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The dramatic growth in individuals and businesses on the Internet is clearly the prime driver in creating the opportunity for both e-commerce (selling on the Internet) and e-business (conducting business processes via the Internet). Worldwide Internet users have grown to about 100 million in 1999 and are projected to reach 400 million consumers in 2001 (Forrester Research). While most activities on the Internet are largely communications, information gathering, and comparison shopping, consumers purchasing online have grown to more than 30 million. Lower cost of connection devices, increasing bandwidth, growing audio and video streaming, the emergence of call telephony, and improved purchasing security are helping further drive rapid adoption of the Internet.

Despite most of the publicity about major e-retailers such as Amazon.com and Buy.com, the preponderance (>85%) of e-commerce activity is business-to-business. This trend is projected to continue with business-to-business growing by 100% annually versus retail e-commerce growing at about 50% annually over the next five years (Forrester Research). In addition, business-to-business extranet activities represent significant volumes and changes in the way business processes are being conducted.

Financial services on the Internet are exploding with new sites and services emerging daily. It is clearly one of the early markets to take advantage of this electronic medium with low frictional costs and move significant portions of its business processes to the Internet. Banks and stock brokerage are leading in these efforts, due largely to the transactional and informational aspects of those businesses.

About 8 million households are currently conducting banking via the internet, which is projected to rise to more than 12% of households in 2000 (Jupiter Communications). About half of the banks are currently offering some PC banking services with most of the remainder planning to initiate their offerings within the next few years. The major driver for pursuing PC banking to date has largely been to retain the bank’s customers as opposed to acquiring new customers. However, more than 80% of all banks also are planning to sell insurance via their online banking offering by 2002, in addition to selling mutual funds, offering online stock trading, and supporting online account opening. Many banks are setting up separate Internet banks to pursue new customers and expand their reach. eCiti has received most of the publicity, but Banc One has launched Wingspan Bank, Sovereign Bancorp has America’s Web Bank, Synovus with synovusbank.com, North Fork Bancorp using its acquired Superior Savings for an Internet bank, and Royal Bank of Canada has acquired Security First Network.

Online stock brokerage has also risen dramatically since 1995 and is expected to capture 25-30% of retail transactions in 2000. In addition to lower transactional costs of an online trade, convenience factors and information availability are driving rapid growth in stock and mutual fund purchases via the Internet. E-Schwab has become the online brokerage leader with more than a 25% share after moving aggressively from being the leading discount broker. Even Merrill Lynch has joined the online brokerage revolution after declaring it to be only a small segment of the marketplace. Even the stock exchanges are feeling the pressure of the Internet with Instinet and Island ECN electronic networks now accounting for about 30% of daily trades on the NASDAQ.

Mutual fund companies are also rapidly moving on to the Internet. Mutual fund companies with web sites have grown from 181 in 1997 to more than 350 today with 53 allowing transactions and 96 offering account access (McGladney & Pullen). At Charles Schwab, 45% of mutual fund transactions were on the Internet in June, up from 16% at the beginning of 1998. Retirement plans are moving online, such as Fidelity now offering e401(k) plans to small businesses, sold and maintained entirely over the Internet.

Online insurance sales have been relatively small to date, but are projected to grow to about an 11% share of the property casualty market and 8% of the life & health market by 2005, representing more than $2 billion in annual premiums (Datamonitor). The predominant online products are projected to be personal automobile, homeowners, and individual life insurance, with the majority of sales expected to be to individuals and small businesses. However, the primary internet goals of most insurers are not direct distribution today. Insurers? e-business focus has primarily been to easily disseminate company and product information, improve customer service, and facilitate agent referral. Insurance agents are increasingly using the Internet to access their carriers and establish their own websites. Clearly the larger agencies are further ahead in pursuing these efforts with most expected to be online by yearend.

However, the leading insurance Internet sites and activities are generally from “aggregators,? shopping sites, and portals such as InsWeb, QuoteSmith, InsuranceMarket, and the Yahoo Insurance Center. Consumers appear to be more willing to visit a site that has a broad range of insurance products from different carriers that they can compare instead of needing to visit a number of sites in order to comparison shop. In addition, there are only a limited number of carrier sites where a direct insurance purchase can take place today. Progressive Insurance not only sells its products directly via the Internet, but also offers a limited number of competitors? products. Websites that are built around consumers? major asset purchases (homes, cars) and major life events (weddings, retirement) also offer significant related insurance sales opportunities for carriers today, such as AIG products being offered on AutoByTel’s site.

While threatened by the online insurance shopping services and direct sales, insurance agencies need to focus on becoming more efficient and providing higher value-added services to succeed in an increasingly Internet-driven world. There are a number of entities emerging, such as Channelpoint, that are focused on enabling insurance agencies to provide a broader range of product/service offerings to their customers. Many other firms are providing web design and hosting services to further enable agents to become “cyberagents? and deal electronically, telephonically, and personally with their customers.

Much of insurers? focus to date has been on marketing and distributing insurance products via the Internet. However, the initial competitive advantages may actually come to those insurers that are providing superior customer service (including claims) via the Internet. These services are being provided to both insurers? agents as well as directly to their end customers by firms, including Allstate’s Customer Care Center, Travelers online claims reporting, Zurich American’s Claims Workstation Online, and Crum & Forrester’s Internet Claims Information Access System. Associated insurance services are also being offered via the Internet, such as collision repair management by First Priority Group and claims negotiations via Cybersettle.

The ultimate uses of the Internet for insurers are still being defined and created. However, it is clear that they will dramatically change the industry and its leaders. There are many assumptions that one needs to make to choose a successful path at this point. But it has become essential now to focus on e-business forces and trends in order to gain further knowledge and be ready to act as they emerge.

In light of these revolutionary e-business trends, there are a number of critical success factors that leading insurance executives should consider at this time.

1. How should we make e-business a corporate-wide priority instead of just an information technology or marketing lead initiative? The first challenge for an insurer is generally to get e-business development as an executive leadership-driven effort since its impact is pervasive throughout the organization. Most insurers have e-business efforts run by information technology and/or marketing functions, which results in limited focus and resources committed to pursue the full business opportunities on the Internet.
   
2. What are our current and potential competitors pursuing on the Internet?
   In addition to looking at traditional insurance competition activities, it is now critical to examine what banks, brokers, insurance Internet aggregators, and portals as well as what e-insurance startups are doing not to get blindsided by new players. The Internet changes the rules of the game, which allows newer players to rapidly gain market position and become serious competitive threats. It is also critical to understand what e-startups have done to other similar industries, including brokerage and media.
   
3. How should e-business become an integral part of my overall vision and business strategies? We find that insurance business leaders have varying degrees of understanding of what is happening in e-business, both technologically and in the business process. In order to succeed, executives need to become more aware and knowledgeable on e-business trends and possibilities. There is also a tendency to develop e-business strategies separately from the overall business strategy. Today, it is really the same thing.
   
4. Which aspects of e-business should insurers focus on initially? While most insurers are fearful of selling via the Internet, considering the impact on their current agency-based distribution channels, there are significant opportunities to strengthen the delivery of customer and claims service, agent support, and marketing programs. Each functional aspect of e-business needs to be fully explored, including but not solely limited to, e-commerce.
   
5. Should we engage in e-commerce and sell our insurance products on the Internet?
   Forecasters predict that the Internet will represent about 8-10% of insurance sales for both property casualty, and life and health over the next five years. However, information gathering and “shopping? on the Internet will significantly influence a larger portion of sales. Carriers need to carefully consider their presence on aggregators? sites, related life event and major asset purchase sites, and provide quality product information on their sites to support customers? shopping activities. Selling directly on an insurer’s site is only one way to consider in pursuing e-commerce.
   
6. Will agents survive in the new e-business world? Personal value-adding services will become increasingly important to businesses and consumers overwhelmed by information and choice. Personal advice will remain an important aspect of the insurance purchasing activity. However, e-business will change the role of the agents, eliminating much of the frictional costs for conducting transactions and providing many aspects of customer service. Insurers need to continue to evolve the role of their agents and enable them to compete successfully in an e-business-driven world.
   
7. How should we leverage alliances with other e-business providers to gain experience and a presence on the net? Business models are rapidly evolving in light of the Internet, further driving companies to understand and focus on their core competencies. Partnering with service and technology entities is increasingly critical for rapidly implementing emerging e-business strategies. Effectively pursuing and managing strategic alliances is now an even more important competency for insurers? future success.
   
8. What kind of investments and returns will we gain from pursuing e-business for our organization? Building quality websites that incorporate the full scope of insurers? activities is a significant investment and, for many, often encompasses much of the information technology budget. The returns are even more complicated to project. Usually an insurer’s business case initially revolves around cost savings for delivering services to both end users and distributors. In general, it is much harder to justify the investments based upon increasing revenues as direct insurance sales via the Internet tend to be limited and the ability to track ultimate sales from Internet shopping activities is complex. However, the impact on shareholder value is clearly significant. Companies that have a clear e-business strategy being implemented are generally handsomely rewarded by the stock market. Investments in ?.com? entities are also providing significant returns for more aggressive e-business players.
   
9. Do we have the will and expertise necessary to successfully pursue e-businesses?
   Today, it has become a necessity for insurers to pursue e-business opportunities. Therefore, those insurers who still wish to “wait and see? will rapidly find their ability to compete diminished. Having the will is a minimum requirement. However, finding and keeping the key resources to pursue e-business is increasingly difficult. There is a limited supply of talent in the e-business arena and this talent is being offered attractive entrepreneurial opportunities with significant upsides by both established and new ?.com? companies. The organizational parameters for success in pursuing e-businesses are considerable and usually require different approaches than the existing businesses.

The good news is that insurers? e-business development is lagging behind many other industries so it is not too late to get in the game. However, now is clearly the time to act and learn by becoming an e-player rather than watching from the sidelines. The true risk for insurers is to wait and see what will happen rather than initiate efforts to learn by doing in what is clearly a rapidly evolving entrepreneurial arena. The insurance e-revolution is clearly underway.