nov. 10 it said it would cut 10% of its workforce and begin selling insurance over the Net.

TRICKY TASK. But don't look for an of insurance just yet. The insurance business is much more complex than books or music or even stocks. That means that it will take far longer for it to undergo the massive change brought on by the speed and interactivity of the Net. The $2 billion worth of insurance Forrester expects to see sold online in two years is less than 1% of the total industry--and it's likely to be more than five years before 5% of insurance is sold via the Internet.

Why so little? Policy writing isn't easy. Few Net upstarts have the size, expertise, and money to take on the risk of underwriting insurance. None of the newcomers is selling its own products. Instead, they're selling insurance products from established players--which means the upstarts have little ability to undercut the prices of their competition. The result is that traditional insurance companies still have tremendous power to set their own prices and protect the agents who sell their policies through local offices.

Agents clearly are the most threatened by the Internet. The 1.8 million agents in the U.S. take an average of 11.3% of what consumers pay for insurance, according to the Insurance Information Institute think tank, and that figure can top 20% at some insurers. Selling insurance over the Net could eliminate or drastically reduce those fees, saving customers billions of dollars each year. But most traditional insurers, which depend on agents to sell their products, don't want to risk alienating them with an aggressive Net strategy. There's "a huge channel-conflict issue," says Clayton M. Christensen, associate professor at Harvard Business School. The result is that "you don't see as much activity [in insurance] as in other industries."

Check out insurance sites on the Net. Most still send users back to agents who won't seal a deal without a telephone call or a personal visit. State Farm Mutual Automobile Insurance Co. has started to quote rates online, but will only close deals through its own agents. "We must work to build business online in a way that does not disenfranchise our agents and brokers," says Mark Hamel, a spokesman for the St. Paul Cos., a $9 billion insurer that is selling only a few niche products through the Internet.

What does the Web do for consumers shopping for insurance now? It makes it much easier for them to compare the prices of insurance policies than in the past. For example, top sites like Quotesmith offer prices from more than 300 underwriters in one place. That means companies can't get higher prices simply because consumers lack the time to shop around. This may sound simple, but it's a significant change. Sanchez could have gotten the same rate from GE on the phone--but he didn't know the rate was available until the Net made it easy to find.

But that's only scratching the surface. The real change will come when the Internet forces both startups and established companies to get more aggressive. Leading the charge is eCoverage. The San Francisco-based company is selling policies from Pacific Specialty Insurance Co. that are specifically designed for eCoverage's Net customers. It plans to help underwrite its own products in the future. With no local offices or agents, the company can save 10% or 20% on the costs of distributing its products. The real benefits, however, are in speed and efficiency: Users can buy a policy within five minutes of logging on to the company's site, and they can file and track claims through the Net. "We allow customers to completely control the process through their online accounts," says CEO David Riker.

Even some established insurers are adding momentum to the Net movement. Insurance stalwarts like Progressive Corp. and Geico Corp. now let customers buy policies online. It's easier for them than for most insurance companies because they already sell policies without agents over the phone, so they're not jeopardizing their primary means of distributing products.

Most of the major insurers that sell through agents won't admit publicly that Net insurgents like eCoverage are a threat. Privately, though, they acknowledge that online players have the potential to transform their industry--just as Internet brokers drove down commissions in the securities business, forcing even giant Merrill Lynch & Co. to develop a comprehensive Web strategy. So executives at big carriers are exploring options for selling directly to customers over the Net. Because of fears of angering powerful agents, they may set up separate subsidiaries or even spin off Net distribution companies. Whatever the structure of the business, look for major insurers to become more aggressive about their Net strategies. "Everybody will have to take notice," says Ruth Gastel, vice-president at the Insurance Information Institute.

"NIGHTMARE." No question, online insurance has a long way to go. The key is using the Net to make buying insurance less of a headache. "Consumers want to click and close online," says Salomon Smith Barney e-commerce analyst Richard Zandi.

Online insurance isn't really there yet. After vainly trolling the Internet for renters' insurance, Manhattan-based KPMG recruiter Christine Smith logged off. "It was quite a nightmare," she says. Some sites crashed, and others sent her e-mail promising follow-up quotes they never delivered. And some companies she wanted to consider didn't sell online. The veteran Net shopper was shocked: "If I know what I want, why can't I buy it online?" That's a question insurers are racing to answer.

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