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What's New in
Cybertalk?
By Jean Gora
September 2000
Note: CyberTalk is a column that
appears monthly in LOMA's Resource, the magazine for insurance and financial
services management. To see more contents of the magazine and to see how to
subscribe, click on RESOURCE MAGAZINE.
High-Tech Insurance Brokerage:
A Certain Place in an Uncertain Future
Up to now, distributors of insurance on the
Internet have never confronted a situation in which both Internet distribution
technology is mature and the legal environment governing Internet insurance
transactions permits complete online sales.
Thus, from this vantage point it is difficult to
tell how powerful the Internet can become as a direct insurance distribution
tool. What is clear at this time is that some insurance brokers and
insurance-oriented, vertical-market technology companies are finding that they
have common interests. These common interests lead them to enter alliances to
build Internet distribution services integrated with broker-staffed telephone
call centers. A new model of insurance distribution is emerging: the insurance
brokerage high-tech company, which:
- Operates an insurance market on a nationwide
basis.
- Enters alliances with organizations that
have prime access to potential buyers.
- Operates under whatever brands its allies
want.
- Provides telephone access for those who want
it and Internet access for those who want it, sometimes offering
integrated Internet and telephone access.
- Employs open-standard technology that
simplifies the task of doing business with multiple partners and,
therefore, lowers its cost.
- Strives for economies of scale that allow it
to charge less for its services than an insurer would pay for doing the
same things itself.
- Operates as a software vendor or outsourcing
provider as well as an insurance broker.
Because the activities of insurance brokerage
high-tech companies span both the insurance and high-tech industries, it is
difficult to find information that profiles them accurately. The insurance
industry looks at their insurance activities; the high-tech industry looks at
their technology activities; no one views them in a way that takes their
complete activities into account. Because of this problem, it is difficult to
know how many such companies there are and how important they are. This column
attempts to fill part of this vacuum by describing one such company and how it
came into existence. It also examines some of the economic issues associated
with various types of Internet insurance markets. (Click here
to see the table that outlines these economic issues.)
InsureZone’s Foundations
The company is San Francisco-based InsureZone, an
Internet insurance market that recently merged with Texas-based Higginbotham
& Associates, the 118th largest insurance agency in the U.S. The
management of InsureZone is also the management of Lexica LLC, a developer of
Internet-based supply chain management software targeted at the insurance
industry. Lexica and InsureZone received funding from Buena Venture Associates,
a venture capital company led by Texas financier Sid R. Bass.
InsureZone began operation as a business in 1999,
announcing plans to offer a line of typical personal insurance products through
an Internet insurance market targeted at individuals. It planned to start with
auto insurance and expand over time into homeowners, renters, term life,
long-term care and health insurance. In contrast to the Internet insurance
markets that offer only price quotations and referrals, it planned to allow
buyers to bind insurance policies online as well as to obtain price quotes. It
billed itself as the Internet’s first insurance superstore.
In reality, InsureZone was targeting space
already occupied by InsWeb, InsureMarket, and others, which were willing to bind
policies online if the insurers using them for distribution wanted it. Insurers
tended to be reluctant to want it because of the absence of legal recognition of
digital signatures and electronic contracts.
Affiliating with Lexica
The founder of InsureZone, John Pergande, now
chairman of InsureZone, began to look at the kind of technology an Internet
insurance market would need. At that point, he encountered Peter Henry, the
founder of Lexica LLP, who was interested in using XML (extensible mark-up
language) for supply chain automation. In contrast to HTML, which tells the
computer how to lay out content on an Internet page, XML describes the nature of
the content. XML can thus be used in structured business transactions; it
represents a more flexible way of accomplishing the kinds of things that
electronic data interchange (EDI) was designed to accomplish.
Henry had been one of the architects of ViLink,
an early Web middleware insurance company, which was ultimately was sold to
CYBERTEK. Lexica Holdings, the predecessor of Lexica LLP, was a provider of
integration services to corporations. Under one of its contracts, it designed
and developed Charles Schwab’s active trader desktop and institutional new
business and call management system. Susanne D. Lyons, chief marketing officer
at Schwab, now serves on the InsureZone board.
As a result of the meeting with John Pergande,
Lexica became an affiliate of InsureZone and entered the market as an
application services provider offering a framework for communicating insurance
supply chain transactions among trading partners. It markets this XML-based
system as Lexica Online™. In October 1999, it announced that InsureZone would
be its first customer.
Benefits of Association
It is useful to consider how companies like
Lexica benefit from associating with companies like InsureZone. In the past two
years, an abundant supply of venture capital and an exploding stock market have
funneled tremendous resources into firms engaged in building Internet
applications. They have not funneled similar funds into insurance companies.
Thus, although many Internet companies have had the resources to build products
targeted at the insurance industry, they have not found ready markets for them.
In essence, they have been building products more rapidly than the industry in
its present state can absorb them.
Thus, to an Internet technology company,
affiliation with an organization like InsureZone that has special ties to a
particular vertical market makes sense. InsureZone’s affiliation with an
insurance broker who has shown he can sell to that vertical market makes even
more sense.
Generating Demand
When Lexica began developing XML applications,
XML was brand new. The World Wide Web Consortium had only published its first
XML recommendation in February 1998. Many people were interested in XML and saw
a bright future for it. Lexica became one of the first insurance industry XML
developers. Its management saw an opportunity to generate demand for Lexica
Online™ if it could get its XML schema adopted as an insurance industry
standard.
To do so, it had to persuade a lot of other
people to use it. To that end, in December 1999, it announced plans to publish
its XML insurance schema through the Organization for the Advancement of
Structured Information Standards (OASIS), on Microsoft’s BizTalk.org site, and
finally on its own iLingo™ site, www.ilingo.org. The name of the schema is
iLingo™. Lexica plans to refine the schema over time. Lexica has joined both
OASIS and the World Wide Web Consortium.
In addition to marketing its Lexica Online™
software to insurance carriers, Lexica also began marketing a Lexica Online™-based
outsourcing service. Insurers that did not want to operate their own Internet
insurance markets could use Lexica to do it for them.
For InsureZone, Lexica’s use of XML and its
standards activities offer a host of benefits, not the least of which is vastly
increasing the number of organizations with which InsureZone can partner easily
from a technical point of view.
Altering the Business Model
Sometime after the end of 1999, InsureZone
altered its business model. Near the end of 1999, Congress had passed the
Gramm-Leach-Bliley Act, which removed many of the barriers to bank involvement
in the insurance business. InsureZone’s management believed there would be
significant demand on the part of banks to sell insurance to their customers.
Although some of these banks would choose to operate their own insurance
agencies (and perhaps eventually their own insurance companies), others would
not. Therefore, it abandoned the idea of positioning InsureZone primarily as a
third-party Internet insurance market targeted at individual consumers. It even
de-emphasized marketing LexicaOnline™ to insurance companies so that they
could operate their own Internet insurance markets. Carrier-operated insurance
markets are supplier markets.
Instead, InsureZone focused on selling
LexicaOnline™ (or offering outsourcing services based on LexicaOnline™) to
banks, securities firms, large employers and affinity groups, giving them the
opportunity to operate either a private-label version or a co-branded version of
InsureZone. Banks, securities firms, large employers, and affinity groups have
unusually good access to specific customers. Insurance markets operated by
organizations with unusually good access to specific customers are buyer
markets.
For InsureZone, the big attraction of serving
organizations operating buyer markets is that it does not have to spend millions
of dollars to generate brand awareness for a new, unknown third-party market. In
the case of buyer markets, the customers served by the buyer market already know
the buyer market’s brand.
However, before banks would consider a
relationship with InsureZone, they wanted to see what carriers would distribute
their products through InsureZone. Thus, InsureZone’s management was under
pressure to sign up carrier distributors in order to increase the product’s
appeal to banks.
On March 1, 2000, InsureZone began operating a
public Internet site offering small business commercial products, including
business liability, business property, workers’ compensation, and umbrella
liability insurance from The Hartford, Travelers, St. Paul, and Kemper
Insurance. It targeted firms with 50 or fewer employees. It also announced plans
to add personal and commercial auto insurance, life insurance, and homeowners
insurance to the site.
Adding A Broker Relationship
Why then did InsureZone seek a relationship with
an insurance broker? Because of the absence of legal recognition of digital
signatures and electronic contracts, operators of online insurance markets have
never up to now relied on online sales only. Although in some cases, they would
accept online applications with payment of initial premium by credit card, they
typically also permitted agent referrals. Some insurers may even have required
agent referrals, particularly for closing the sale. In the course of the
referral process, many leads were lost.
As a result, some Internet insurance markets
decided to link their Internet markets to telephone call centers. When call
center employees are used in the distribution of insurance, state insurance
regulations require many of them to be licensed insurance agents. Thus,
InsureZone believed that successful Internet insurance distribution required a
linked call center and, therefore, licensed brokers. It began looking for an
insurance broker as a merger or alliance partner.
A merger with an insurance broker also offered
InsureZone another important benefit: a real revenue stream. A broker with a
viable existing business generates revenue. Because InsureZone did not plan to
follow the lead of InsWeb and engage in expensive national mass marketing, it
could hold down its own costs and even aspire to profitability.
Merging with Higginbotham & Associates
InsureZone found Higginbotham & Associates, a
large regional insurance agency based in Texas but licensed in 48 states.
InsureZone and Higginbotham merged. Higginbotham says it generates $200 million
in annual premiums in business and personal lines insurance, employee benefits,
life insurance and executive compensation. It targets high-net-worth individuals
and corporations.
After the merger, J. Russell Reid, Higginbotham
president and CEO, became president of InsureZone. Higginbotham had a call
center that became the heart of the merged company’s Internet-telephone
operations. John Pergande, founder of InsureZone, says he expects the new merged
company to spend only $5 million on marketing in 2000, to generate $20 million
in revenue, and to be profitable. The company is also seeking additional venture
capital funding in 2000, a fact that suggests that its expected profits are not
likely to be sufficient to fund the operational expansion that it plans.
According to Reid, Higginbotham sought the merger
in order to expand its regional market to the national level. Even prior to its
relationship with InsureZone, Higginbotham had already been exploring possible
distribution agreements with banks and worksite marketing agreements with
corporations. In the latter case, it wanted to market personal auto, homeowners,
and umbrella coverage to the employees of these corporations.
One can speculate on other reasons for an
insurance broker’s interest in merging with a high-tech Internet company. Many
insurance brokers have not had an easy time in recent years. North American
insurance companies have been reducing their career agency forces over the past
decade, converting to independent agent forces instead. In some cases, the
consolidation of insurance companies has led to consolidation and ultimately
reduction of the total number of agents with which the company does business.
A number of large insurers — Equitable, John
Hancock, and Lincoln National — have created quasi-independent nationwide
distribution companies. These companies generate enough business to achieve
significant economies of scale through the use of technology. Regional brokers
such as Higginbotham may have lacked the scale necessary to compete with the
nationwide distribution companies backed by the leading insurers.
Challenges of Scale
The big challenge in moving from a regional to a
national focus is scale. How do you serve customers in widely distributed
locations? The Internet and Internet-based insurance applications offer a way to
do so. Furthermore, the electronic markets for insurance on the Internet match
sellers and buyers, performing the insurance broker’s task electronically.
Thus, insurance brokers can see important advantages to allying themselves with
high-tech companies that are building Internet insurance markets. Furthermore,
for a broker already interested in worksite marketing, the Internet offers the
perfect delivery mechanism to sell individual insurance products to the
employees of large corporations.
The InsureZone site (after the Higginbotham
merger) now enables buyers to click a button and get an immediate phone call
from a licensed agent. InsureZone’s agents can issue bindable quotes either
via the Web, via e-mail, or through the call center itself. InsureZone currently
promises delivery of such quotes within one business day. It hopes to be able to
issue quotes and bind policies online in 15 minutes by the end of 2000. The call
center operates from 8 a.m. to 8 p.m., Central Standard Time, and offers IP chat
with applicants who want it. Customers will be able to choose between online
help and the call center for claims or service. In June 2000, InsureZone
announced plans to quadruple the size of its call center and to hire 200 agents.
InsureZone has also established alliances with
two Internet sites targeted at small businesses: Smalloffice.com and
BuyerZone.com. Both of these sites have positioned themselves as small business
portals. Smalloffice.com offers small businesses resources on technology,
marketing and sales, employees and human resources, law, finance, accounting,
online banking, training, office supplies, business services, and shopping.
BuyerZone.com is a portal aggregating small business services, enabling buyers
of these services to comparison-shop multiple vendors, models, and prices. These
alliances should help InsureZone attract bank partners; as large corporations
have switched from bank financing to market financing, banks have increasingly
focused their corporate marketing on the small business market.
Issues and Choices
The accompanying table summarizes some of the
economic issues and choices facing those who would operate various types of
Internet insurance markets. In its short life span, InsureZone (with its Lexica
affiliate) has moved from positioning itself as a third-party market to
positioning itself as a provider of software, outsourcing services, and
insurance brokerage to buyer markets. Time will tell how effective this
positioning is. This approach appears promising, but other approaches may be as
well.
There is one important piece of evidence that the
insurance, banking, and securities industries believe that irrespective of how
the Internet develops, insurance agents and brokers will play an important role
in the future. That piece of evidence is the inclusion in the Gramm-Leach-Bliley
Act of measures to create a unified national licensing system for insurance
agents and brokers. Such a system is needed only if these individuals need to
deal with prospects from many states. Only agents and brokers based in call
centers and/or serving Internet customers deal with prospects from many states.
The Gramm-Leach-Bliley Act was passed with the support of the insurance,
banking, and securities industries. The passage of this measure is a vote of
confidence in the future of the insurance brokerage high-tech company.
See other previous issues of CyberTalk in the CyberTalk
Archives.
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