Multi-Distribution: Switching channels

Recent management consultant surveys of the North American property and casualty insurance industry have highlighted distribution as the number-one future concern facing insurer CEOs. The reports all weigh strongly in favor of integrated multi-distribution approaches with the Internet playing central stage. However, whether or not company CEOs agree with the views put forward by the management consultants, it is clearly apparent from the industry’s lackluster response that the path toward multi-distribution is being treaded with considerable caution.

If distribution is the first priority of insurers, then it is also their number-one concern: the crux of the debate being how to get products in a cost-effective manner through to the end consumer without losing marketing ground to new competitors.

The obstacle facing traditional insurers is exasperated by the fact that “ownership” of the end purchaser of their products lies with independent brokers. With new direct writing entrants to insurance having come into the game at a late stage when technology costs and that of integrated distribution modes has been dramatically reduced, traditional insurers who in the past have invested heavily in legacy-based computer systems and developing broker channels could find themselves at an extreme disadvantage in the future marketplace, analysts say.

While there is an obvious reluctance on the part of traditional insurers to forsake past investment, which was centered almost solely on developing broker distribution, lack of action in embracing new technology approaches to integrated multi-distribution could prove the death-knell for many companies. “This is a whole new game we’re playing,” observes one analyst, “…companies that may be leaders in yesterday’s or even today’s marketplace could easily be swept aside tomorrow by much smaller competitors. With any game, you can only play successfully once you know the rules.”

A recently released survey from Tillinghast-Towers Perrin shows distribution has risen to the top of property and casualty insurance (p&c) CEOs’ priorities. Multiple distribution channels, including brokers, agents and direct response, will continue to be explored, the study suggests, and the Internet may be front and center in this trend.

However, the same Tillinghast survey shows that, while CEOs consider technology the means of dealing with distribution control, it is also their greatest obstacle to achieving effective distribution. This finding is supported by other surveys suggesting e-commerce is not being fully utilized by many companies. “Comparing the utilization [of e-commerce] in insurance to other sectors in financial services, we lag significantly,” admits Kevin McNeil, president of Gore Mutual Insurance. “We just don’t have the technology. Everyone in the industry is trying to use e-commerce in some way, but I don’t think they’ve figured out how it will be important.”

McNeil’s comment is particularly true when it comes to the role of the Internet as a direct sales tool. “Some people are experimenting with it now,” he observes, but figures show that very few insurers are getting into the game. This is particularly true in Canada, where the insurance industry is believed to lag its U.S. counterpart by about 18 months in terms of Internet utilization.

“[Insurers] tend to think and talk strategically,” says Judy Maddocks, CEO of Kemper Canada. “E-commerce was seen as “the sexy, new wave, but there is a high level of discomfort in terms of ‘how does this translate into revenue?'” The Internet has yet to prove itself as a vehicle for direct sales, she says. “Consumers will book trips or buy RRSPs on the Internet, but are they going to be prepared to buy their home or car insurance in the same numbers?”

Mark Webb, COO of CGU Group Canada, agrees. “There’s been a lot of hype and talk about this, but not a whole lot of delivery. Insurers are not going to invest big money in developing interactive Internet applications until these things start delivering and proving themselves.”

Who will buy?

Dominion of Canada vice president of field operations Alan Hanks believes, however, that the public’s hesitancy to buy on-line insurance is not going to last forever. “People are still reluctant to do insurance purchases over the Internet. But that’s just an issue for today.” The younger generation, which has grown up on the Internet, will not be so reluctant, he notes.

While he admits that i/money, a one-stop financial services website, “hasn’t had much luck selling policies”, he predicts that five to 10 years down the road “the younger generation will be ready to buy”.

What will entice people to buy on the Internet, he says, is the potential for one-on-one interaction on-line. The technology is already available to allow consumers to contact sales representatives they can “talk” to on-line. “People use [the Internet] to shop, to look. But in the end they want to talk to somebody. From an insurance perspective, they want to talk to somebody to be sure of their decision.” And, Hanks predicts the technology to do that will become widespread much faster than people expect. “Once people make the leap to that technology, more and more people will buy over the Internet. And we’re not too far away from that.”

Ted Belton, author of the Belton Report, says insurers cannot afford to ignore any potential form of distribution, particularly the Internet. The “net-gen” is reaching buying age, he told a recent conference of insurance and automotive industry representatives. The rise of call centres in the 1990s, and now the Internet, “this means consumers are going to have access to whatever kind of distribution they want…with consumers in the driver’s seat, flexibility and innovation are the keys to survival.”

Counting the costs

But can companies afford the hefty price tag associated with new distribution channels, and specifically technological solutions, even if the result could be reduced expenses. The cost of technology is a “huge factor” deterring many companies from venturing into e-commerce, say Maddocks. This is especially true following the big investments made as a result of Y2K issues. “People are Y2K’d out yet,” she says. “They’re overloaded. They want some stability.”

The Y2K experience also left many CEOs questioning the cost of going high-tech. “CEOs are not adept at technology, so they turned power over to the IT (information technology) people. Now, there’s a retrenchment happening. They’re asking themselves, ‘Did I really spend $40 million on a system I ended up having to scrap.'” The Synchron experience was similar, alienating people in the industry because of the complexity of the technology.

“There was all sorts of money spent and fingers burnt” by solutions like Synchron, agrees Webb. “The great attraction of the Internet is the potential to reduce the cost of distribution.” But, if money is wasted on systems that are eventually abandoned, insurers grow leery of making yet another investment. Still, there is real potential to reduce expenses, particularly in staffing costs, by getting on the web.

“The biggest lie in the 1970s and ’80s was that with computers we would work a 4-day work week and have lots of leisure time”, but just the opposite is true, says Hanks. Technology has actually allowed people to work more hours, often at home, and to have fewer people handling more jobs. “The Internet in insurance sales will allow us to have higher service without added people costs.”

Webb thinks Canada’s geography and distribution patterns have something to do with the reason this country’s industries overall are not taking advantage of the Internet. Indeed, a recent study by management consultants Deloitte & Touche showed that “while 2/3 of Canadian companies recognize that e-commerce will transform or have a major impact on their business, only one in five have fully adopted Internet based services.” One reason Canada lags, says Webb, is that with people spread far and wide, insurance distribution has been very much community-based. “Here, in Canada, brokers have been qu ite successful, direct companies have been less successful. It has made [e-commerce] less of an immediate proposition… it’s not such a logical jump.”

Preserving traditional distribution

Preserving the broker distribution system is likely the main reason many companies have shied away from the Internet. “There are a lot of people with a vested interest in traditional distribution,” says Webb.

McNeil agrees, noting that direct sales on-line do not make sense for companies who have invested in relationships with brokers. “It becomes an issue when you have a company having brokers as a distribution channel on one hand, and on the other hand having distribution channels that compete with those brokers.”

The spread of call centres in the last decade led to “disintermediation” that could be taken further with the expansion of Internet use, observes Belton. “The Internet promises to put further pressure on the broker distribution system. But it [the Internet] is still in its infancy.” Furthermore, Hanks points out, “people will still want advice, I don’t see the Internet replacing agents and brokers, I see it as a tool for dealing more easily with customers”.

The Internet could be a vehicle for dealing more cost-effectively and quickly with brokers, McNeil agrees. “We’re partners [with brokers], how can e-commerce improve what we do together?” Anyone considering bypassing brokers in favor of a direct sales strategy is taking a high risk, says Maddocks. “If you have a strong relationship with your distribution network, then they can influence your bottom-line results. Conversely, if they get mad at you, they can hurt you.”

But the vision of one electronic system, either through the Internet or an intranet system, which binds the entire insurance industry is probably not realistic now. The structure of the industry is at least part of the reason why. “Our industry is highly competitive — many players with small market shares,” says McNeil. “That highly competitive industry has made it hard for companies to co-operate.”

In fact, Canadian p&c CEOs ranked the hypercompetitive environment of the industry as their main stumbling block to effective distribution. Regardless of the bumps along the road, insurers know that technology is a path they must venture out on. As Maddocks notes, “customers are going to access you the way they want to — you have to be accessible”.

Recent management consultant surveys of the North American property and casualty insurance industry have highlighted distribution as the number-one future concern facing insurer CEOs. The reports all weigh strongly in favor of integrated multi-distribution approaches with the Internet playing central stage. However, whether or not company CEOs agree with the views put forward by the management consultants, it is clearly apparent from the industry’s lackluster response that the path toward multi-distribution is being treaded with considerable caution.