How a business, its customers, can save by capitalizing on the 'interactive' nature of the internet.

By Thomas R. Schori, Ph.D., and Michael L. Garee, Principals,  Millennium Marketing Research, 808 E. Ironwood, Normal, IL 61761-5239. 

NOTE: This article also was published in the January 19, 1998, issue of American Marketing Association's Marketing News

For the last several years, there has been a lot of talk about the business potential of the Internet. The realization of that potential, however, has been slow in coming. The reason for this, we think, is really quite simple. Those trying to conduct business in cyberspace continue to use "traditional" business practices and procedures, and are not adapting the conduct of their business to the unique characteristics of this exciting new medium, particularly the inherent "interactive" nature of the medium. Probably not a smart move.

Precisely because of the interactive nature of cyberspace, it holds the promise of permitting businesses to operate significantly more efficiently. But that promise will only be realized if businesses adapt themselves to cyberspace, rather than trying to adapt cyberspace to how they've always done business. Let us give you an example of how we envision a business could capitalize on the interactive nature of the Internet both for the significant benefit of themselves and their customers.

Since a considerable amount of our professional lives was spent in the insurance industry, we will use as our Internet business example a personal lines insurance company, i.e., an insurance company that specializes in selling auto, home, and life insurance to individuals. Before discussing how our cyber-insurer would operate on the Internet, however, it’s important to have at least a general understanding of how personal lines insurance companies currently operate.

In general, there are four key points of interaction between a personal lines insurance company and its customers: sales, underwriting, claim handling and billing/record keeping. Let’s look at how each of these interaction points normally function today.

• Sales. Individuals who need insurance must first be put in contact with an insurance company. Many times this will involve contacting an agent representing the company. If it does, the agent will receive about 10% of the auto or home premium paid by the individual, or as much as the equivalent of 100% of a first-year life insurance premium. That’s an expensive proposition any way you look at it. Directly attracting customers to the insurer (i.e., without an agent) may be slightly less expensive, but it’s still a very costly proposition.

• Underwriting. When an application for an insurance policy is received by the insurance company, someone must review it for accuracy, decide whether or not to offer coverage, and determine how much to charge for the coverage. To put the scope of the underwriting function in perspective, auto and home insurers may have as many as one underwriter for every 3 or 4 agents. In addition, if the company also offers life insurance, that requires an additional life insurance underwriter for every 6 or 7 agents. Expensive? You bet!

• Claims. When a claim occurs, someone has to decide whether or not it’s a covered claim, and how much should be paid on the claim. Auto and home insurers may have as many as one claims person for every 2 or 3 agents. Add to that the necessary personnel to verify life insurance claims. As to cost, all we can say is, "ouch!"

• Billing/record keeping. Premium notices have to be sent out on a regular basis, be it monthly, quarterly, or semi-annually. Just sending premium notices out is not an inexpensive proposition, either. Add to that the cost of maintaining customer records and, obviously, it becomes even more expensive.

Now, let's look at how a cyber-insurer, taking full advantage of the interactive nature of the Internet, could handle these same four basic interaction points far more efficiently and far less expensively than their traditional counterparts.

• Sales. Paying agents a high rate of commission for selling policies is done for one reason only: to encourage agents to be active "order-getters" rather than passive "order-takers." The truth is, though, most agents still function as passive order takers! They simply wait for prospective customers to call or walk in the door. And, quite frankly, under those circumstances, high agent commissions simply don’t make much sense. Consequently, the cyber-insurance company will target, via the Internet, those individuals with whom they would like to do business. These people would then be encouraged to go to the insurer's cyber-kiosk to purchase their auto, home, and life insurance. At the cyber-insurer's site, there will be marketing information to help the individual decide whether or not he/she should consider purchasing auto, home, and/or life insurance from the cyber-insurer. No sales people!

• Underwriting. The underwriting process will also be completely automated. The prospective insured will complete an electronic application, whether it be for auto, home, or life insurance. In real-time the automated underwriting system will check motor vehicle department records, health records, etc., and either accept or reject the application. Accept or reject it now, not later. No underwriters!

• Claims. When a customer has a property claim, he/she will report it at the cyber-insurer's web site, which will direct him/her to a local vendor who will repair or replace the property. The vendor will have authority to electronically debit the cyber-insurer's account for the cost to repair/replace the property. When a life insurance claim (i.e., a death claim) is made at the web site, the system will automatically verify, in real-time, the validity of the claim by checking to determine if the corresponding death certificate has indeed been filed with the appropriate "vital statistics" official. The payment will immediately be electronically transferred to the beneficiary's account. No claims people!

• Billing/record keeping. Each month, quarter, or whenever a premium is due, the customer's checking account will automatically be debited for the amount due. No paper involved, just an electronic funds transfer. Furthermore, if the customer requires any change to his/her auto, home, life insurance policies, he or she need only go to the cyber-insurer's virtual customer service center on the Internet, where changes will be made to his or her policies, again, in real-time. No waiting for verification, no person involved.

Admittedly, doing business with a cyber-insurer may not sound all that exciting to a lot of people¾ yet. Currently, most people seem to prefer doing business with other people, e.g., the agent or his/her staff, et al. However, when consumers realize that a cyber-insurer is going to be able to charge about 40% less than conventional insurers, the proposition undoubtedly will become far more palatable! Certainly good news for insurance consumers, but equally good news for cyber-insurers as well. Rather than paying out $1.08 for every $1 in premium they receive (as "traditional" personal lines insurance companies now do), cyber-insurers would be paying out, say, $0.85 on the dollar. This will be possible, primarily, because of two important benefits of doing business as a cyber-insurer. First, by targeting and soliciting "good risks," cyber-insurers will have to pay less in claims than would an insurer who simply insures most people who call or walk in the door. Second, by truly automating sales, underwriting, claims and billing, by taking full advantage of the interactive nature of the Internet, a cyber-insurer's expenses will be considerably less than will those of a conventional insurer.

The consumer wins with significantly lower insurance rates. The cyber-insurer wins with much higher profitability. A classic "win-win" situation. But, you might ask, would consumers really buy from a cyber-insurer, with no human assistance or intervention? A few would now. More certainly will later!

Consider this: not so very long ago, Sears and Montgomery-Wards were certain that consumers would never buy from self-service discounters like K-Mart, Target and Wal-Mart. Quite obviously, they were wrong! Fortunately, for the small insurer who demonstrates the courage and resolve to make the leap to becoming a cyber-insurer, the big, well-established insurers will know in their "heart-of-hearts" that consumers just will never buy their insurance in cyberspace. But they will be wrong, too. Count on it.