What's New in Cybertalk?

by Jean Gora
May 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.

Senior Executives Discuss Their E-Commerce Plans

At the end of 1999, LOMA and Andersen Consulting conducted a joint survey of senior insurance executives around the world regarding their activities and plans for electronic commerce. A report based on that survey is available for sale through LOMA. Here are some of the highlights of the report, which was based on 213 respondents—60 percent from the U.S. and Canada, 23 percent from Australasia, 9 percent from Europe, and 8 percent from other countries in the Americas.

The results of the survey suggest that insurance executives around the globe believe that the Internet will have a profound effect on their business, particularly in the areas of distribution and customer service. It will also have significant effects in the areas of product design and industry structure. CyberTalk presents the highlights of the survey’s results with respect to insurance distribution.

Internet Impact on Distribution

Ninety percent of the insurers that responded to the survey believe that the Internet will have a moderate or significant impact on insurance distribution; 40 percent believe it will have a significant impact. It will cause the following major changes:

• Allow insurers to reach new customers.
• Shift business away from traditional channels.
• Improve the efficiency of traditional channels. Distribution costs represent 80 percent of the typical agent-based insurer’s expenses.
• Undermine the economics of traditional channels, causing a reduction in the number of agents and brokers.
• Reduce commissions for sales through traditional channels.

Results suggest that these results will occur slowly. Respondents appear to believe that the Internet will trigger relatively modest distribution changes soon, with dramatic changes likely to occur within five years. Most changes include the ability to reach new customers and reduce distribution costs. Dramatic changes such as commission reductions, reductions in the number of agents, and market share gains will occur more slowly.

Respondents believe they will be able to use the Internet to reach three customer segments most successfully -- the emerging affluent, the mass market, and business owners.

• The emerging affluent have an average net worth of $300,000 and are aged under 45.
• Mass market members have an average net worth of $80,000.
• The working wealthy have an average net worth of $3,000,000 and are under age 65.
• The older affluent have an average net worth of $500,000 and are over age 45.
• The retired wealthy have an average net worth of $2,500,000 and are over age 65.

Selling to Particular Segments

The Internet will be particularly useful in selling particular groups of products to particular market segments. Four product categories were considered:

• Wealth protection products: term life, whole life, variable and universal life.
• Asset accumulation products: mutual funds
• Retirement products: annuities and individual retirement accounts.
• Health-related products: disability insurance and long-term care insurance.

Respondents were most optimistic about the chances of using the Internet to sell wealth protection products to the emerging affluent and the mass market, and asset accumulation products to the emerging affluent.

Respondents believe that Internet sales will represent 9 percent of wealth protection product sales, 10 percent of asset accumulation sales, 9 percent of retirement product sales, and 8 percent of health-related sales within two years. They expect these figures to double in five years.

Optimistic Projections

These projections are optimistic. The insurers surveyed acknowledged major challenges in executing straight-through processing, i.e., automating all the back end processes required to issue a policy on the Internet. More than 90 percent of respondents believe straight-through processing represents a significant or moderate challenge. Insurers that try to sell without straight-through processing lose sales as prospects tire of delays and hand-offs.

In the case of life insurance policies requiring medical examinations at the time of issue, complete straight-through processing is not possible. It remains to be seen how successful insurers will prove to be implementing straight-through processing in other areas of their business.