The allure of the Internet: is the emergence of online intermediaries selling group insurance products a threat or an opportunity for insurers and local agents? (Life/Health: Underwriting Insight).

Group insurance carriers have traditionally sought long-term relationships with a limited number of agents who are committed to their success. The carrier cultivates the relationship through extensive training programs, special considerations and attractive compensation packages that reward both sales and persistency. The benefits are agents who are more familiar with the carrier's products and services, a higher close ratio, increased satisfaction and a genuine sense of family.

This traditional system is beginning to change, however, as online intermediaries make inroads. A recent survey of small to midsize group insurance customers of Principal Financial Group revealed that more than 80% have Internet access at work and a dramatically growing desire to use the Internet more for self-service. Carriers are rapidly expanding their online service capabilities to meet this demand (enrollment, billing, payment, benefit access and claim information, etc.). As employer interest in the use of the Internet has grown, so have the number of online intermediaries attempting to capture their business.

According to a Limra International report last year, more than 60% of small to midsize businesses in 2000 used the Internet to deal with other companies and to market their products to new customers. Nearly 50% of Principal Financial Group customers responded that they were "very/somewhat likely" to buy group life or disability insurance direct via the Internet. While the response was somewhat lower for group health insurance, it was still close to 30%.

Insurers, meanwhile, are increasingly forming partnerships with online intermediaries, affinity groups and benefit portals. These partnerships range from simple lead generators to online agencies with comprehensive technology platforms. Actual sales of group products over the Internet have been minimal to date, but that could change as more national carriers add their products to these sites.

Carriers that form these partnerships could see several advantages:

* multiple distribution channels;

* ability to reach new market segments;

* efficient, low-cost method to quote and enroll groups;

* access to advanced technical online capabilities;

* increased market share; and

* benefits of association with a strong brand.

The online capabilities offer several advantages for consumers, as well:

* convenience (available 24/7);

* access to information for self-guided research;

* real-time proposals and response to questions;

* increased efficiency in comparing multiple companies and products; and

* narrower list of carriers to be considered.

But new risks emerge. In working with loyal local agents, the carrier can rely on the agent to validate the existence of a small business, to ensure adequate participation requirements are being met and to help complete health statements that include full disclosure of conditions and treatment. When an employer shops for benefits online, there is no such consultation or support by an agent.

The obvious danger of business sold and enrolled electronically is the sense of anonymity. No one is calling on the employer locally to explain the product or underwriting guidelines or to verify any of the responses. Small employers, particularly, are unfamiliar with insurance principles and may not see anything wrong with low participation levels, offering coverage to people not working full time or misrepresentations or omissions on health statements. To qualify this business, underwriters will need to use different tools:

* articles of incorporation and past income tax filings for the very small businesses;

* most recent quarterly wage and tax statement to verify participation levels;

* phone verification to verbally validate information provided on each employee's health statement; and

* careful monitoring of claims during the first year to identify any serious misrepresentations or omissions that might lead the carrier to rescind coverage or adjust rates.

The local agent will continue to play a significant role in the sale and service of group insurance to small to midsize employers. And carriers will continue to seek out and develop local agent relationships. But the Internet will grow as another distribution channel for those technology-savvy employers who prefer to perform their own research and, perhaps, feel comfortable making direct purchase of insurance products without the advice or support of an agent. With more appropriate underwriting tools, business from either source can prove to perform equally well.

Gary Cain, a Best's Review columnist, is senior vice president, Group Life and Health, at Principal Financial Group, Des Moines, Iowa. He can be reached at [e-mail].