What's New in Cybertalk?

by Jean Gora
June 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 MAGAZINE.

Still Unprofitable After All These Years

Every so often, factual information regarding the success of Internet insurance distribution activities becomes available. This information is buried in annual reports and filings with the Securities and Exchange Commission. This month’s CyberTalk examines information regarding InsureMarket and InsWeb. It shows that despite impressive gains in traffic, these sites do not operate profitably at present. Their lack of profitability serves to some degree as a proxy for the relatively limited insurer success with Internet distribution to date.

InsureMarket

Quicken InsureMarket is the online insurance market operated by Intuit, a provider of household and small business financial management, accounting, and tax preparation software. Intuit’s products are distributed under the Quicken label. InsureMarket is accessible through the Quicken.com Web site. Founded in 1983, Intuit has been in existence longer than the Internet has been used for commerce. It had an IPO in March 1993. When the Internet became important, Intuit adapted many of its products for delivery over the Internet. It has never been a purely Internet company, and thus its business model has never been totally dependent on high stock valuations in the absence of profits.

In August 1998, Intuit and America Online (AOL) announced a joint venture under which Quicken InsureMarket would provide insurance content for AOL’s Personal Finance Channel. In February 1998, AOL and Intuit established a three-year agreement under which Intuit would be a primary source of financial content and programming for AOL and its Internet site.

As of April 2000, AOL has 22 million members worldwide, moves 110 million e-mails daily, and supplies 200 million stock price quotations daily. AOL users access 5.2 billion Internet URLs daily. Two-thirds of AOL’s members made online purchases over the prior six months. Thus, AOL is a major source of consumer Internet traffic. InsureMarket is positioned to benefit from that traffic. However, Intuit’s agreement with AOL requires it to make certain guaranteed payments of $30 million over three years to AOL. Generating traffic does not necessarily translate into revenue generation. Intuit generates revenue from financial institutions that sell their products and services through Quicken.com.

Intuit Is Profitable...

Intuit’s fiscal year ended July 31, 1999, so its annual report covers the last half of 1998 and the first half of 1999. Internet-based products generated only 15 percent or about $127.5 million of the company’s $850 million revenues in FY 1999. The company’s overall revenue was up 43 percent from the prior year. Its pre-tax net income was $617 million.

Quicken.com grew significantly in the last quarter of 1999 (the second quarter of the company’s fiscal year). January page views were 257 million, up by almost 95 million since October 1999. Quicken.com had seven million unique visitors in January 2000, up from 4.5 million in July 1999. By the end of 1999, Quicken was providing online banking services to 1,031 banks, brokerages, credit unions, credit card companies and other financial services companies, a 50 percent increase over the prior year. Approximately 60 percent of all U.S. checking accounts can now be enabled for online banking through Intuit. Intuit had a three-for-one stock split in September 1999. In April 2000, after the great decline of Internet stocks, its stock was trading at $33 per share.

Thus, Intuit’s business has both grown and been profitable on an overall basis. Its alliance with AOL has positioned InsureMarket well to generate traffic. InsureMarket’s link to Quicken.com positions it well to attract business from affluent households. InsureMarket offers insurance products from a high-powered group of insurers: AFLAC, Allstate, CNA Life, Electric Insurance, GE Financial Network, John Hancock, MetLife, MONY, Ohio National, American General, Ohio Casualty, The Principal, Prudential, Reliance Direct, State Farm, The Hartford, Transamerica Occidental Life, Travelers, UNUM, Western-Southern, and Zurich. During fiscal year 1999, life insurance policy applications grew at a rate of 66 percent per month. More than 70 percent of the U.S. driving population could obtain online auto insurance price quotations through InsureMarket.

...But No Profit At InsureMarket

Thus, it is disappointing that Intuit reported that its InsureMarket business failed to generate significant revenue or profit during FY 1999. Because InsureMarket generates agent commission revenue from sales conducted through it, this announcement serves as a proxy for revenue generated by insurers for sales generated through InsureMarket. It will be interesting to see whether Intuit’s FY 2000 figures show a significant improvement in this area.

One has to wonder whether the insurers that participate in InsureMarket have effectively integrated it with their back-end systems. When someone wants to buy insurance, what happens? Is there still a three- or four-week delay in delivering policies to new customers? If this is the case, InsureMarket may generate high volumes of traffic that do not result in closed sales.

InsWeb

Consider now the situation of InsWeb, another Internet insurance marketplace that started at about the same time as InsureMarket. InsWeb offers insurance from about 50 carriers and has dozens of alliances with other sites that generate traffic. These sites include Yahoo, MSN (the Microsoft Network), E*Trade, and cars.com. InsWeb is involved in an online insurance joint venture in Japan with Softbank, a Japanese software company. InsWeb facilitates comparison shopping by presenting comparative price quotations.

InsWeb works directly with participating insurers to automate their data capture, underwriting, rating, and quote generation. It provides participating insurance companies rapid feedback on their comparative performance within the InsWeb marketplace. This feature allows insurers to adjust their product offerings, remove products, change product features, adjust underwriting criteria, and distribute current information to prospective customers.

InsWeb is compensated primarily on the basis of transaction fees generated by the delivery of qualified leads to participating insurers. The following constitute qualified leads:

For companies providing online price quotes: When the consumer who has been presented an online price quote clicks to request insurance coverage based on a particular quote.

For companies providing e-mail or off-line price quotes: When the consumer requests the quote itself.

This model contrasts with that of InsureMarket, which is compensated on the basis of agency commissions. InsWeb gets compensated even if prospects do not buy. InsureMarket does not.

InsWeb, however, appears to be moving closer to the InsureMarket model. Beginning in October 1999, InsWeb established a subsidiary that operates as an agent and closes sales, in both a traditional and online settings, for four auto insurers in California. It plans to expand this service nationwide. As of March 2000, the subsidiary had licenses in 39 states. In the remaining 11 states, it has licenses through its officers or resident agents that contracted with InsWeb.

InsWeb transferred to its licensed agency subsidiary the responsibility for ongoing operation of its Web site in April 1999. This move placed InsWeb in conflict with some of its participating insurers that have policies prohibiting them from employing agents or selling insurance through agents that compete with their own exclusive agents. InsWeb feared that it might lose some carrier business as a result of this decision.

In August 1999, InsWeb began operating a customer care center that provides assistance in the shopping process and customer service through real-time chat and teleservicing operations.

As of March 2000, InsWeb had at least two insurers offering automobile insurance price quotations in states covering 56 percent of the population. It has at least six insurers offering term insurance from states covering 93 percent of the U.S. population.

InsWeb’s database contains more than 5.8 million consumer profiles generated during insurance shopping sessions, with approximately 1.2 million profiles added each quarter. InsWeb provides reports summarizing this information to participating carriers.

InsWeb Partnerships

In December 1999, InsWeb entered a two-year agreement with Microsoft to provide insurance comparison shopping services through Microsoft’s MSN Insurance Center on MSN Money Central. In February 2000, InsWeb entered a two-year agreement with AOL under which AOL offers a co-branded version of the InsWeb market place on Netscape Netcenter, CompuServe, and Digital City, brands owned by AOL. InsWeb is slated to pay them $12 million in 2000 and almost $10 million in 2001. In March 2000, InsWeb introduced new technology that allows online customers to buy, bind, and print proof of auto coverage. The service was launched in California and will be taken to other states later this year.

InsWeb generated big increases in traffic during 1999. It had more than two million completed shopping sessions during the year, an increase of 418 percent over the prior year. Unique user sessions totaled 7.8 million, a 166 percent increase over 1998. At the end of the first quarter of 2000, shopping sessions rose another 27 percent, and unique user sessions rose 44 percent.

As of March 2000, InsWeb had relationships with the following companies for sale of the following products:

Auto insurance: AAA Michigan, AIG, American Family, Amica, The Hartford, Kemper, Nationwide, New York Central, Allstate, Avomark (Ohio Casualty), CNA, Country Mutual, Electronic Insurance, Explorer, GE Financial Assurance, Progressive, RelianceDirect, Reliant, State Farm, The Commerce Group, Travelers, and Tri-State.

Term life: Amica, CNA, John Hancock, Lincoln Benefit (Allstate), GE Financial Assurance, Midland, MONY Life, Ohio National, State Farm, Western-Southern, Old Republic Life, and Zurich.

Homeowners/Renters: AIG, American Family, Homesite, Nationwide, and State Farm.

Individual Health: Blue Cross/Blue Shield of Florida, Blue Cross/Blue Shield of New Jersey, Blue Cross/Blue Shield of Virginia, Central States, Healthnet, Golden Rule, Mutual of Omaha, and Pacificare.

InsWeb is a true Internet company. It was incorporated in 1995 and had a very successful initial public offering in July 1999. Soon after that, its stock hit $44 per share. This public offering generated substantial resources for InsWeb, and these resources allowed it to operate at a substantial loss. In 1999, its total revenue was $21 million, and its operating expenses were $60 million. It operated at a total net loss of $36 million, up from its 1998 net loss of $22 million. It spent $13 million on advertising. After the March and April 2000 crash of tech stocks and the withdrawal of a major customer, its price per share dropped to a little over $2. However, it still has $75 million in cash to fund its continued operations.

Non-renewal of Participation

InsWeb recently announced in a news release that its largest customer, State Farm, would not be renewing its participation agreement, and as of May 1, 2000, would not participate in InsWeb’s marketplaces for auto, term, life, homeowners, condo, or renters insurance. (InsWeb said that State Farm accounted for 30 percent of its revenues, while AIG and American Family account for about 11 percent each.) The news release said that with this non-renewal, auto insurance would not be available through InsWeb to consumers in South Carolina and Vermont, and renters insurance would be available in fewer states. Hussein Enan, chief executive officer of InsWeb, said in the news release that he believed the reasons for the non-renewal were specific to State Farm’s own distribution model, and "in our view, do not jeopardize the viability of our online marketplace model." Enan said InsWeb will cut expenses to align with reduced revenue expectations, and he announced a staff cut of ten percent.

Additionally, State Farm announced in a separate news release dated April 18, 2000, that its State Farm Bank, which opened in May 1999, is now Internet- and telephone-accessible nationwide. According to the news release, anyone in the U.S. can use the Internet to open a State Farm Bank deposit account. Customers can also go online to view detailed information about their accounts, transfer funds from one account to another, and pay bills electronically. The bank’s focus is on consumer-oriented financial products, complementing State Farm’s focus on personal lines.

Thus, the two major U.S. Internet insurance markets are encountering the reality that Internet distribution of insurance through multi-provider markets is not vanquishing alternative distribution channels—at least, not rapidly.