Competitive marketplace conditions and changing customer habits are driving insurers in the U.S. to invest in online sales strategies, according to a new report by independent market analyst Datamonitor.

"By developing an online sales strategy, insurers are able to lower customer acquisition costs, as well as gain control of the customer relationship," stated London-based Datamonitor.

"Wide scale adoption, however, will be tempered by the fragmented regulatory regime and the powerful agent forces in the U.S.," the company noted.

The report, "Catching Up: Online Direct Sales in US Personal Lines Insurance," suggests several ways that U.S. insurers with existing agent channels can develop a direct sales strategy.

"Because of the market conditions, insurers need a way to efficiently deliver their product and increase per-customer profitability, which is possible with an online sales strategy," said Jonathan Steiman, a financial services technology analyst with Datamonitor and the report's author. "But perhaps even more importantly, insurers need to move online to meet the needs of an increasingly Internet-centric consumer."

Mr. Steiman warned, however, that an online sales strategy can be fraught with risk. "For insurers with agent forces, which are the majority of insurers, there is a real threat of agent backlash," he noted. "Also, as more U.S. insurers move online, aggregators will begin swarming like sharks, threatening the very customer relationship insurers hoped to own with a direct online strategy."

According to Datamonitor, "Today's market is challenging. Insurers are facing a soft pricing environment, as well as poor investment income. The combination of these two factors is placing great pressure on the bottom line."

The company advised that, "To bolster their competitive position, insurers need to adopt cost efficient sales and servicing strategies, as well as improve the customer relationship--both of which are possible with an online strategy."

A successful online direct sales strategy enables insurers to own the customer relationship, said Datamonitor. "Under the typical agent model, the agent owns the customer relationship in that they manage nearly all interactions, while the insurer simply carries the risk. As a result, many insurers have struggled to manage their brand, drive cross- and up-sales and capture pertinent data. By selling direct to the consumer, insurers can conquer the policyholder relationship, leading to improved profitability."

The researcher also noted that because buying insurance can be daunting, consumers find some comfort in agents who can explain details. Datamonitor goes on to suggest that, "Insurers, therefore, must try to closely replicate the consultative nature of agents with their online offering."

To accomplish that, "First, Web sites should be designed dynamically so that only the pertinent questions are asked. If, for example, an auto applicant indicates they will be the only person on the policy, then the section for 'additional drivers' should not be presented," the researcher said.

"Second, security is a key concern for consumers. It seems like every day a financial services firm compromises their customer data. Insurers, who oftentimes possess financial as well as personal health information, must do their best to ensure data safety. For this reason, it is imperative that carriers with online strategies invest in verification and encryption technologies," said Datamonitor.

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