Editor's Note: This is the second of two columns by Jeff Bronchick which discusses topics that arose at the Association of Insurance and Financial Analysts conference in Naples, Fla., last week.
Insurance and the Internet
So what about the Internet's impact on the insurance business? Rarely do you see a better contrast between the old and the new than when
sat on a three-man panel with
. Unlike the current e-surance sites which are generally aggregators of information for consumer choice,
eCoverage is going to be a real, live "coverage-to-claims" auto insurer. All that's required is to answer 16 questions anonymously: You get your quote in seconds, enter your name and credit card, print out your insurance card and -- voila! -- you're covered.
Without getting into a deep analysis regarding their pricing (expected 25% below the market), the likelihood of adverse selection (look at their clientele: early technology adapters who are white single males jazzed on daytrading and zipping back and forth between home and double-grande espressos at
). Not to mention the fact that there has not been a single example of a top-tier auto insurer which relies exclusively on third-party claims administration.
The presentations by new insurance and old insurance were like night and day, and they perfectly captured the allure of the dot-com world. The old was both seasoned and stuffy, and somewhat monotonously went through PowerPoint presentations on how to grow large businesses.
In contrast, E-man was funny, glib and gloriously unburdened by legacy and history. The old talked of making more money the old-fashioned way. E-man joked about not making money "anytime in the near future" (maybe never as the prospectus will surely read) and blowing "lots" of money on marketing dollars to be the first mover. Rarely have successful senior executives who have done nothing wrong looked more uncomfortable than the two old-line execs did while E-man entertained the crowd by essentially calling their business model stupid and their managements dinosaurs. And in the ensuing Q&A, all the questions were directed toward E-man, while the panelists (representing billions of profitable dollars) sat quietly fuming.
This is the classic battle: between the idea that starting from scratch is the way to go, and the idea that having to worry about legacy distribution systems and the technology costs of bringing them to the Web is an albatross.
And yes, these guys will raise a lot of money from the get-go with a business model that is committed to selling dollar bills at 85 cents until they are too big to fail, which will undoubtedly put pressure on pricing in the auto business. But the question remains: Can billions of dollars of capital play rope-a-dope with the upstart until they collapse -- all the while bringing their own Web efforts up to speed?
One of the great quotes along these lines came from Travelers: "Interestingly, we are getting 20% of the hits of
and I am pleased to say that both our policies are doing well."
Everyone in the industry is throwing dollars at technology, some of which will support current distribution and some of which will undermine current distribution. How big, really is the do-it-yourself market in insurance -- and if the
of the world have brought the market to the masses, how come "loaded" financial products are showing faster growth than unloaded? Is there a diminishing marginal utility to choice and information -- with the brain ultimately falling back on hiring an advisor/specialist/salesperson to help with the decision?
These are all interesting questions, but what is clear is that the e-answer is infinitely sexier and exciting and will continue to capture investor dollars ... until it won't. If so, does that make existing assets really liabilities?
And another thought (one close to my self-interest): If technology can truly enable a best-of-breed offering for the financial consumer, then isn't there lots of room for boutique money managers, niche insurers, financial planners, etc., who can be linked together under a common umbrella and statement? Which implies that the thesis that only the largest financial-service organizations or investment managers will survive is bull.
While nearly every big commercial insurer is seeing a fifth consecutive month of higher premiums pricing, the reported combined ratios (which measure underwriting losses plus expenses) do not show it -- yet. Higher premiums are deferred and work their way into the book over the year, while losses from older and cheaper policies are still being paid.
So give this trend a little more time. But if taking the path less trodden is your game, you should be looking here. At these prices, you pay little for insurance against losses in your portfolio.
Jeffrey Bronchick is chief investment officer of Reed Conner & Birdwell, a Los Angeles-based money-management firm with $1.2 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value fund. At time of publication, RCB owned Philadelphia Consolidated Holdings, Markel and White Mountains Insurance Group, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at