The E-surance Trap

By John Greenwald

Of all the goods and services that can be purchased on the Internet, few have plunged as much in price as life insurance, a product that is hundreds of years old. The size of the drop has been startling. The same 20-year, $500,000 term-life policy that cost a healthy 40-year-old male $995 a year in 1995 now costs just $455 on average--a decline of 54%, even though consumer prices rose nearly 15% over that period.

While Americans are living longer and competition has grown increasingly fierce in the $100 billion life-insurance industry, that's only part of the story. A good chunk of the savings stems directly from the popularity of more than a dozen online insurance sites, such as InsWeb.com and Quotesmith.com which instantly serve up price quotes for term-life policies sold by hundreds of insurance companies. This lets shoppers pinpoint the best rate without having to contact an agent.

The Net's ability to deliver so much price data to buyers has made insurance a more perfect market, and the impact on premiums has been enormous. Online insurance sites accounted for as much as half the decline in term-life prices from 1995 to 1997, when the Web was but a pup, according to a study by economists Jeffrey Brown of Harvard and Austan Goolsbee of the University of Chicago.

But the windfall for Internet surfers has come at the expense of many of the sites that make the savings possible, since consumers frequently shop online only to purchase a policy from their own off-line agent. Some gratitude. "These websites have done consumers a tremendous service," says Brown, "but they have not figured out how to make money." Indeed, the stock prices of Quotesmith and InsWeb, the two largest insurance shopping sites, have fallen some 90% below their 52-week highs.

The websites are wobbling because they solved one problem--finding a good price--without making it just as easy to apply for and buy the product. Because all initial estimates are preliminary, locating an attractive price quote is often just the start of a lengthy process. Next, shoppers must contact an agent--either online or off--or apply directly to an insurance company. They then complete a questionnaire and take a physical exam before obtaining final quotes and purchasing their policies.

For such reasons, online insurance sales are still in their infancy. A study by Mercer Management Consulting found that insurance lagged all other financial services in Internet usage. That's in part because many insurers, fearful of alienating their pen-and-pencil agents, have been reluctant to launch aggressive online products.

One company that hasn't been worried is John Hancock Financial Services, last year's No. 1 seller of term-life policies on both Quotesmith and InsWeb. "Our strategy is to sell products in all the different ways that consumers like to buy them," says Diana Scott, vice president for e-business at John Hancock.

Hancock is already launching new types of insurance online, including a long-term health-care policy that the company will offer through Fidelity. And as aggressive insurers conjure up new e-policies, the health of comparison-shopping sites may take a turn for the better.