Weekly Update

The insurance industry challenged by technology change

 

Insurance is notorious for being among the sleepiest and most conservative of industries, but it is also one of the products most frequently sold online. Not only is technology poised to change many aspects of the business, but new research shows just how strong the correlation is between advanced tech use and top financial performance within the vertical. All together, insurance is a more interesting vertical case study than it outwardly appears.

Tech use among the industry leaders
IBM has found stark differences between industry leaders and nonleaders in their awareness of consumer changes in the sector. In a study based on interviews with executives at 80 insurers, IBM defined leaders as those firms that led in both profit and growth, with ROI in the top half of firms over a three-year period, and CAGR at least five points higher than market CAGR in that timeframe.  Although 88% of the leaders ranked changes in consumer behavior as important or very important, only 33% of the non-leaders gave the same response. IBM reports that “about 90% of insurance leaders are investing in customer support and 94% are funding new products and services, compared with 79% and 76% of non-leaders, respectively.”

Disruptive new entrants?
Along with online marketers of insurance products (e.g., einsurance.com and ehealthinsurance.com), large Internet companies have become potentially significant challengers in the sector. One pioneering new entrant into insurance markets has been Rakuten, known as the “Japanese Amazon”. The company is the third-largest e-commerce company worldwide, after Amazon and eBay, and it bought Buy.com in 2010. Rakuten has entered several insurance markets in recent years: offering medical insurance in 2011, and buying Airio Life Insurance Company Ltd., which it promptly rebranded and expanded from agent-based to online sales in 2013. Rakuten also has significant securities, e-money card and banking online businesses (ranking  #1 in Japan for the latter two). In its 2013 annual report, the company listed finance as one of its three strategic businesses, along with e-commerce and digital content.

In the U.S., Overstock.com followed suit this April, teaming with insuritas.com, an insurance private labeling agency, to launch an online residential, business, and auto insurance agency from Overstock’s main retail portal. The company has described it as a natural fit with its home furnishing sales. On the same day, Walmart announced a marketing partnership with the online vehicle insurance provider AutoInsurance.com.

In short, insurance agencies as a distribution channel appear to be going the way of travel agencies. A local, dedicated sales channel is simply being replaced by lower cost and more convenient online outlets. (Notably, Ratuken is also the number two travel agent in Japan.) Of course, established insurance companies also market their products online, with varying degrees of technical proficiency.

A new industry challenge

Forbes.com this week profiled a new online challenge to the insurance sector. The startup Injured Money surveys consumers on their insurance company payout experiences. The resulting data gives consumers new marketing power by rating insurance companies on their payout records—or the delivery on their promised services. This type of turnaround on industry knowledge may contribute to more costs and profits being squeezed out of the system.

An entry from Google?

Not surprisingly, there has also been considerable speculation that Google will enter the insurance industry, as typified by rumination in TechCrunch last month. In March, BCG and Google India released a study that shows insurance ranking among the top five products for Internet-influenced purchases in Europe, at 83%, with Internet influence somewhat less, at 66% of purchases, in the U.S. (For auto insurance, the figure has already reached 75% in the U.S.) From 2008 to 2013, auto, life, health and travel insurance saw 3.7x, 4.5x, 4.5x, and 6.0x increases in online searches, respectively.

The study also finds that U.S. insurers such as Geico and Progressive that have extensive online, but limited traditional, sales channels are significantly more profitable than more traditional firms.  Already Google acquired BeatThatQuote, an online price comparison service in the U.K., in 2011, although the site was disabled in 2013. With the sector’s exceptionally strong and growing online advertising and sales emphasis, will Google be able to resist some type of market entry?

Conclusions

In short, within the constraints of significant state-by-state regulation, the insurance industry is evolving its online presence for greater direct Internet sales. Those companies with a lesser traditional presence are generally doing better than the rest of the industry, and even among traditional providers, those with a greater focus on investing to meet changing customer demands are realizing greater financial success. New online entrants provide a significant marketing cost advantage, and large e-commerce players, with their massive scale and broad cross-selling capabilities, are entering the fray. That’s why as online search, research, and purchasing increases, the specter of Google’s Internet clout looms large in the fear of insurers–whether or not the company would ever consider more than a marketing partnership entry. Consumers may also gain from more symmetric, socially generated, market information.

Although there may be some advantages in hybrid traditional and online sales today, the intangible nature of insurance products make them naturally suited for pure online sales and delivery. Thus, traditional providers will likely find an ability to provide integrated, omnichannel sales and delivery is even less of a defense for them against new competitors than it is for providers of more physical products.