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Price-focused Consumers are using the Internet to Squeeze Traditional Insurance Carriers: Compete, Inc.

Compete finds key consumer segments making decisions based on price transparency provided by emerging insurance distributors

Boston, MA, February 11, 2002 -- Compete, Inc., an advisory services firm that delivers customer and competitive intelligence based on the industry's foremost pool of consumer behavior data, has found that consumers are increasingly emphasizing price over brand attributes when selecting an insurance carrier. Compete shows that although traditional insurance carriers have succeeded at attracting consumers to research and manage their insurance policies online, insurance distribution sites have encouraged a significant portion of consumers to select their insurance policies based almost exclusively on price.

Drawing from the clickstream data of more than 10 million active Internet users, Compete analyzed shifting consumer preferences and trends within the property and casualty insurance market from September to November 2001. Segmenting the market between Carriers who underwrite insurance policies, who channel customers to carriers' insurance policies, such as InsWeb, Quotesmith, Insurance.com and Answer Financial, Compete examined the demographic composition, usage and cross-shopping patterns of insurance seekers to diagnose the changing channel dynamics in the insurance industry.

"By minimizing direct contact with insurance carriers, distribution channels compromise the value propositions that allow the carriers to differentiate themselves," according to Derick Sutton, Vice President of Advisory Service for Compete. "Insurance carriers need to discourage price focused consumer behavior and begin developing deeper, service-based relationships that lessen the effects of price sensitivity over time."

The evolving insurance distribution channel

Compete's analysis confirms that the Internet has developed into a critical customer channel in the insurance industry; however, data reveals that the increased traction of distribution sites has begun to siphon direct customer contact away from leading insurance carriers. InsWeb, the largest distributor attracted nearly 400,000 monthly unique visitors over the timeframe monitored, nearly 60% greater than carrier sites Allstate and State Farm, who each averaged under 250,000 visitors per month. Additionally, newer distribution sites, while not attracting as many monthly consumers as InsWeb are growing at rates faster than those seen among carriers; Quotesmith, Insurance.com and Answer Financial grew 19%, 50% and 137% respectively, compared to an average traffic decline of 1.2% amongst carrier sites.

Compete also shows that consumer behavior at carrier sites can be categorized into two primary activities: policy research/quoting and account management. Excluding homepage views, nearly half of intrasite pageviews were directed toward customer service and account management sections during November. In particular 46% of Allstate and 45% of Nationwide's activity was dedicated to account management during November. Furthermore, customers who accessed online account management and customer service functionality demonstrated higher visitation frequency, exhibiting repeat visits within the month at a rate 12% higher than distribution sites, revealing a new segment of customers with unique insurance preferences and needs.

Although the majority of insurance policies continue to be purchased through the traditional distribution channel, carriers are beginning to use online tactics to influence consumers' ultimate purchase decisions by facilitating quote inquiry and access to policy and agent details. And while carriers are not attracting consumers at the same level as distributors, they are successfully attracting a segment of users who demonstrate strong research and shopping behavior. Progressive, Nationwide and Allstate garnered quoting activity representing 51%, 42% and 35% of their non-homepage pageviews, respectively, and 10% of Allstate's pageviews were directed toward offline agent information. Further, the average number of pageviews per visitor on carrier sites is double that of distribution sites, indicating that consumers who research policies on carrier sites are exposed to carriers' unique service-oriented propositions, and that this impacts their policy selection.

Price versus brand preferences

Compete's analysis of consumer demographics and user flows in and out of insurance sites, an indication of cross-shopping behavior, underscores the concentration of these two distinct consumer segments. During the months evaluated, three out of the top five destination sites from InsWeb were to competing distributor sites, whereas the top four insurance destination sites from GEICO were to competing insurance carriers. These patterns suggest cross-shopping behavior for the two segments, each with unique preferences: price shoppers who leverage distribution channels to gain comprehensive pricing knowledge, and brand shoppers who research carriers based on their association with trusted insurance brands. Further, demographic differences indicate that distribution sites attracted 7.4% more visitors from households reporting income over $60K per year and 8.5% more visitors over the age of 35 as compared to insurance carriers.

"On one hand, distributors expand the market reach for carriers by broadening their channel," said Sutton. "On the other hand, distributors channel customers to the low-cost provider more often than not, exacerbating price sensitivity and policy churn. We see two distinct customer types emerging in the insurance market: churn-prone, price-focused purchasers who view insurance merely as a commodity product, and service-oriented, brand-focused customers who perceive their policies as a differentiated service. Clearly the challenge for insurance carriers is to enable the latter, without jeopardizing their channel."

Ultimately, the challenge facing insurance carriers is to bridge the gap between the brand-focused customers they successfully attract and the price-focused customers siphoned by distribution sites. Although few carriers are meeting this challenge, Progressive emerges as an insurance carrier that has been able to successfully bridge brand and pricing transparency. Progressive offers hassle free pricing transparency to attract price-focused shoppers by publishing unbiased competitive quotes on its homepage, and appeals to brand-oriented consumers with high quality account servicing capabilities.

While Progressive's strategy to provide price transparency has helped them sustain the most consumer traffic among both carriers and distributors - over 475,000 unique visitors in November alone - only one in five quotes served on the Progressive site are priced at or below competitive carriers' quotes. This has enabled Progressive to appeal to both consumer segments equally well. An analysis of destination sites indicates that consumers actively keep Progressive in their purchase consideration set, making it the only company to appear in the top five destination sites for both carriers and distributors.

Moving forward, distribution sites will likely introduce customer service initiatives to infringe on carriers' customer relationships, promoting increased price sensitivity and encouraging policy churn. While many consumers will continue to initiate their policies through price-based distribution sites, carriers can mitigate the long-term impact of distributors by reinforcing their differentiated service benefits to discourage churn, yet maintaining a vibrant channel for new customer growth.

Recommendations for the Insurance Market

Based on its analysis, Compete recommends that insurance carriers employ the following strategies to more effectively attract and retain insurance customers:

• Associate a relationship to each policy: Reinforce branded customer relationships in which customers view policies as a differentiated service versus a commodity. As more customers turn to the Internet to manage their existing accounts, incumbent insurers have an opportunity to strengthen their brand and service offerings to minimize long-term policy churn.

• Satisfy Consumers' Need For Transparency: Expedite the quoting process by giving consumers access to competing quotes. Transparency instills an element of trust that insurance buyers seek -- and will ultimately be achieved through cross shopping activity and/or through a distribution site. Progressive's strategy to publish competitive quotes, indicates that carriers can encourage insurance buyers to look beyond price.

• Recognize dynamic consumer behavior: Consumers do not display consistent purchasing and browsing behavior over time. As consumer segments adopt different behavior in regards to their insurance needs, carriers should recognize and monitor these trends to reduce consumer defection as well as detect immediate acquisition opportunities.