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Wednesday, 17th April 2024
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Back to basics for online insurance Back  
Norman Carroll says the life insurance and pensions industry should use the internet to improve their core operations before they will see any real progress in selling their products online.
There is little doubt that the internet revolution saw the dawning of great promise and opportunity for many industries seeking to reach their customers and business partners in a completely new way armed with the exciting distribution channels and new business models. Of the many sectors tipped to rapidly assimilate and profit from the ‚€ėinternet opportunity‚€ô, few had such a strong proposition for the new economy as the life assurance sector. The traditional distribution model used for life and pensions was archaic and inefficient, with significant value being lost to salespeople in the form of commissions. With the internet life assurance would become a commodity product and customers would all benefit hugely as a result.

With hindsight, the changes that have taken place in the life and pensions industries have been even greater than those predicted by the industry watchers but the internet was not the agent of change. Rather, it has been factors such as wholesale demutualisation, increasing government regulation, increasing industry M&A activity and significant changes in the life assurance product mix.

In considering how the internet affects the life assurance industry, it is important to examine some fundamental differences between the life industry and other retail financial sectors:
‚€Ę Life assurance products are sold and not bought.
‚€Ę Transactions are infrequent and complex.
‚€Ę The products themselves are complex and not directly comparable.
‚€Ę Insurers and consumers value the role of intermediaries.

While these differences appear self-evident, there have still been those in the industry who have risen to challenge them, but they have been largely unsucessful. Fascinated with the prospect of creating a new and gold-lined distribution channel, many have endeavoured to succeed with a host of on-line business models for selling life assurance during the past five years, including on-line brokers, on-line referral sites, on-line portals and on-line company sites. Shining examples of failure are manifest in the US, with companies such as Insweb, Quotesemith and ChannelPoint all falling well short of investors expectations. Other similar examples of doomed enterprise can be seen on this side of the Atlantic, including one or two within the Irish market. Some of these sites were established by industry outsiders, who fundamentally underestimated the importance of personal selling as a critical success factor. Other sites were more surprisingly, set-up by industry veterans attempting to
deny the unassailable dynamics of insurance distribution.

The assertion that direct on-line sales of life assurance offers limited potential will be contested by evangelical advocates of the direct on-line revolution. Clearly it can be acknowledged that there have been some small successes with companies selling simple term assurance products on-line. Crucially, however, there has been almost no success in directly selling complex full premium products over the web.

Another well-worn prediction was that life and pensions products would be sold increasingly as component products and become increasingly commoditised as a result of the internet. In effect, it was predicted that the traditional method of selling complex life products with multiple additional benefits would be replaced by an approach whereby the customer would pick and mix different benefits from different companies, on a best-of-breed basis. Again, there is little evidence of this actually happening. The manufacturers of life assurance clearly see the risk associated with product commoditisation and the ensuing impact on lowering margins. Given that few people actively go out seeking to buy life and pensions, product designers need to build in sufficient margin to be able to incentivise the agent or salesperson, without whom only compulsory products (such as mortgage protection) would be sold. Such a perfectly competitive market might suit the 5 per cent of people who will actually motivate themselves to take out other life assurance products on-line. It would leave the rest of us severely underinsured.

Now that the internet dust has settled and particularly on the B2C selling model, the life industry‚€ôs interest has switched strongly towards using the internet as a B2B enablement tool. Increasingly the industry is focused on reducing overheads and improving service levels. It is in this area that the internet is delivering real benefits. Many companies are already successfully outsourcing data entry tasks to brokers and clients, happily reducing the workload for everyone involved. Error rates are reduced and turnaround times have been dramatically improved. For certain products, such as the dominant US pension product - 401k, the cost dynamics are such that it is impossible to compete effectively without using the internet. The same dynamics are being experienced over here with the arrival of Stakeholder pensions in the UK, with their 1 per cent charging structure. Similar pressures will be felt in Ireland with the advent of the PRSA.

The focus is now on initiatives that offer real and predictable return within a reasonable timeframe. There is plenty of low-hanging fruit in broker servicing and group pension administration and many companies have decided to go for these areas first. Once companies have got people used to transacting with life companies over the internet, we can expect to see the next stage in the revolution. A clear and deliverable e-business strategy is becoming the most important differentiator between life companies. Several companies have already shown how appropriate use of internet technologies can both increase operational efficiency and improve service levels. While the early days of the internet saw life companies coming together with on-line initiatives, they are now increasingly using the internet as a means of delivering a clear competitive advantage. Industry ventures aimed at providing common services and price transparency are, unsurprisingly, being given muted support. While the public statements from life companies appear to support joint ventures, their private actions suggest that the age of internet cooperation is coming to a close.

In the Irish life and pensions market only short term predictions can be made. Surveys of CEO‚€ôs of life companies consistently identify distribution as the single most important factor in determining their success. Having the right products and selling them through the right channels remains absolutely key. That this will involve traditional brokerage and agency channels is certain - despite brokers‚€ô persistent fear of their own demise. It remains unlikely, however, that any significant innovations will come out of the agency channels as they simply do not have the necessary scale to develop and execute a profitable web strategy. We must look, therefore, to individual life and pension companies to grasp the opportunities and make the running for the sector.

In the long run sustainable competitive advantage will come from innovations that improve the core operations of life and pensions companies. This is how the revolution will suceed.

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