Turn the Headlights On

Arecently held KPMG seminar on e-commerce application opened with a quote from Bill Gates: “Business is going to change more in the next ten years than it has in the last fifty…If the 1980s were about quality and the 1990s were about reengineering, then the 2000s will be about velocity.” And, a North American e-commerce report on financial services released by global investment bankers Morgan Stanley Dean Witter in the second half of 1999 carried the following bold statement on its cover: “Traditional financial service providers are reeling as technology shifts the balance of power from intermediaries to consumers.”

Over the past year CU has carried several articles on the impact and expected impact the Internet will have on the selling/distribution of property and casualty insurance products. Many of these articles were based on conferences and seminars hosted by organizations across the Canadian p&c board, namely the yearend conference of the Insurance Brokers Association of Ontario (IBAO) and the Insurance Institute of Canada (IIC). Speakers at these, and many other industry discussion gatherings, have agreed that the Internet will play a significant future role in both business-to-business and business-to-consumer transactions. I mention the range of organizations above merely to impress the point that the argument in favor of the Internet’s likely impact is not being driven by any particular party with a vested interest.

Sadly, studies in both the U.S. and Canada indicate that broker-supporting insurers and the brokerage community alike are moving far slower in Internet application when compared with competitors such as direct writers and potential competitors such as the banks. In reality, the old challenge of achieving “real-time technology interface” has been superceded by the advancements made on Internet development.

What may once have been an issue of business-to-business transacting convenience, initially thought to rest on EDI platforms, is quickly turning into a race to meet the expectations of online consumers. At the risk of being shot down in flames, I will venture to say that building any kind of technology business-to-business interface system today without incorporating the capability of consumer interaction would be equivalent to closing the barn door after the horse has already bolted. This comment is not only directed at carriers, but brokers as well, the latter likely to feel the pinch as the broker network consolidators continue to build market muscle and develop their own array of integrated online financial services (the proposed bid by Equisure for Canada Brokerlink would create an organization with control over more premiums than most carriers in Canada — see article in MarketWatch of this issue).

While some insurers such as CGU, Zurich and Royal & SunAlliance have moved forward with primarily broker-supporting Internet services, with limited customer-care options which determinedly avoid conflict with brokers over the “customer ownership issue”, the majority of traditional players maintain limited Internet presences, not much more than electronic information billboards.

The danger that lies with such complacency is that a “gap” is being left open in the market for other enterprises to enter. To list the potential invaders would be pointless, but as we have already seen in the market, both in the U.S. and Canada, retailers from book clubs to automobile manufacturers have ventured into online quoting of auto and home insurance. To get back to Mr. Gate’s comment, the pace of events in coming years is going to make that of the 1990s look like a replayed slow-motion action.

The Morgan Stanley Dean Witter report’s section on the p&c market (presumably of North America, but the figures and research contained indicate it to be primarily U.S.) says auto insurance of all financial service products will be one of the easiest to sell over the Internet. The investment banker predicts that by 2003 approximately 15% of all auto insurance policies, valued at US$18 billion, will be sold over the Internet (this compares with US$1 billion in 1998). “Those companies that don’t implement Internet strategies due to perceived channel conflict with their agents will be most affected by the loss of customers, in our opinion,” the report states.

Due to ongoing intense competition in the p&c sector, combined with increasing consumer expectations and knowledge of comparable pricing through the Internet, the investment banker expects the “price” of personal insurance will fall by 10% over the next two years, resulting in margin compression for both carriers and brokers.

Overall, Morgan Stanley are anticipating a US$300 million reduction in industry profitability over the same time period. As such, the investment banker believes that companies carrying lower expense ratios and those who have adjusted to a greater extent to online business will become the top performers in this environment.