General Agents Make An Internet Play.

The Internet gives insurance wholesalers the reach to move from regional to national--and command a bigger share via the virtual marketplace.

Insurers are about to be blindsided by a group of traditional channel partners using dot-com strategies to circumvent the traditional primary insurance distribution channel. Life/health general agents, property/casualty managing general agents and other managing general underwriters are developing this new business model. These virtual managing underwriters may prove to be the first practical vision of the virtual insurance company concept.

Channel Conflict Abounds

General agents, managing general agents and managing general underwriters have long offered insurers an alternative method of working with an independent agent that is cost effective for smaller insurers and practical for niche lines of larger carriers. Several of these wholesalers are now aggressively pursuing dot-com strategies by connecting their retail agents to the Internet and providing direct access for policyholders. In many cases, this expansion will include providing full transactional capabilities for quoting, policy issuing, claims and service. The scope of their agreements with insurers is being broadened to include national contracts with expanded responsibilities. In some cases, the virtual managing underwriter is getting exclusive Internet-access rights to the contracting insurance company.

Virtual managing underwriters are developing Web-enabled outsourcing of all major insurance functions. Although early business models still rely on traditional insurance companies as their source for risk assumption, it is likely these virtual operations will seek alternatives and additional capacity from the reinsurance marketplace.

Reinsurers--the ultimate risk takers--also are poised to circumvent primary insurers because of the consolidation that has taken place and the overcapacity that exists in that marketplace. Reinsurers have ventured into the primary market before, but usually it was in the large commercial marketplace. The advent of virtual managing underwriters will allow reinsurers to use the shell primary insurance companies that most of them have on the shelf waiting for the right opportunity.

Virtual Evolution

By 2005, technology-based virtual insurance companies will command 20% of life and property/casualty retail underwriting markets, according to projections by Meta Group. Commodity-like pricing will force many insurers to shed costly infrastructure and focus on process and service innovation. As that happens, virtual insurance companies will evolve with advanced underwriting and claims capabilities that will use electronic commerce to build brand identity and forge customer relationships.

General agents, managing general agents and managing general underwriters have several inherent advantages over traditional insurers that will contribute to their early success in the evolution of virtual insurance companies. They include:

* an entrepreneurial culture that provides a time-to-market advantage;

* a core competency in distribution and working directly with customers to provide service;

* freedom from the financial reporting constraints of Wall Street;

* less onerous state regulation with no solvency concerns; and

* the ability to raise and spend venture capital at Internet valuations.

As a result of these advantages, the percentage of independent-agent transactions conducted through general agents, managing general agents and managing general underwriters will likely double by 2003. Meta Group also expects this virtual distribution channel to become viable for all primary insurance companies that identify their core competency as risk selection and choose to become pure product manufacturers or packagers. As banks and other financial institutions ponder insurance investments, virtual managing underwriters will allow them to enter the risk-taking business without creating the huge infrastructure normally associated with the insurance business.

Developing the Model

Here are some examples of companies at the forefront of this trend:

* BenefitMall.com is the dot-com incarnation of Centerstone Insurance & Financial Services, which spun off from Humana Inc. last year. It bills itself as "the complete online marketplace for small business employee benefits." BenefitMall.com is a portal that offers pertinent information, plan-design options and quoting to small-business buyers and provides an extranet to assist agents and brokers to close deals and service existing business. It makes no attempt to disintermediate agents and brokers; rather, it allows them to, in effect, "private label" the functionality of BenefitMall.com for their own purposes. It sees the independent agency system as a cornerstone to their business model and recently acquired several agencies. BenefitMall.com has contracts with more than 80 insurers, is admitted in all states and surpassed $400 million in Internet-enabled premium last year. With recent acquisitions, it expects to see $750 million in premium this year. In November, it announced nine national contracts with m ajor insurers, including Metropolitan Life Insurance Co., Mutual of Omaha and Prudential Insurance Company of America.

* On the property/casualty side, YouZoom Inc. is the dot-com incarnation of Arrowhead General Insurance Agency. Arrowhead writes more than $300 million in premium and represents many insurance companies. YouZoom.com is presented as a portal and extranet that will allow independent agents to market, sell and service business over the Internet. In December, the company went live with 11 agent and broker sites selling auto insurance in California. YouZoom is providing each agent with a hosted private-label version of YouZoom's Web presence and technology. YouZoom is expanding its writings into five additional states this year. It planned to add homeowners in California by March and intends to add life and health products in the future.

* For life insurance and annuities, Poage Center Insurance Services, a general agent representing more than 30 insurance companies, recently signed an agreement to administer application processing, case management and policy issuance with QuickQuote, a life insurance marketplace. QuickQuote offers comparative quoting directly to the public; it also acts as a general agent through its CyberAgent program. CyberAgent allows any independent agent to "co-brand" with QuickQuote and private label both QuickQuote's comparative quote engine and Poage's back-end servicing.

This combination indicated that being just an aggregator would not be enough to remain competitive. Thus, aggregators themselves will be forced to transform into direct agents or virtual managing underwriters.

Shopping for Software

Software vendors focused on providing enterprise solutions to brick-and-mortar insurance companies increasingly are being asked to respond to the needs of general agents, managing general agents and managing general underwriters who are evaluating the virtual managing underwriters model. Unlike the narrow opportunities that insurance software vendors often see with their insurance company clients, general agents, managing general agents and managing general underwriters seek complete turnkey component solutions on state-of-the-art platforms. These wholesalers are discovering that turnkey systems don't exist, and it is forcing them to modify or Web-enable their existing applications.

On the flip side, software vendors are finding that general agents, managing general agents and managing general underwriters do not have the deep pockets of their traditional insurance company clients. Selling into this space, which is dominated by entrepreneurs, is creating new challenges and forcing vendors to re-examine their marketing plans. Meta Group expects those vendors with component-based solutions that are not weighed down with the burden of supporting legacy applications will be the winners in this new virtual insurance environment. In addition, those vendors who themselves are entrepreneurial are the most likely to succeed in understanding and responding to this virtual-managing-underwriter market.

Bottom Line

Virtual managing underwriters are just one of the many forms of virtual insurance companies that will take shape in the future. To deal with these changes, insurance companies must identify their core business competencies and allow those competencies to drive their business model. New competition and evolving business models will require that traditional insurance companies divest themselves of functions and processes at which the company does not excel. Learning to partner will become an essential business competency so companies can align themselves with the best of breed in various disciplines, whether it is underwriting, distribution, policy processing or claims.

James Kroviak is vice president of the Insurance Information Strategies service of Meta Group, San Diego.