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Impact of Internet Channel on Auto Insurance Industry

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  1. Executive summary
  2. Overview
    1. Definition of the insurance industry
    2. The role of insurance agents/brokers
    3. History and structure of the auto insurance industry
    4. Selling costs and scale economies
  3. Five industry forces analysis
    1. Barriers to entry
    2. Bargaining power of suppliers
    3. Bargaining power of buyers
    4. Rivalry among existing competitors
  4. Vlaue chain analysis
    1. Where the premium dollar goes
  5. Internet insurance process analysis and demonstration
    1. Traditional and internet direct channels
    2. Integration of the internet in car insurance companies
    3. Progressive auto insurance
    4. Progressive direct
  6. Future trend in e insurance
  7. Conclusions
  8. Appendices

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.

[...] They hold a 60% of market share of commercial lines and 34% market share of personal lines. This part of the industry has become more consolidated in the last series of years.[2] History and structure of the auto-insurance industry: Automobile insurance accounted for less than half of the total premiums of the property liability insurance industry in 1971 (see chart below)[3]: Even though auto insurance existed prior to World War the rapid growth in the car industry during the postwar period boosted the sales of auto insurances. [...]

[...] The rivalry in insurance industry with internet is high, because the price comparison is easy among the companies on the web as well as barriers to entry lowered as mentioned before. The industry is moving towards a more concentrated model. The recent mergers and acquisition let us think that when the number of significant players will be reduced to a handful, the rivalry might get tougher. Value Chain Analysis Where the premium dollar goes: The following figures give an idea of how each $100 of insurance premium in the US is broken down into several categories[5]: Claims $ Value % Payments to injured persons $ Payments for damage to cars $ Expenses Commissions and other selling $ General expenses (costs of company $ State premium taxes, licenses and $ Dividends to policyholders $ Claims and expense total $ Bottom Line Investment gain $ The following graph shows the percentage breakdown per item in the premium value chain: The following graph shows the percentage breakdown of claims payments to injured persons: Medical and lawyer's fees make up 70% of the total costs. [...]

[...] The dispute was brought up because GEICO stated that Google was using their brand name to sell insurance ads to competitors.[11] This worked when search engine users looked up the word GEICO and several ads and websites of competitors would appear leading customers to buy insurance from them. Google stated that companies in the US have always used their competitor's names in advertising like Coca Cola and Pepsi. In the end, Google won the case.[12] This shows that even though the internet is a powerful advertiser, customers have gained more buying power and can ultimately decide what's best for them based on real time information. [...]

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