Life Online.

To increase individual life insurance sales on the Internet, a company must overcome market-entry barriers, generate greater consumer awareness and improve opportunities for cross selling.

Although the Web has already found a place as a distribution channel in some financial-services sectors, including banks and brokerages, its ultimate role in life insurance is not yet clear. Many in the industry still are pondering whether the Internet is suitable for life insurance commerce, which life products are being marketed on the Internet by which companies and how the Internet will affect the future of life insurance marketing and sales.

To increase individual life insurance sales on the Internet, a company must overcome market-entry barriers, generate greater consumer awareness and improve opportunities for cross selling. An effective Internet strategy will require cross selling to a certain proportion of existing customers and the ability to reduce distribution expenses well below current, traditional new-customer acquisition costs.

Insurers collect a certain amount of demographic information on every applicant and warehouse the data in their administrative systems. Now is the time to mine the demographic data to produce multiple sales and a larger share of the wallet. The success of many of the online brokerage Web sites demonstrates this potential.

In the end, however, the success of individual life insurance sales on the Web will depend on:

* Customer Price Sensitivity. Internet shoppers and term buyers are extremely price sensitive. The ease of comparing products on the Web and commodification make it essential that one offer attractive products.

* Consumer Self-Reliance. Because Internet-savvy baby boomers and generation Xers are more knowledgeable about their financial needs, they need less hand-holding. Older individuals with more complex financial needs may require advice from agents but will utilize company Web sites for service.

* Technology Capabilities. Internet supermarkets/malls far exceed the capabilities of single-company Web sites. Therefore, an insurer must have the ability to quote for a wide range of customer characteristics and underwriting conditions and conduct real-time, online transactions.

* Broader Product Reach. An insurer will have to broaden its product offerings beyond term life to include universal life, variable universal life, annuities and possibly long-term-care and disability income coverages.

According to Tillinghast's latest survey of life insurance company chief executives, the No. 1 issue facing the industry is the effectiveness and productivity of distribution systems (See "Distribution Is the No. 1 Concern in Financial Services," below). This concern has topped the list in the last three chief executive officer surveys.

Insurers are exploring the Internet as a viable channel for life insurance distribution. Chief executives assume the Internet will provide an opportunity to incorporate cost efficiencies in the pricing of products. The ability of the Internet to distribute products at lower premium rates worries traditional distributors. U.S. insurers already are starting to feel the heat from new competitors that don't have to worry about unhappy agents and other distribution conflicts or the potential cannibalization of in-force blocks of business.

Based on a survey in 2000, typical Web users are good prospects for life insurance products (See "Web Users Are Attractive Prospects for Life Products," page 119). The Internet provides real value to consumers shopping for financial services. It makes comparison shopping easy and convenient. In addition, Web sites offer interactive needs analysis and freedom from high-pressure sales tactics. All of these advantages can be applied to life insurance.

Life on the 'Net

To date, most traditional life insurers have adopted a relatively cautious approach to the Internet. Many single-company Web sites provide only product information, and may be used as a lead generator for agent-assisted sales. Most of the online sales activity is initiated by third-party Web sites, including aggregators that serve as online quote services, individual agent sites and agency group sites.

To some extent, these Internet intermediaries can be viewed as Web-enabled traditional agencies. They sell products from multiple companies, collect full retail commissions for sales or referral fees for lead generation and are supported by call centers staffed by employees who are licensed life insurance agents. These Web-enabled agencies differ from traditional agencies in that their primary goal is to draw traffic to their Web sites, which generally is done by multimedia advertising or by forming alliances with Bank and brokerage Web sites that also market insurance. Even though both sources operate as supermarkets for mutual funds, brokerage companies such as Fidelity Investments and Charles Schwab are attempting to brand their own insurance products. At present, it is unclear what direction banks will take in selling life insurance on the Internet.

Even though the Internet is being used to generate leads, most of these sales still are completed in a traditional fashion--with a paper application and lots of manual intervention. This is changing, however, as companies move more of their new business processing to the Web.

Coming to Term

Term insurance has been the life product most often sold over the Internet. Term insurance is simpler in design than other products and lends itself to Internet selling. The growth of supermarket/mall sites has helped to exert downward pressure on term premium rates. The major players in the term insurance market offer extremely competitive rates. In most cases, the sales involve products that pay full retail commissions. Most of the large term writers have felt compelled to offer products on the Internet that are comparable to those offered through traditional agent distributors. They also offer comparable products to avoid distribution-channel conflict. Ironically, most Internet intermediaries require full commissions to cover their costs. Given the low premium rates on term, even a full retail commission rate generates a relatively low dollar amount of income. This may change as Internet intermediaries sell an increasing amount of business.

As individuals become more comfortable with purchasing life insurance through the Internet, the opportunity to sell a broader range of life insurance products will increase. A natural extension would be to market a term product with a side fund--such as universal life or variable universal life.

Individuals with term insurance may wish to take advantage of the tax benefits of life insurance (tax-free deferral of investment earnings and the income tax-free status of death benefits) to make side fund contributions. Providing such benefits through an attractive product with lower loads (most likely driven by lower distribution costs) may enhance the appeal.

The more traditional life insurance sale typically focuses on more affluent individuals. These policies typically feature larger face amounts and emphasize estate protection or business applications. Whether this can be accomplished online without the services of an agent who understands life insurance remains to be seen.

Life insurers also are experimenting with the sale of annuities on the Internet. One such venture-AnnuityNet--was set up to target this area directly, and other low-load providers are seeing more of their sales come through the Internet.

Marketing Trends

In the traditional distribution of term products, highly competitive premium rates and market-level commissions have driven sales. Term insurance marketed on the Internet is even more price sensitive. To generate significant sales from the major quote services, an insurer's premiums generally must fall within the five best rates quoted. To remain competitive, companies should consider trade-offs on returns or substantial subsidies coming from:

* reductions in distribution costs;

* reductions in processing and service costs; and

* an accurate forecast of the level of expected mortality.

The competitiveness of the term insurance market has led many major players to increase their number of preferred underwriting classes. The assessment of expected mortality is the critical factor shaping the premium rate structure. The characteristics of the typical Internet buyer should place many risks among the preferred ranks. Thus, as long as the mortality experience is consistent with the levels expected, price sensitivity will remain a major force.

Pricing of term products has demonstrated that a reduction in distribution costs will result in a smaller decrease in premium rates than a comparable reduction in the level of mortality. With losses flowing from current expenses in technology, marketing and brand awareness related to Web site start-ups, distribution costs are not likely to decrease soon. Hence, achieving the best possible mortality-based pricing and cross sales will be crucial to market success.

The Internet may provide opportunities to reduce commissions and distribution costs while avoiding distribution-channel conflict. The potential to lower distribution costs will come from a change in Internet intermediaries, for example:

* the emergence of financial-planning Web sites that will accept lower commissions and fees and whose sales are generated by identified needs (for example, Pro Act Technologies);

* the possibility of sales through affinity Web sites such as those that are oriented toward life events, such as the birth of a baby or retirement;

* the use of new low- or no-commission products designed for insurance supermarket/malls; and

* the growth in Internet banking and brokerage Web sites, leading to more opportunities for cross sales through joint ventures.

In addition, Internet marketing may help companies achieve certain economies of scale, leading to lower distribution and operating costs. These economies may derive from:

* increased productivity of lower-cost intermediaries;

* free advertising from articles in the media;

* lower underwriting costs through electronic systems;

* lower processing costs at issue and higher placement rates; and

* lower policy administration and servicing costs via Web-enabled processes.

Sales Potential

While online life insurance activity appears healthy, actual online sales seem somewhat less so. A review of two popular quote-service Web sites showed the following activity:

* InsWeb had 1.7 million completed shopping sessions from 2.9 million unique visitors in the first nine months of 2000. But experience shows they typically lose four of five customers post-underwriting when individuals did not qualify for the rate quoted.

* Although Quotesmith provided 2.5 million quotes in 1999 (the most recent data available), only 17,786 policies were sold-a conversion rate of only 0.7%. This could be a result of the 100-plus-day lag time between date of application and date of issue.

As an alternative, a life company could expand its own Web site to focus more on selling products. This may provide an opportunity to be more innovative with product design by incorporating Internet economies into pricing, and with services by offering needs analysis, application completion, real-time underwriting and process follow-up. An insurer, however, must deal with significant cost issues in driving customers to its site, while managing potential distribution channel conflicts. Key questions for management to ask include:

* Can we effectively reach out to current customers via the Internet?

* How does an insurer's existing distribution system get involved?

* Are consumers responsive to these entreaties?

During the last hour, more than 25,000 individuals became new users of the Internet-and, therefore, potential prospects for Web-generated life insurance sales. Are you ready for e-business?

Larry N. Stern is executive vice president and group head, Financial Solutions, Scottish Re (U.S.), Charlotte, N.C. John M. Fenton is a principal of Tillinghast-Towers Perrin in Atlanta and head of the firm's financial services product suite practice.

         Distribution is the No. 1 Concern in Financial Services
Rank  Banking          Investment Management   Life Insurance
 1    Competition      Distribution            Distribution
 2    Changing market  Information Technology  Competition
      demands
 3    Distribution     Competition             Changing market
                                               demands
 4    People           Changing market         Expense
      Management       demands                 management
 5    Expense          Product performance     Information
      management                               technology
Rank  P/C Insurance
 1    Distribution
 2    Competition
 3    Information
      Technology
 4    Expense
      management
 5    Changing market
      demands

Web Users Are Attractive Prospects for Life Products

Profile of Internet users

Age: 18-54: 91%

Gender: Men, 52%; Women, 48%

Household Income: $50,000 and higher, 68%

Education: Minimum of bachelor's degree, 79%

Occupation: Professional, management, 40%