The surviving few: only a handful of the online insurance-broker pioneers remain in a market that many left when the dot-com boom faded.

The world of online insurance brokers looked a lot different five to 10 years ago, when many start-up companies raced to gain a share of the market and capture a new opportunity to reach customers directly via the Web. But just as the hype of the dot-com boom in the early part of this century quickly vanished, the dreams of creating a leading online insurance-brokerage company also faded for many of the early pioneers.

A handful of online insurance brokers remain in the market today--some with refocused operations and others continuing down the initial path they pursued. Not only are these companies reaching out to millions of agencies and customers via the Internet, but they're also finding the payoffs to be lucrative. Refocused strategies, an extensive knowledge of the industry and a strong technological foundation are several secrets to success that the remaining few credit for their sustainability in the market.

In the Beginning

Many companies jumped on the dot-com bandwagon in the mid-to-late '90s to create online brokerage businesses to sell insurance.

InsWeb was among one of the first online insurance aggregators to venture into the market after its chief executive officer and co-founder, Hussein Enan, learned from his son about the availability of purchasing items via the Internet. His supposition: if people were selling compact discs via the Web, why not do the same for insurance? He then took that vision and launched the online company in March 1995, and it has seen continued growth in the past nine years. InsWeb consumers can log on to compare multiple quotes provided by leading insurers for automobile, term life, homeowners, renters, condominium, health and other insurance products.

A handful of other companies, such as eHealthinsurance, ePolicy Solutions, Esurance, insure.com, InsuranceNoodle and ReliaQuote, also joined the ranks of direct-to-consumer online venues in the past several years. Not only have they maintained strongholds in the industry, but they're also overshadowing the once dismal predictions for online insurance sales. In 2000, Meridien Research Inc., now known as Financial Insights, said only 1% of all policies were purchased over the Internet. But since its inception in the market in December 1999, San Francisco-based Esurance, for instance, has seen a compound annual growth rate in premium volume of more than 170%. Esurance is a subsidiary of White Mountains Insurance Group Ltd.

Down and Out

Some online insurance broker pioneers weren't as fortunate.

In the early 2000s, the burst of the dot-com bubble also meant dissolution for many of the online broker pioneers. Lack of both funds and a focused strategy forced several companies out of the market.

Ecoverage was one of those companies. The once-promising Internet-exclusive auto insurer left the market in 2001 after it was unable to secure a buyer for its heavily indebted operations. The slogan that once ran across the company's home page--"the industry is history"--proved the opposite as the company failed to make its place in the online arena.

"The real problem that caused many of the companies to exit the market was that their business models weren't in sync with reality, so many became overaggressive in terms of what they believed they could sell," said Matthew Josefowicz, manager of Celent's insurance group. He attributes the downfall of many early companies to a combination of two things--a lack of understanding of how different the insurance market is from other financial services, and the Internet hype and dot-com boom that led people to spend too much money on the wrong things. "The Web makes consumers a lot more informed when they begin a conversation with an agent or direct carrier, but it doesn't change the process of buying insurance entirely. People expected massive transformation, similar to what happened in the retail securities industry" he said.

Limited funds also drove some companies out of the market. "Many of the online brokers fell by the wayside because they simply ran out of money," said Don Martin, co-founder and chairman of Torrance, Calif.-based ePolicy Solutions Inc. In addition, some organizations' failure to recognize system problems that needed to be corrected added to the mix. "It's interesting that many companies' CEOs didn't get involved as they probably should have. Instead, purchasing of systems was done by the head of the IT department, who in many cases preferred to build than buy," he added.

In addition, some companies failed to adapt technology to assist carriers. Don Urbanciz, chairman of Insurance Vianet, InsuranceNoodle's holding company said that while a lot of competitors were asking carriers to change the way they did business on their technology platforms, his company took a different approach. "We were quick to market because we were adaptable to the current state of technology within specific areas," he said.

There are now only a handful of companies left, down from about 30 start-ups four years ago, said Urbanciz. "Competitors remaining in the market are now well funded and well developed, so the field has been pretty well defined now as to who the players are, and we don't see many new entrants because the ability to raise capital today is much more difficult than it was a few years ago," he said.

Despite the exit of many players from the market, some industry leaders see even more competition today. "Retailing insurance, be it face-to-face or through direct response, has always been highly competitive, and in the case of term life insurance, for instance, it's also challenging to sell a policy that has premiums and commission that are now less than half of what they were 10 years ago," said insure.com's CEO Robert Bland. The dynamic, he added, forces successful brokers to become efficient or lose. "We believe that there are now many more competitors or imitators in the market than there were in 2000, primarily because it's so easy and cheap to start a Web site today," he said. However, it takes marketing muscle, staying power and the ability to actually obtain new customers in high numbers to bring this business up to a viable scale, he said. "Our business is a lot more capital-intensive than it looks from the outside, and rising customer acquisition costs don't make this a game for the faint hearted," Bland said.

Few Going Strong

The remaining online insurance-broker players in the market cite their focus on customers' needs, experience in the industry, a restructured focus and a strong technological platform as driving their continued success.

Insure.com's staying power in the market is linked to its strong capital base--absent of debt; 200,000 customers on the books; and some direct-response advertising know-how from being in business for two decades, said Bland. He said the most important driver of the company's success, however, is its ability to constantly offer a Web site of information, instant quotes and toll-free support staffed by experienced insurance specialists, which continuously appeals to people. "Repeat sales and renewal commissions are central to making it in this business, and direct-response customers are very demanding and will shop offline or elsewhere at the drop of a hat," he said. In December 2001, Quotesmith.com acquired selected assets of Insurance News Network LLC, a provider of consumer insurance news and information. The acquisition included Insurance News Network's flagship Insure.com Web site.

Experience and knowledge of the insurance industry also are key. Many of the companies that left the market simply didn't understand the business, said Gary Tolman, president and CEO of Esurance. Tolman is a seasoned insurance veteran with more than 25 years in the insurance industry, 15 of which were spent at Fireman's Fund Insurance Co.

In addition, Tolman said catering to all consumers' needs is important to sustainability in the market. "You can't geo-target as much as you'd like online, so you have to have a product that fits most people," he said. That's been paying off for Esurance, which currently writes personal auto insurance in 16 states. The company receives nearly 1 million visitors a month to its Web site.

In addition, improving throughput, which measures the extent to which a consumer gets through various stages of the shopping process, is a continuous effort that reaps big benefits, said Jaimie Pickles, executive vice president of InsWeb Corp. He said the company learned several lessons over the years, including that consumers don't like to get personal too soon and they generally don't mind answering questions that are relevant. As self-directed consumers understand the relevance of the questions asked, he added, throughput should improve over time.

Another key to success for companies selling insurance online comes from providing a simple and positive customer experience. Visitors to Esurance's Web site, for instance, can purchase a product without any human intervention--a service taken advantage of by about 55% of its customers. "However, if someone wants to speak with a live person, we have telesales operations within our service center in Sioux Falls to assist them," said Tolman. The company recently added a "click to call" feature on its site in which online users can click on a button that instantly connects them with a company representative or allows them to schedule a call-back from the company, which is particularly handy for users with dial-up modems.

For eHealthinsurance.com, its decision to focus on one line of business--health insurance--continues to pay off. The company, which was founded in 1997, markets individual and small group-health insurance to more than 98% of the U.S. population. The company's technology is responsible for the nation's first Internet-based sale of a health insurance policy. The company also is trying to help take a bite out of one of the nation's top problems--the growing number of uninsured Americans. More than 47% of people who purchased health insurance through the site indicated that they were previously uninsured for at least six months. More than half of the uninsured are from working families who can afford health insurance but either don't know where to go to purchase it or aren't aware they can afford it. "We've brought transparency to the health insurance market, enabling consumers to peer through our online window and see the health plans and pricing available to them so they can shop, compare plans and then buy a policy using our online process that specifically meets their needs," said Robert Hurley, vice president of customer care. The result? A health plan policy that is more cost effective for them and their families.

While many of the remaining startups are continuing down their original paths, others felt the need to make some changes to their structure along the way. ePolicy Solutions recognized early on its need to refocus its business model from an online broker, offering insurance through affiliations such as Staples, MasterCard, Intuit and UPS, to a vendor of its policy-administration solutions to carriers. "We gave this great party but nobody came, and part of the problem was that when the dot-coms started to lose their glamour, the public also changed its mind and decided to play it safe by using a broker," said Martin.

InsuranceNoodle's advantage over many of its long-gone competitors came from its decision to reintermediate the business rather than disintermediating it, said Urbanciz. "We felt agents control business, so we wanted to enable our business through independent agents, whereas a lot of the other models were direct play to customers," he said. The company's management team was skeptical that its small commercial business-owner customers would purchase their insurance online and abandon their agents or carriers. "And I think we were correct going down that route," Urbanciz said.

But success couldn't fully be achieved without a strong technology platform behind the online venture. "We all came out of the insurance industry and weren't techies and didn't seek to build the most powerful computer in the world. We built our technology in an economical fashion that didn't require a 50% market share," said Urbanciz. Some of its competitors spent multiples of InsuranceNoodle's spend on technology, and then compounded it by having flawed distribution by going direct, he said. "And they couldn't get enough customers quick enough to pay for what they borrowed to build," he said.

"The biggest key to success when processing large volumes of business is that it's very paperwork intensive, and to gain a competitive advantage and move the business along we were constantly having to hire people to process paper, which costs money," said Will Jerro, president of Falls Church, Va.-based ReliaQuote Inc., which markets and sells life policies via the Web." So we spent a lot of time and effort on technology automating a lot of the processes so we don't have to be dependent on labor as many companies are."

The secrets to success are paying off. Many remaining online insurance brokers are finding the market to be quite lucrative. Esurance, for instance, saw its written premium climb from $3.5 million in 2000 to $116 million in 2003, and expects to end 2004 with more than $200 million in written premium.

Advertising Dilemma

Online insurance brokers are facing a growing challenge in acquiring new customers--rising online advertising costs.

Online advertising costs have tripled in the past several years, said Pickles of Sacramento, Calif.-based InsWeb. He said the company's revenues are down significantly because of the difficult advertising and marketing of auto and life policies. In addition, more companies now are competing for online space. While it's experimented minimally with offline advertising, the vast majority of InsWeb's advertising is done online via search engines and sites where consumers are likely to be in an insurance shopping mode. The company's marketing costs were up 143% in the second quarter of 2004 over the last year.

Esurance is noticing a similar trend. Exorbitant online advertising costs drove the company recently to expand some of its advertising offline. The company's marketing spending a year ago was about 95% online, but in 2005, it's planned to have a more even split, with 50% online and 50% offline (including direct mail), said Tolman.

In addition, insurers aren't the only ones giving online insurance brokers a run for the money in terms of online advertising competition. A growing number of noninsurance-related businesses, such as mortgage lenders and credit-card companies, are entering the space.

But Pickles said he believes online insurance brokers can soon breathe a sigh of relief. "All these things are solvable and will become more stable going forward, which is one reason we continue to do what we do," he said. The question isn't if but rather when that will happen, he added.

Going the Route

Despite rising advertising costs, online insurance brokers are optimistic about a future of increased online insurance sales.

"We believe eventually insurance will be purchased in large amounts on the Web, but we're just not sure when that will happen," said ePolicy's Martin. More Web visitors will be converted to Internet shoppers.

While the online insurance market has proven to be much smaller than online companies and many experts predicted in 2000, insure.com's Bland said he's optimistic about the future of serving the self-directed insurance buyer. "Insurance buyers today still have a high skepticism of the insurance industry in general, and everybody wants to save money, but we think that there's a great future serving those customers going forward," he said.

As more people move online, brokers will feel the pressure to have better systems, companies will feel pressure from brokers, and systems will eventually improve, said Martin. "In addition, many people predicted brokers would eventually be eliminated, but it's been proven that the broker is an integral part of the whole system, and we don't think they will get replaced, but rather continue to get better," he said.

However, while online insurance brokers were an exciting category in the early 2000's, the category will eventually begin to fade, and success will come mainly to those agencies that are better at online marketing and communication than others, said Celent's Josefowicz. "The market was insurance's foothold in the dot-com boom. Every once in a while, a slow-moving industry misses something dangerous, and most insurers can pat themselves on the back for sitting out the hype cycle, learning its lessons and using the Internet now as it should be used--as an important way to communicate with agents, customers and prospects."

Key Points

* Several of the online insurance-broker start-up companies of the mid to late '90s have left the market, thwarted in part by limited funds and lack of a focused strategy.

* Those online companies remaining in the market today are finding success in both attracting online users and building a profitable business.

* Experience and knowledge of the industry, strong technology and recognizing customers' needs are helping drive the remaining online brokers' sustainability in the market.

Still on Solid Ground

Several of the start-up insurance brokerage companies survived the dot-com boom and remain in the market today:

* eHealthinsurance.com

* ePolicy Solutions Inc.

* Esurance

* insure.com

* InsuranceNoodle

* InsWeb

* ReliaOuote Inc,