All things considered: consumers are looking for more than low prices when they shop for insurance online. (Technology: Online Selling).

Insurance sold over the Internet will account for more than $5 billion in premiums in 2002. This amount represents a three-fold in crease since 2000, and online sales are expected to jump to more than $12 billion in 2005, representing 1.5% of total net premiums written for automobile homeowners, renters and life insurance, according to a 2001 online insurance study by Booz Allen Hamilton.

Even these figures, however, vastly underestimate how much the Internet has and will influence consumer behavior and insurance-purchasing decisions. For every consumer who buys an insurance policy online or completes most of the buying process online, Forrester Research estimated that five will have used the Internet to "influence" their purchasing decision. Various sources, including PG Data, Nielsen/NetRatings and Booz Allen Hamilton, estimate that more than 10 million consumers research insurance online each month. The Internet is clearly proving to be a credible, viable and critical tool to acquire customers.

It's an enormous market that will only grow larger. To compete successfully for Internet shoppers, insurers must understand what drives their buying decisions.

Who Is Online?

The 2001 UCLA Internet Project gathered compelling data that the Internet is now a mainstream force in American life. Its use pervades all age groups, education levels and incomes. The project found that 72% of Americans went online in 2001, up from 67% in 2000, and that 49% of Internet users made online purchases in 2001. Among respondents not yet online in 2001, 44% expect to go online within 12 months, up from 40% in 2000.

As the Internet becomes more mainstream, one would expect that the online consumer will start looking and behaving more like offline consumers. Examination of three demographic characteristics--gender, home ownership and age--confirms that general trends in the population are also evident in online consumer data.

A recent analysis of more than 500,000 profiles of consumers shopping for auto insurance at InsWeb, an online insurance marketplace, further highlights the increasing similarity between online and offline consumer demographics. For example, according to the U.S. Census Bureau's 2000 data, 51% of the population age 18 years or older is female. InsWeb's 2001 analysis found that roughly 43% of consumers shopping online for auto insurance were women, compared with 37% of online shoppers in 1999. This is a dramatic increase in less than two years.

InsWeb also found that homeowners accounted for nearly 47% of those looking for auto insurance online in 2001, compared with less than 40% during the same period in 1999. This overall homeowner growth correlates to U.S. Census Bureau data showing that homeownership rose from 58% to 66% in the last decade. InsWeb's data also suggested that 24% were between the ages of 35 and 44, and 15% were between the ages of 45 and 54. This compares to the Census data that suggest that of people age 18 years or older, 22% were between the ages of 35 and 44 and 18% were between the ages 45 and 54. While the demographics of consumers shopping for insurance online still don't fully mirror those of the U.S. population at large, they are rapidly moving in that direction.

The Cost of Insurance

According to the Insurance Information Institute's Fact Book 2001, the average expenditure on personal auto insurance in 1998 (the most recent year for which actual aggregate insurance industry data exist) was about $700 per vehicle insured. However, since a typical household has, on average, 1.6 vehicles, the average per-household expenditure on auto insurance in 1998 was about $1,100. In addition, the Bureau of Labor and Statistics suggests that consumers spend roughly $400 on life and other personal insurance during the year. The combined total expenditure of $1,500 a year on life and auto insurance represents about 3.4% of the typical household's estimated annual pretax income.

Although auto insurance costs were expected to remain close to 1998 levels through 2000, the Insurance Information Institute estimated that these costs rose an average of about 6% in 2001 and are expected to increase similarly in 2002. InsWeb's analysis of its data suggests that prices in 2001 rose about 10% over 2000, with a similar rate of increase over the past several months of this year.

Given the rising cost of personal auto insurance, one would expect the typical insurance consumer to be a price-conscious shopper. For online insurance consumers at a Web site that enables them to compare prices and other factors, price would likely play a major role in their decision to purchase insurance from a particular carrier. The question, therefore, is: How much does price influence a consumer's decision to buy an insurance policy?

Price's Role

It would be difficult, if not impossible, for an individual insurance company to know how much price influenced a consumer's decision to buy a policy through that company's Web site. To assess this, the company would need to know what the consumer was previously paying, what the motivation for shopping or switching was, where he or she had been to shop and the amount of money the consumer had saved by switching. While most carriers have difficulty accessing this type of information, online insurance marketplaces provide a unique means for analyzing consumers' buying behavior and, specifically, how buying behavior is affected when the consumer is presented with more than one price quote. InsWeb has aggregated such data.

During the fourth quarter of 2001, InsWeb presented nearly 1.3 million auto insurance quotes to more than 700,000 consumers. Currently, InsWeb offers auto insurance consumers an average of two quotes per query. As the number of quotes presented increases, InsWeb will increasingly qualify as an adequate indicator of how price affects consumer behavior. A deeper look at the data provides some valuable insights. On average, consumers picked the lowest price eight out of 10 times. Interestingly, though, as more quotes were presented, consumers were less likely to pick the lowest price. (See 'The Role of Price in Buying Auto Insurance," above.)

When six or more quotes were presented to a consumer, the consumer did not pick the lowest price roughly three out of 10 times. In addition, more than 10% of the consumers picked a carrier that presented a quote that was more than 20% higher than the lowest price presented. Looking at the data by consumer risk profile reveals another (yet not unexpected) pattern. Within the group of consumers who saw six or more quotes, those in the preferred-risk tier did not pick the lowest price nearly five out of 10 times. These figures were based on InsWeb's analysis of more than 300,000 consumers who saw at least six quotes.

Term Life Buyer Behavior

InsWeb's analysis of term life data suggests that consumers are even less likely to make their decision based on price for this product. On average, about half of all consumers picked a carrier based on the lowest price presented. Again, as more quotes were presented, fewer consumers chose the lowest price. (See "The Role of Price in Buying Term Life Insurance," right.)

There are several reasons consumers are less likely to pick a carrier based on price when choosing term life insurance as compared with when they are making a decision about their auto insurance. The following outlines some of the factors.

As mentioned previously, the average cost of insuring the automobiles in a typical household could well exceed $1,100. This is roughly three to four times the amount it costs for a typical term life insurance policy. Furthermore, price differences for auto insurance vary significantly from carrier to carrier. A recent study by Progressive Insurance Co. suggested that prices vary by as much as $500 for a typical six-month policy. Also, since the typical term life policy costs around $400, it is conceivable that the consumer is more likely to pick a carrier with a well-recognized brand name, rather than trying to save a few dollars.

An additional element, although subtle, is that consumers must have auto insurance, whereas term life insurance is purely an optional coverage. Many consumers, especially younger ones, select the minimum liability limits prescribed by law, and as such, are likely to pick the "low-priced" carrier. Another factor that influences the different behavior is that consumers who are looking for term life insurance are slightly older than consumers who are shopping for auto insurance. Younger consumers tend to be more price conscious (even within the auto insurance market), while older consumers tend to be more conscious of the protection they receive. Finally, the fact that a consumer picks the lowest-priced carrier doesn't necessarily mean that price was the sole reason for that choice.

While the figures above (for both auto and term life) are broad averages, further analysis by carrier suggests that for those carriers who have powerful, nationally recognized brands, price became even less of an issue. So, while it would be fair to say that price is a key factor in a consumer s decision to pick an insurer, it is by no means the only factor.

Other Factors

Analysis shows that there are several distinctly identifiable factors that influence to varying degrees a consumer s decision in choosing a carrier. These factors include the brand strength and financial strength of the carrier, the perceived level of service offered by the carrier and the presence or absence of a "life event."

Significant life events that affect a consumer's motivation to shop for and buy an insurance policy include recent claim experience, the receipt of a price change (usually a large increase) with the notice to renew the policy coverage for an additional term, the addition of a driver (usually a youthful operator), the addition of a vehicle and the physical move from one location to another. In addition, concerning the purchase of term life insurance, life events could include marriage, the birth of a child or the death of a family member.

The evidence points to the fact that consumers who shop for insurance online look and behave very much like consumers who shop for insurance offline. The evidence also suggests that while price is an important consideration for the typical insurance shopper, it is not the only factor that influences a consumer's decision to pick a given carrier. While recent media attention has discussed insurance becoming more of a commodity, there is plenty of evidence to the contrary. When presented with sufficient information and sufficient alternatives, consumers will make a rational decision to buy their insurance coverage considering many factors, including price.

The Role of Price in Buying Term Life Insurance

InsWeb's analysis of term life data suggests that about half of
consumers are likely to make their decision based on price for this
product.

Number of Quotes    % Choosing
Given to Consumer  Lowest Price

2-4                     68
5-7                     51
8-9                     47
10 or more              47
Total                   53

Source: InsWeb corp. [C]2002
The Role of Price in Buying Auto Insurance

InsWeb presented nearly 1.3 million auto insurance quotes to more than
700,000 consumers. On average, consumers chose the lowest price eight
out of 10 times. As more quotes were presented, consumers were less
likely to choose the lowest price.

% of Consumers

No. of Quotes Presented to Consumer  % Choosing Lowest Price

2                                             89.7%
3                                             84.3%
4                                             80.9%
5                                             77.9%
6+                                            70.8%

Source: Ins Web Corp. [C] 2002

Note: Table made from line graph

Kiran Rasaretnam is senior vice president of finance and chief actuary of Ins Web Corp., Gold River, Calif.