What's New in Cybertalk?
by Jean Gora
February 2000
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.
Altering the Economics of Distribution
There will be significant growth in Internet insurance distribution in the year 2000
for two reasons. One is that laws governing electronic contracts and signatures will be in
place at both the federal and state levels. The other is because more and more insurers
are shifting resources away from their agency distribution systems in order to invest in
Internet distribution. Last month, CyberTalk examined the first reason. This month, it
examines the second—and also shows how agency distribution is being restructured to
cope with this change.
Since the introduction of the Internet, insurers have been reluctant to invest in it
for fear of antagonizing their agents. Internet volume was low, and the return did not
appear to be worth the cost. At the same time, however, the high costs associated with
traditional insurance distribution kept insurers interested in the Internet. Evidence is
beginning to accumulate in the public domain that some insurers are curtailing their
investments in agency/brokerage distribution in order to invest in the Internet and other
non-traditional distribution channels. This shift in resources does not mean insurers are
abandoning agency distribution. Rather they are dramatically altering its economics.
Some of the evidence is indirect. For example, the number of insurers participating in
online insurance malls continues to grow, and the number of insurance agents continues to
decline. Small agencies vanish or are consolidated into large ones.
On the other hand, some of the evidence is direct. Insurers announce their Internet
investments at the same time as they announce cutbacks in their traditional distribution
systems. Some of that direct evidence, compiled from the employee benefits, personal
lines, and mutual fund sectors of the insurance industry, is presented below.
Evidence from Aetna U.S. Healthcare
On November 10, 1999, the Philadelphia Inquirer reported that Aetna U.S.
Healthcare is cutting commissions to independent brokers selling its group health
insurance and managed care products. Commission cuts average between 20 and 50 percent.
This announcement came in a speech by company president Michael J. Cardillo to the
American College. Cardillo indicated that the reason for the cuts is the fact that half of
Internet users use the Internet to access health information.
A benefits consultant who heard the speech indicated that Aetna had cut brokerage
commissions from six percent two years ago to between two and four percent now. The same
article reported that brokers accounted for $5.6 billion of Aetna's $14.8 billion in 1998
premiums. Nonetheless, an Aetna spokesman indicated that the company has no plans to allow
the Internet to replace its agents and brokers.
There are abundant reasons why employers might prefer Internet distribution of employee
benefits to traditional approaches. The same Philadelphia Inquirer article mentions
an auction held by Hewitt Associates for the health insurance business of three employers.
Fifty insurers entered bids in the auction. In the course of the auction, the insurers
reduced their bids two to eight percent. Thus, insurers as well as brokers will experience
pressure on the prices as a result of the Internet.
Evidence from Allstate and Scudder Kemper
Other direct evidence of insurer substitution of Internet distribution for traditional
distribution comes from Allstate. In November, Allstate announced that it would spend $1
billion over the next two years to develop the infrastructure to sell auto and homeowners
insurance via the Internet and telemarketing. It expects to begin direct sales in Oregon
in May of 2000, with 16 other states to follow before the end of the year. To finance this
investment, Allstate will cut 4,000 non-agent employees by the end of 2000.
Allstate is converting its captive agency system into a single-agency,
independent-contractor program. As part of that move, it will convert 6,500 agents
employed by the company to independent contractor status. Allstate plans to continue to
use agents in conjunction with its Internet distribution, but it will pay them commissions
of only two to 3.5 percent of sales. Allstate's captive agents traditionally received
commissions of eight percent while its independent agents received ten percent
commissions.
A similar dynamic is occurring in the distribution of mutual funds by insurer-owned
mutual fund companies. Scudder Kemper Investments, a unit of the Zurich Group, is shutting
five retail offices and two of its four telephone centers, laying off between 100 and 120
employees—two percent of its work force. Instead it will invest the money in mutual
fund distribution.
Organization Reconfiguration
Reductions in commissions are forcing a dramatic reconfiguring of insurance and other
financial distribution organizations. The chief consequence appears to be a consolidation
of insurance agencies and brokers and the creation of independent nationwide distribution
organizations.
Four leading life insurance companies—Equitable, General American, John Hancock,
and Lincoln National—have established nationwide distribution companies. At least two
of these insurers have given their distribution arms names that differ from those of the
company. Equitable has named its company AXA Advisors, incorporating the name of its
parent organization. John Hancock has used the name Signator Financial Advisors.1
These distribution companies attempt to use size to generate economies of scale,
enabling them to operate more efficiently than previous distribution systems. No published
information is available about the commissions paid by these carriers. However, clearly
their streamlined nationwide agencies, staffed by independent contractors in many cases,
should be better positioned to operate with low commissions than their predecessors were.
These distribution companies are apparently allowed considerable latitude to distribute
products of other companies, an arrangement that may help them generate other revenue
sources to compensate for reduced commissions. The hope is also that by giving their
distribution companies brand names not traditionally associated with insurance, they will
better position these companies as providers of independent financial advice.
It is unclear how independent these distribution companies will ultimately prove to be
as no information about their financial arrangements is public. If they become truly
independent, insurers will be able to compare the returns from this distribution channel
to those of alternatives.
Consolidators: The BenefitMall Example
Gary Schulte of Milliman & Robertson, who studies insurance company distribution
strategies, reports that an entire industry of distribution consolidators has emerged.
Some consolidators are publicly held companies; others are private companies intending to
make initial public offerings (IPOs). Some are banks and securities firms. Insurance
consolidators focus on agencies with individual practices of at least $500,000. Private
consolidators target agencies that sell to the affluent.2
BenefitMall.com shows how a traditional broker has attempted to maintain a role in the
employee benefits distribution process by functioning both as an agency consolidator and
as an Internet employee benefits shopping mall. Established in 1979 as the West Coast
Insurance Marketing Corporation, it embraced personal computers enthusiastically and very
early was able to generate real time online price quotations from carriers. Humana, a
leading managed care company, acquired it in 1995. Taking advantage of the Internet, it
introduced a Web-based employee benefits shopping mall targeted at small businesses. It
offers real-time online group insurance quotes plus sales support, proposal management,
and tracking. To date, it claims to have enabled the generation of more than $400 million
of annual insurance premiums.
Noticing the success of Internet IPOs, Humana divested BenefitMall.com in mid 1999 to
two venture capital firms (Humana Ventures and Austin Ventures) and company management.
Venture capital ownership is usually a precursor to an IPO. This divestiture allowed
BenefitMall.com to sign up an impressive array of insurance carriers that intend to use
the site for distribution nationwide. These carriers include MetLife, Mutual of Omaha,
Humana, Prudential, GE Financial, Companion Life, United States Life, ReliaStar Financial,
and Cole Managed Vision/Security Life.
At the same time as it has been signing up insurance carriers, BenefitMall.com has also
been buying up employee benefits agencies. In November 1999, it announced the acquisition
of six insurance general agencies in the East. Its press release describes it as the
largest wholesale insurance aggregator in the country with more than $500 million in
active managed premiums. Its Web site solicits individuals who are interested in selling
their agencies. It previously distributed products only in four central and western
states.
BenefitMall.com shows how independent distributors can preserve a role in the Internet
era. They can do so by embracing the Internet and creating a shopping mall which carriers
are reluctant to bypass for fear of losing business. By buying multiple agencies across
the country, they can gain both economies of scale and the ability to close sales on a
nationwide basis. This combination of attributes can position them well to make initial
public offerings. Successful IPOs can allow them to extend their reach.
Thus, although many insurers are shifting resources from their traditional distribution
channels into Internet distribution, perceptive independent distributors are remaking
themselves to preserve a role that allows them to operate within a reduced-commission
environment. Their embracing of the Internet will contribute to expanded Internet
insurance distribution. It will be interesting to see whether any of the
insurer-established distribution companies mentioned above will follow their lead. But the
overall trend is clear. Increased investment on the part of insurers and aggressive
intermediaries will drive up the level of insurance distribution on the Internet in 2000.
___________________________________
Notes:
1George McKeon, "Considering the Distribution
Alternative," Best's Review: Life/Health, November 1999.
2Gary Schulte, "Who Is Buying Life Insurance
Practices?" National Underwriter: Life & Health/Financial Services,
December 6, 1999, p. 13.
For more information, EMail research@loma.org
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