KPMG Analysis: Around The World, E-Insurance Still ‘Five Years Away’

By Andrew Rosenbaum, Senior Editor, Insurance Insider (April 3 2001)

April, 2001 – At the height of the dot-com craze, a lot of dire predictions were
being issued about how the online revolution would displace large numbers of insurance
agents. But today, the widespread acceptance of online insurance sales remains a goal
that’s sitting on a distant horizon.

In 1999, only 0.2 percent of personal lines insurance
policies were sold online in the United States, according to a study by Zurich-based
reinsurer Swiss Re. While online auto insurance is catching hold in the United Kingdom and
some parts of Europe, Datamonitor expects that only about 2 percent of total insurance
sales in the EU countries and Switzerland will come from the Internet by the end of this
year. Asia is, and is expected to remain, out of the picture for the near future.

So has the online insurance revolution fizzled out and
become yet another victim of the dot-com disaster? “It’s very early to
judge,” says Simon Poole, director and head of insurance at KPMG’s Corporate Finance
practice in London. “But it is clear that growth has not been explosive anywhere in
the world. A few of the B2B sites are beginning to see success, but, apart from some
growth in motor insurance, the story is a short one,” Poole says.

“This does not mean that the potential isn’t
there,” adds Poole, “but it’s just at the outset of being explored.”

It is also becoming clear that the online channel is not
likely to dominate all of the others, as some predicted. “Everybody won’t be
online–a few should dominate online, but online won’t necessarily dominate the
market,” says Keith Nicholson, executive partner with KPMG’s Assurance practice in London.

A number of market observers say the widespread
distribution of insurance products online remains a good five years away. According to a
Swiss Re forecast, about 8 percent of personal lines insurance will be sold online in the
United States in 2006–a significant amount, but not a world-shaking one. In Europe, that
amount will only be 4 percent, the Swiss Re study predicts.

Others are more optimistic about the growth of online
insurance distribution, saying that the efficiencies gained by offering coverage on the
Web can allow them to offer lower premiums and improved customer service.

“In five years,” says Peter Wood, chairman of
esure, the London-based Internet insurance venture of Halifax Bank, “direct telephone
sales of insurance will be history, just as high street insurance brokers became history
when direct sales took off.”

For Wood, who pioneered telephone sales-based motor insurer
Direct Line, there is no mystery about how to succeed as a retail insurer on the Internet.
“You have to give the consumer a real incentive to use the new channel,” Wood
says, ”and you have to keep your expense ratio down.”

Wood says the expense ratios of British insurers average
30.7 percent, while, in comparison Direct Line is around 10 percent. He says further
reductions through online sales will boost the chances of esure, which, backed by GBP 150
million from Halifax, will offer home, travel and other personal lines products.

Wood’s intention is to repeat the kind of success he saw at Direct Line, using the new
channel to keep costs low and offering sizeable discounts on premiums.

That formula does not seem to have worked in Germany,
though, where several insurers have invested heavily in online distribution but
haven’t reaped much of a reward. “One insurer here could only boast 10 sales
after months of work and investment in a Web site,” says Eva Dewor, a partner with
KCA Consulting working in the financial services insurance practice.

This inability to develop the channel has discouraged most
insurers from offering products directly to consumers, according to Dewor, but many are
still interested in B2B. Munich-based Allianz plans to build a Web portal to support
real-time communication and transactions with their broker channel. There are also plans
to deliver personalized e-business services that integrate the insurer’s policy
administration systems and business processes with the Web.

All of this is still in the planning stage. At Swiss Re and
Munich Re, a new B2B portal called Inreon was launched this year. This Internet-based
reinsurance exchange will initially concentrate on property business in the United States,
the UK, France, Germany, the Netherlands, Italy, Belgium and Spain. Swiss Re also runs
Elrix, a risk exchange for smaller insurers.

But both of these exchanges are just starting out, and
their volume of business has yet to build up. Paris-based Scor and Bermuda-based Partner
Re are the only announced participants so far.

Meanwhile, Munich-based Gothaer Re launched Reway in
January as a one-stop electronic marketplace in which primary insurers and reinsurers can
exchange information, negotiate risks and conclude binding contracts.

“All of these sites have enormous potential,” says Dewor, “but they
will have to build the confidence of the industry, and that will take some time.”

These early e-commerce developments have not been matched
in southern Europe, according to Alberto Olindo, a partner in the Milan-based online broker ASSIBIT.

“In Italy, for example, most of the online insurance
activity is still in the stage of marketing and communication,” Olindo says.
“There is only a very small amount of real business being done, and not all of the
regulatory questions have been worked out.”

The relatively low level of Internet penetration in
southern Europe continues to dog would-be online insurers, Olindo says. Still, Olindo
says, e-brokers are able to provide the Italian public with price transparency for
insurance that has never before been available.

Perhaps not surprisingly, there has been a great deal more
online insurance activity in the New World than the Old. Still, the U.S. numbers are
somewhat disappointing for insurers. According to the Cambridge, Mass.-based Internet
consultant Forrester Research, of the $265 million spent for Internet purchases of
insurance in the U.S. in 1999, $150 million was for automobile policies, $90 million for
life insurance and $25 million for homeowner and renter coverage.

“The use of the Web should eventually transform the
insurance industry in the U.S.,” says Barry Rabkin, a senior manager with KPMG
Consulting, Inc. in Boston. “The cost savings are there, both for the client and the
insurer. But we have only just begun to access them,” Rabkin says.

Rabkin points to the life insurance market as an example.
Only a few insurers in the U.S. sell life insurance on the Web, because the product is
generally considered too complicated for online sales.

“In fact, term life insurance is not all that
complicated,” Rabkin says. “There are a number of successful sites where
financial service providers sell annuities, and an annuity is a truly complex product. If
consumers can handle annuity sales online, surely they can manage to grasp term life insurance.”

Boston-based insurer John Hancock last year began selling
life insurance on the Web, offering deep discounts–a move that Rabkin calls logical.

U.S. property and casualty insurers are also moving to make
use of the new channel, but, like their life counterparts, they are finding that the seas can be rough.

“A number of P/C insurers moved too quickly to get on
the Net, without formulating a thorough strategy,” says Clint Harris, vice president
of insurance research and publications at the Hartford-based consulting firm Conning & Company.

A Conning study notes that initially insurers believed that
the Internet would be a major source of new sales. But, in reality, online sales have
accounted for only about 1 percent of today’s personal line property-casualty premium, the study shows.

“Part of the problem was a failure on the part of many
insurers to recognize where their business was likely to come from, and to design products
and systems that would tap into that market,” Harris says. “It has not been
uncommon for insurers with strong agency networks, for example, to spend heavily on
systems that provided direct-to-consumer online applications. They learned that building
it and driving an audience to it were two different things.”

One area where the Web has truly disappointed insurers,
says Harris, is lead generation. “It was thought that clients would initially make
contact via the Web, and that afterwards the lead could be followed up by agents on the telephone.”

What insurers found, instead, is that clients who sought
information on the Web did so to avoid having to speak to someone on the phone, Harris
explains. “It became counterproductive,” he says.

Some insurers are trying to launch B2B applications on the
Web, especially for communicating with their agents. “Allstate, for example, has
taken a determinedly multichannel approach with its agents,” Rabkin says. “They
have to be prepared to share information using every electronic means, and this is one
area where online communication is working.” American International Group, Kemper and
Prudential announced plans in February 2001 for a Web-based agency that would allow
consumers to research and buy personal lines products. The companies plan to launch the
exchange in the fall of 2001.

The Hartford is another insurer using the Web to help
agents communicate with business clients. The company’s @venture e-business tool
provides its specialty lines clients and agents with customized access to information.

One American company, Progressive, is making an aggressive
bid for the wireless market, according to the company’s Internet business leader,
Alan Bauer. The company is in the process of implementing a site where auto insurance
transactions can be made via wireless phones and handheld devices. “It’s a new
space, and no one knows how it will work out,” comments Rabkin.

With all this experimentation in the U.S. and in Europe,
one might think that the Asian market would provide a slew of interesting examples as well.

“In fact, there is almost nothing,” says Steven
Roder, KPMG’s Assurance Line-of-Business chairman for Asia. “Across the
Continent, almost all insurance sales are handled by tight, apparently irreplaceable
networks of agents,” Roder says.

One surprising fact, according to Roder, is that many Asian
insurers don’t have the strong back-office support systems found in the United States and Europe.

“I’ve seen some that don’t even have e-mail,” Roder says, “so you can
imagine how long it will be before they start selling on the Web.”

Some foreign firms moving into Asia have had some degree of
success. The UK’s Royal & SunAlliance has launched a direct-sale site in Thailand
that the carrier predicts will do 54 million baht ($1.2 million) worth of business this year.

In Japan, a country where foreign insurers only have access
to about 9 percent of the market, Zurich and Royal & SunAlliance are both making
aggressive efforts to open direct channels, Roder says.

As for B2B in Asia, Roder says it is really just in the planning stage.

“It will be another five years before this channel
becomes a major market force,” Roder adds.

Sound familiar?

All information provided is of a general nature and is not
intended to address the circumstances of any particular individual or entity. Although
KPMG endeavor’s to provide accurate and timely information, there can be no guarantee
that such information is accurate as of the date it is received or that it will continue
to be accurate in the future. No one should act upon such information without appropriate
professional advice after a thorough examination of the facts of a particular situation.

Article reprinted from the Insurance Insider, Copyright ©
2001 KPMG LLP, the U.S. member firm of KPMG International, a Swiss association. Printed in
the U.S.A. Reprinted with permission of KPMG LLP. All Rights Reserved.

For additional industry news and information, please access KPMG’s Banking,
Consumer Markets, or Insurance Insiders on the Internet at