Impact of Internet Channel on Auto Insurance Industry

The influence of the internet on insurance industry is increasing in accordance with the spread of internet retailing. Quotes submitted and policies purchased through internet channel grew 23% and 29% respectively from 2004 to 2005. The proper adoption of a strategy in line with the changing trends of the internet channel can become a company's competitive advantage. This paper explains the changes in industry forces brought by the internet, value chain of insurance business, and future trends of the internet insurance market.

The industry force analysis addresses how the internet has changed the industry forces in the insurance business. The major changes are in the threats of rivalry and buyers which have increased in strength. Even though barriers to entry are high under the traditional model, the internal competition among incumbent companies has significantly increased because of a competitive business environment. Companies are competing not only on price, but also by providing better customer service. The barriers to entry are somewhat reduced due to internet, but still are medium high. New comers will struggle with their business mainly because of lack of brand recognition and high level of capital needs.

The value chain analysis shows that the level of scalability is low. The main reason for this is because variable costs are high and most of them are incurred from external entities. The use of the internet will result in cost saving opportunities in commissions and selling expenses from adopting a direct channel. To do so, companies can reduce sales forces and brokers by implementing internet quote, sales of insurance policies and claims processing through the internet.

Companies should also consider the trade-offs between human intervention and cost reduction. Comparison between four major companies including State Farm, GEICO, Progressive Direct and Farmers, will show that the level of usage of internet varies according to the corporate strategy and its market position. For example, State Farm does not use internet channel for sales of policies but mainly for customer service which will result in satisfaction by having multi-channel customer support. Then, the company focuses on face-to-face contact between brokers and customers. Progressive has both an internet channel and a traditional network approach. It pursues low operational expense which translates into above average operational profitability.

Finally, a small test was run on Progressive's and GEICO's website to test their quoting capabilities. The results show that a quote can be obtained in 4 minutes and that both companies have different approaches in background check and final policy price. Progressive has integrated credit and driving records background check and compares policies from other companies. GEICO, which offers low price, doesn't have the same background check capabilities and uses a combination of profiling and current policy price for quotes.