One on One.

Insurers need to re-engineer the distribution process to reap the lower costs of direct marketing.

By the end of this year, an estimated 412 insurers will be marketing directly to consumers, and their efforts will have translated into more than $100 billion of in-force premium.

With its focus on the collection and easy retrieval of information about consumers, direct marketing allows a company to make the right offer to the right person at the right time in the way the prospect or customer chooses. It is advertising intensive, using all media-newspapers, magazines, television, radio, direct mail, telemarketing, billing inserts, package inserts, billboards and the Internet-to deliver offers. It anticipates that its offers will generate response directly from the end user, so it provides communication channels back to the company making the offer via the Internet, the telephone, the mail or personal visit.

Direct marketing is steadily attracting more insurers, and its growth shows no sign of slowing. Ten years ago, only 100 insurers engaged in this distribution system. Last year, about 390 companies produced an estimated $95.5 billion in premium, and the figure is expected to reach $117.2 billion in 2002, according to projections in a study conducted by the WEFA Group for the Direct Marketing Association.

Direct Marketing by Line

In specific product lines, direct-marketing sales are growing faster than the segment as a whole. The growth spurt is most apparent in the automobile segment of the property/casualty business, which will account for 27% of sales this year, up from 13.6% in 1997.

The auto insurance market is an interesting harbinger of the transformation of distribution initiatives. In 1990, eight companies sold auto insurance directly to consumers. By 1999, there were 43, including 15 start-ups.

What is more interesting is that several old-line companies with established brands and an agent force are now selling auto direct. These include Fireman's Fund, Kemper Insurance Cos.- which recently acquired Reliance Insurance Group's direct auto book-Nationwide Group, Safeway Insurance Group, Electric Insurance Co. and All state Insurance Group.

All state, the second-largest U.S. auto insurer, announced its entry into direct sales in November. The Allstate strategy is to integrate multiple distribution channels with the direct-marketing concept.

"Allstate is a company that has always delivered products and services to our customers when and where they wanted, from our earliest days through direct catalog, then through retail stores, and more recently through offices conveniently located in neighborhoods," said Edward M. Liddy, Allstate chairman, president and chief executive officer, referring to Allstate's roots as part of Sears, Roebuck & Co.

Allstate is betting about $1 billion in capital expenditures and operating funds over the next two years to ensure the initiative's success.

Opportunity, Competition, Cost

The efficiency of insurance direct marketing can reduce a company's distribution and maintenance costs. Combined ratios for products delivered through the mail-order distribution channel are lower than for products delivered through the agency-distribution channel.

That results in lower rates. There is a dispassionate disparity between rates for products distributed through the mail-order channel and those distributed through the various agency channels. This does not mean that the agency system is dead. Instead, it is being forced to reinvent itself. The notion of a major insurance company like Allstate developing an integrated distribution system strategy is reasonably convincing evidence that competition is heating up.

New entrants to auto insurance direct sales have seized the opportunity. The pressure put on old-line companies by the remarkable expansion of Geico, American International Group, Hartford Insurance Group--through its contract with AARP--and a dozen other organizations is forcing most insurers to take a hard look at their distribution strategies.

In contrast, State Farm, the largest auto insurer in the United States with 67 million policyholders, has no intention of selling direct. "We plan to continue to use independent contractor agents," State Farm spokesman Joe Johnson said. The company has 16,000 agents in the United States and Canada.

The expansion of the Internet--because of its ability to accumulate data and interact with customers in real time--makes direct marketing even more convenient to embrace.

One of the biggest barriers to instantaneously accepting applications, underwriting and issuing insurance coverage is the lack of uniform protocols for electronic signatures, but that is changing. At least 34 states have adopted some form of electronic signatures, and others are considering similar legislation.

The real barrier to selling insurance through the Internet is the dual requirements of task shifting and transformational thought.

* Task shifting. This is the process by which repetitive analysis--underwriting, for example--requires offline staff and time. For most life insurance coverages, the application is shepherded through the system by an agent. In some cases, guaranteed-issue products require no underwriting and can be issued immediately. For auto insurance systems often are hard wired into state databanks, making driving records instantly available. Moreover, risk-assessment information contained in databases like those provided by Choicepoint Inc. further support instant underwriting for this product.

The purpose of task shifting is to reduce underwriting expenses. Lower underwriting expenses and less time spent in the underwriting process convert into rate savings.

* Transformational thinking. The tools may be in place for direct sales over the Internet. But many insurance professionals have yet to grasp the potential of the instant gratification offered by the Internet: Go to an auto insurer on the Web, fill out an application, receive acceptance, pay for your auto premium with a credit card and download your insurance card and policy onto your own printer. The transaction time and cost is far lower than an agent transaction.

Adapting to Change

Historically, a sale is made when payment is received and the goods delivered. The convolutions of old insurance business models applied to this new interactive media environment simply do not work. A handful of companies are accepting applications and payment and are issuing policies over the Internet. Once mastered for all types of products, direct marketing of insurance will explode. It is not inconceivable that some day one-third of every premium dollar written in personal lines may come from direct marketing.

Donald R. Jackson is chairman of the Jackson Consulting Group, Ltd., Middletown Del. This article is an excerpt from Insurance Direct Marketing 2000,A Special Report on the Companies, the Practices, the Standards & the Benchmarks, to be published in June.

                    Direct Marketing of Insurance Grows
            The number of insurers engaged in direct marketing
            has climbed from about 100 in 1990 to about 390 in
                                   1999.
1997  $72.2 billion
1998  $84.6 billion
1999  $95.5 billion [*]
2000 $106.5 billion [*]
2002 $117.2 billion [*]
(*.)Estimated
Source: Jackson Consulting Group, WEFA Group,
Direct Marketing Association.