New Business Model for Insurance Sales

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The government released the first official figures for Internet retail sales on March 2. Retail e-commerce, according to the Commerce Department, totaled $5.35 billion in the last calendar quarter of 1999. The figure was just 6 percent of the total retail sales of $821.2 billion for the period. And more important, it is nearly 50 percent less than the estimates of Forrester Research, which projected online sales of $10 billion for the quarter. Why does this discrepancy have any significance to the insurance industry?


First, it demonstrates that estimates of sales over the Internet are, at best, an ephemeral exercise. Second, it points up confusion about the definition of a sale. In the real world, a sale concludes when the consumer receives the goods or services and pays for them. Insurance companies think they are selling their services over the Internet. Some wild and woolly figures are bandied about concerning the intensity of those sales.


Datamonitor estimates the sales of auto and homeowners insurance will reach $2.4 billion by the end of this year. The Industry Standard concludes that they will reach $3.2 billion by 2003.


A new business model is needed for insurance organizations to sell anything over the Internet. It is true that GEICO Direct, Progressive and Electric Insurance Co. are completing sales of personal auto insurance over the Net today. Apparently they have figured out the electronic signature requirement for the completion of an insurance application. As to the rest, well, there isn't any "the rest."


To successfully sell insurance over the Internet, especially to the millions of American consumers who want to buy various types of insurance, companies have to overcome two obstacles: the signature bug-a-boo and underwriting.


Since insurance companies are in the contract business, every policy sold requires the signature of the insured. The contract simply says that in consideration of the payment of a certain sum of money, the company will provide a sum of money as a "benefit" if a bad thing should happen or if the insured experiences a loss of property.


Today, the explosive growth of technology has generated marketing opportunities that extend beyond the somewhat-archaic paper methodology of contracts. The federal government, the state governments and the National Association of Insurance Commissioners are addressing this issue. The result is that electronic signatures are coming to have the same weight as a manual signature.


For some reason the insurance industry and various government bodies have made this an extremely complex issue. It is not complex. For the last 15 years insurance telemarketers have successfully sold insurance over the phone collecting "telephonic" signatures. A telephonic signature is a unique identifier known only to the insured and the company which verifies the contract.


Each day most Americans visit an automatic teller machine and punch in their unique, self-selected personal ID number to obtain cash from their bank accounts. If insurance companies were in the business of acquiring and retaining customers, instead of the contract business, the commercial creativity applied by banks and telemarketers to the signature problem provides a very clean, immediate answer.


But that's only half the problem. The other half is underwriting -- the process insurance companies use to assess risk and set the cost of insurance. Other than the patchwork quilt of individual state regulations, which cost insurance consumers hundreds of millions of dollars a year in inflated premiums, underwriting is one of the costly barriers to insurance e-commerce.


It isn't so bad in the personal auto sector. The better driver you are, the less you pay. It's pretty black and white. For life insurance, however, it's another story. To get a large amount of life insurance -- from $100,000 to $1 million, for example -- you have to undergo tests, apparently to make sure you are alive. Then the insurance company takes a look at the results and decides whether it will issue you a life insurance policy and how much it will charge you for it. The older you are, the more complicated the process. The same holds true for certain types of health insurance.


So what needs to happen? A new business model needs to be developed to achieve insurance sales over the Internet. First, insurance companies need to unconditionally accept electronic signatures. Second, insurance companies need to overhaul their underwriting standards to simplify the process.


Both these things are being done today by forward-looking companies. Personal auto insurance is being issued and paid for over the Internet. And by June of this year a new underwriting process dependent on consumer interaction will be introduced.


Some companies will quickly adopt these two technological innovations and apply them to e-commerce. You will know who they are. They are the ones that will still be in business, serving their customers and collecting the rewards of a new marketing model specially designed for the Internet. The others, well, they'll still have their paper, their complexity and their intermediaries. And they probably won't be around in 2010.
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