What's New in Cybertalk?

by Jean Gora
December, 1998

Note: CyberTalk is a column that appears monthly in LOMA's Resource, the magazine for insurance and financial services management. To see more contents of the magazine and to see how to subscribe, click on RESOURCE.

Portals and Products: Online Annuity Offerings and the Emergence of Portals Further Change Insurance E-Commerce

For a long time, many people in the insurance industry have talked about the impossibility of selling complex products directly. They hold the view that only an agent can guide a prospect through the intricacies of a product as complex a variable annuity or variable life insurance. They also believe that the only way to close a sale is by discussing needs rather than product specifics.

This writer, who has spent a lot of time at Internet investment sites, has long wondered at this attitude. Many of these investment sites offer products as complex as variable insurance products. Many of them discuss arcane product specifics. Internet investment sites employ complex vocabularies and require more than basic literacy. Their audience is well-educated and willing to learn about new products by reading about them.

Employees covered by 401(k) plans have embraced Internet account access with enthusiasm. A 401(k) plan is at least as complex as an individual variable annuity. Yet much of the individual insurance industry acts as though people interested in annuities online do not exist. Even some of the best insurance Internet sites discuss insurance as little as possible but provide volumes of needs-related information.

Finally, one insurer has decided to embrace this market segment. Lincoln Financial Direct, the new direct unit of Lincoln Life, offers a variable annuity—called eAnnuity—on the Internet (http://www.eannuity.com). The prospect can purchase the product almost entirely on the Internet and transmit a bank draft authorization to execute payment. The initial purchase contract requires that a signed copy be sent via fax or regular mail. The customer can transfer money among the product's mutual funds on the Internet. All customer service functions take place on the Internet.

eAnnuity

Here is how Lincoln Financial Direct addresses its target audience:

"Investing in mutual funds? You should consider eAnnuity."

"If you've spent a lot of time on the Internet, you probably already know the advantages of making purchases over the Net. The most important of these is probably lower costs. We sell our products directly to sophisticated Internet-savvy investors who make their own decisions. In this way, we reduce a major expense—sales commissions. We also eliminate another major expense—having customer service people manning a large bank of phones. We pass these lower costs on to you, bringing you what we believe to be one of the financial industry's best values."

"Another major advantage of buying the eAnnuity over the Internet is ease of access to comprehensive information about your account."

"We treat you like an intelligent adult. We have a good, relatively simple product. We don't need to dazzle you with meaningless slogans. Instead, we supply you with honest, direct information that helps you to make an intelligent investment decision."

Lincoln Financial Direct presents extensive comparative pricing information in conjunction with its description of eAnnuity. Here are several examples of this information:

"Other companies spend from 4.5 percent to 8 percent to sell their annuities; our cost is projected to be between 1 and 2 percent."

"On an overall basis, the eAnnuity is substantially cheaper than other annuities. Based on a $25,000 annuity, the average annual industry expense ratio as of December 31, 1997 was 1.97 percent (Source—NAVA Outlook Nov./Dec.1997). The eAnnuity average expense ratio is 1.22 percent."

"The most important fee in the eAnnuity is the general asset charge. This is roughly comparable to what other companies call a mortality and expense charge. This charge is computed daily. On an annual basis our charge is 0.55 percent. This is significantly less than the typical annuity asset charge of 1.15 percent. (Industry average according to NAVA, the annuity industry trade association.)"

The site describes its Internet Service Center, saying, "The Internet Service Center is available to provide you with comprehensive information about your eAnnuity, available at any time. For security, you may be given a password or personal identification number to access your account information. Some documents, such as the initial purchase contract, require a signed copy to be sent via fax or regular mail." The site continues, "The service center is also your source of information for modifying your account. Transferring money from one sub-account to another, changing beneficiaries, and making withdrawals are examples of transactions that can be accomplished at the My Account section of the service center."

The Electronic Customer Service Agreement contains interesting language regarding the customer's responsibilities for passwords and security, however. The site says, "Your use of the Lincoln Financial Direct Internet Service Center involves the transmission of information that may be considered personal financial information, including but not limited to the identity and number of your Lincoln Financial Direct eAnnuity accumulation units and the net dollar price for these accumulation units. Lincoln will take reasonable security precautions with regard to the utilization of security precautions with regard to the utilization of Internet services to transport data or communications, but Lincoln disclaims any liability for interception of any such data or communications. You will select a password for your use in making transaction requests and for accessing your folder maintained at the Lincoln Financial Direct Internet Service Center. Lincoln shall not be under a duty to inquire as to the authority or propriety of any instructions given to Lincoln with regard to the use of your password, and shall be entitled to act upon any such instructions; and Lincoln will not be liable for any loss, cost, expense or other liability arising out of any such instructions."

Lincoln Financial Direct's attempt to sell a variable annuity directly without offering telephone access to the company for customer service represents an aggressive Internet experiment. Even some of the best-known Internet investment sales sites, such as that of Charles Schwab, offer telephone access to the company as a back-up to e-mail queries.

Attracting Business Through Portals

Many fine Internet sites attract little business because the site operator has not established links to other sites that generate traffic. Some of these other traffic-generating sites are now called "portals," and they are currently receiving tremendous investment. Portals usually include the following features:

• Search engines

• Subject-area links to other sites of significant interest (sports, weather, business, finance, etc.)

• Personalization (The user can organize material presented on the site according to his or her own interests.)

• News (News changes frequently. These changes give consumers incentives to return to them often.)

• Stock market price quotations (Stock market prices change all the time, creating an incentive for users to return to them.)

• Use as default welcome sites when users access the Internet (Portal operators have alliances with Internet access providers or function as Internet access providers themselves. America Online is a good example of such a portal.)

Portals are becoming an increasingly important commercial force. If Lincoln Financial does not establish its own links with portals, then it would do well to establish them with investment sites, which attract the kind of people who are sophisticated and motivated enough to read and understand eAnnuity.

Positioning on Search Engines

At present, most insurers do not have direct links to portals. Furthermore, they do not appear prominently when users conduct searches using the major search engines: AltaVista, Yahoo!, Excite, WebCrawler, and InfoSeek.

Mainspring Communications (www.mainspring.com), an electronic commerce consulting firm, examined the links generated by searches employing the key terms "insurance," "auto insurance," "homeowners insurance," "life insurance," and "health insurance." It found that the searches generated 750 links, of which 44 percent went to Internet intermediaries (insurance electronic malls such as InsWeb and InsureMarket), 37 percent went to agents, and 19 percent went to insurance carriers.

These results suggest that insurers that rely primarily on search engines to drive traffic directly to their sites may be disappointed with the results. This generalization is particularly true for insurers with limited brand-name recognition. A consumer who has never heard of the XYZ insurance company has little reason to select a link to it rather than one to the ABC insurance agency or one of the insurance malls.

The Status of Digital Signature Laws

The countries of the world continue to enact digital signature legislation. The Chicago law firm of McBride, Baker, & Coles has posted much of the existing legislation on the firm's Web site (www.mbc.com). In the case of U.S. laws, the site presents three tables listing enacted legislation authorizing the use of electronic signatures, definitions of the term "electronic signature" in enacted legislation, and definitions of the term "digital signature" in enacted legislation.

All U.S. states have enacted some form of electronic signature legislation. Entries for each state appear at the McBride, Baker, & Coles site, which presents a hyperlink to the National Conference of Commissioners on Uniform State Laws, which in turn offers access to the draft Uniform Electronic Transactions Act. That act is ultimately likely to be the basis of uniform state legislation in the U.S. In addition to electronic signatures, that act covers electronic records, electronic contracts and communications, and governmental electronic records.

This site also presents legislation enacted or introduced in Argentina, Australia, Canada, Denmark, Colombia, France, Germany, Ireland, Italy, Japan, Malaysia, the Netherlands, Russia, Singapore, Sweden, and the United Kingdom. Various initiatives by the U.N. Commission on International Trade Law (UNCITRAL), the European Union, the International Chamber of Commerce, and the Organization for Economic Cooperation and Development (OECD) are also available.

See previous issues of CyberTalk in the CyberTalk Archives.

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