Competitive marketplace conditions and changing customer habitsare driving insurers in the U.S. to invest in online salesstrategies, according to a new report by independent market analystDatamonitor.

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

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

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

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

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

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

The company advised that, "To bolster their competitiveposition, insurers need to adopt cost efficient sales and servicingstrategies, as well as improve the customer relationship--both ofwhich are possible with an online strategy."

A successful online direct sales strategy enables insurers toown the customer relationship, said Datamonitor. "Under the typicalagent model, the agent owns the customer relationship in that theymanage nearly all interactions, while the insurer simply carriesthe risk. As a result, many insurers have struggled to manage theirbrand, drive cross- and up-sales and capture pertinent data. Byselling direct to the consumer, insurers can conquer thepolicyholder relationship, leading to improved profitability."

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

To accomplish that, "First, Web sites should be designeddynamically so that only the pertinent questions are asked. If, forexample, an auto applicant indicates they will be the only personon the policy, then the section for 'additional drivers' should notbe presented," the researcher said.

"Second, security is a key concern for consumers. It seems likeevery day a financial services firm compromises their customerdata. Insurers, who oftentimes possess financial as well aspersonal health information, must do their best to ensure datasafety. For this reason, it is imperative that carriers with onlinestrategies invest in verification and encryption technologies,"said Datamonitor.