THE INTERNET AND INSURANCE: IMPACT AND

IMPLICATIONS :The Internet and life insurance: impact and implications

Current position of Internet usage by life insurance companies
Stages of incorporation of Internet into existing businesses can be broadly
categorized into four main stages.
Web Presence Stage
To obtain on-line quotes on a contract that they may be interested in and the
activities
of the company are largely targeted activities. However there is no processing of
the information past this stage and a customer must obtain an application form
to process the transaction any further.
Interaction Stage
This is where a company uses web pages to provide information about their
products and services i.e. corporate information, to include financial statements
and balance sheets. This stage is very basic and apart from raising brand
awareness, there is no real significant impact and incorporation into existing
businesses.
Transaction stage
This is where the company has enhanced information technology and may even
have facilities for customers to place orders and transactions
Enaction stage
Here the company has used the net and IT, to redefine their business and are
known as
e-enabled businesses. The emphasis is on interactive customer relationship
management and full integration of Internet facilities into the company. An
example of such a company might be Cisco systems.

Currently most companies are in the interaction stage and thus need to upgrade
their business value by making the Internet an integral part of their business
value and despite the insurance industrys hesitancy to embrace the Internet as a
channel for distribution, the outlook over the next five years is very positive.
While the online insurance marketplace represented only about $1.9 billion in
premiums ($1.6 billion net-influenced sales and $0.3 billion online sales) in
1999, this market is expected to grow to $11.1 billion in premiums ($7 billion
net-influenced sales and $4.1 billion online sales) by 2003.
Implications for life companies
Survival of the fittest
One possible impact of the Internet in the future will be the position whereby
only a small number of companies shall exist owing to economies of scale in
commoditization. Having established a strong brand, their support services for
their products will be diverse and be innovative and technological. Inclusion a
mutichannel distribution strategy along with bundling a variety of secondary
related products will help them to provide insurance products for both the long
and the short term.
These companies will be the result of the merger and acquisition of several
existing financial companies and may be a global venture. Profit margins
although deliberately kept low will exist and the emphasis shall be on high
volume, minimum unit cost sales, with heavy investment of capital in advanced
technology. The target sector will be the average person who has relatively
simple insurance needs.
Customers may find that loyalty discounts exists and they shall be quite happy
to purchase other products from these big market players.
Specialisation
Here each company will choose to concentrate on their core business
competencies outsourcing non-critical components and leaving the distribution

of their products to independent firms, such as supermarkets, who have a wider

consumer base. There shall be a trend towards a virtual office environment.
Communication between manufacturers and distributors (B2B) would be by
using extranet facilities and allow one to one marketing. It will be imperative,
from a competitive point of view, for insurers, to offer online transactive
services and to participate in B2B online exchanges. On the positive side, the
expansion of this B2B e-commerce should result in cost-savings for policy
administration.
The industry would see a deregulation with branding and diversity of the
distributors customer base becoming key sources of competitive advantage.
White label products would become increasingly common as competition
increases and new players emerge. The resulting effects will be the demise of
many small and medium sized companies and a reduction in the number of
Independent Financial Advisors.
Team as well as self-education support in the form of information available to
the customer on the Internet. As innovative products and quality of service
become overriding issues, administration becomes complex and expensive and
indeed customers may choose to forms C2C alliances to sell second hand
endowments, for example.
A Niche scenario
As the number of people surfing on-line increases every day and wealthier and
more educated customers display sophistication about them a niche market
might develop in the future to meet the complex financial requirements of such
customers, who have complex financial needs. These needs will include
continual personal expert advice through channels such as Independent
Financial Advisors or a Direct Sales Force
Team as well as self-education support in the form of information available to
the customer on the Internet. As innovative products and quality of service
become overriding issues, administration becomes complex and expensive and

indeed customers may choose to forms C2C alliances to sell second hand
endowments, for example.

The Internet and other markets: impact and implications

Impact on insurance brokers
The market in which insurance brokers operate is very diverse. Consequently,
the potential of e-commerce is also diverse. An investment broker will advise on
which type of investment product or investment fund matches a customers risk
tolerances and personal circumstances, including tax issues. These factors are
variable and hence the broker is, from a business point of view, in a good
position.
Moreover, customers are aware that insurance is a necessity and not a luxury
and hence are prepared to take time to seek advice in relation to a lower-cost
best value approach.

Within the corporate market, brokers are aware of the importance of a best
value approach in terms of cost and creditworthiness. Brokers also advise on
corporate pension issues in terms of selection of investment managers and
assessment of solvency risk. Direct dealing insurers however, who promote
cutting out the middleman, are replacing the role of the non-life broker.
Moreover, the position of the smaller retail insurance broker is very different to
their larger competitors.
By a combination of web-based marketing sites and the facility of transmission
of data between systems using a standard interchange facility may facilitate low
cost electronic trading for brokers which may be paramount to the survival of
the smaller broker. Web-enabled TVs would increase the potential market and
thus provide even greater savings.
Also Internet usage allows an alternative to the traditional manned claims desk
by allowing free exchange of information on claims procedures. All, however,
face the threat of disintermediation and broker commission rates are under
threat. This has been partially due to the Internet, as customers go direct with
the underwriters.
Brokers have responded to this by increasing the range of risk management
services that they offer. However, this still does not deal with the issue of the
Internet being responsible for edging them out of the market altogether, as the
development of a
Universal Electronic Data Interchange allows communication between
customers and insurers that is more direct.
Not all is bad news. Indeed the Internet can be advantageous for the broker in
terms
of providing them with a faster more cost efficient method of transferring
information
globally and hence enabling them to pass on the savings to their customers and
hence

attract more business.

The Internet is also changing the role of the broker from an intermediary to an
infomediary who conveys information to the customer. As markets become
increasingly dependent on standardised information such as the FTSE indices,
the
broker becomes the supplier of information that affects these indices.
In essence, the Internet could speed up trends that are already present in the
market.
If this is the case then only those brokers, who are continually re-evaluating
their role
and its changes due to the Internet, will be able to reap the full benefits. Indeed
ignorance of this technology may result in significant consequences.
Implications for reinsurers
This topic is somewhat difficult to address, as reinsurers have minimal Internet
based activity. The problems they face are different to brokers as they are not
involved so much in the transfer of information and they are more the risk
bearers. The ease of information sharing allows customers accounts to be
continually monitored by reinsurers. It will also mean that they are up to date,
thus making renewal simpler. Moreover, this data is easily manipulated and
stored thus decreasing administrative costs.
Within the London market this advantage is readily apparent with organisations
such as Lloyds enjoying the increased efficiency gain. However, the Internet
facilitates competitors in the reinsurance industry such as the Bermuda
reinsurance centre.
These centers have benefited greatly from the impact of the Internet as distance
and location has been a traditional barrier to entry. Furthermore, such centres
are in anideal situation to postulate legislation for newer forms of e-commerce

that would complement their existing tax position and hence generate even
further business.
These competitors have undoubtedly affected the traditional market share that
Lloyds enjoys and thus it is imperative that such points should be considered.