Insurance Industry Is Plugging In for Profits

A couple of small Southern California companies are trying to bring the efficiencies of online processing to insurance, a business notorious for tons of paper forms and regulations that is choking on its own costs.

Both companies, Answer Financial of Encino, and E-insurance Systems of Woodland Hills, are tapping into powerful trends: The need of insurance companies to cut overhead costs and the need of consumers for information to make choices.

Insurance is a giant business, of course: More than $3.6 trillion of insurance is in force in the U.S. alone, and there are 40,000 companies with more than 1.5 million employees. Online insurance sales this year will total only about $500 million, experts say, growing to about $4 billion three years from now.

Whether these start-ups will succeed remains an open question. But their innovations are promising and reflect well on the lively business atmosphere of Southern California.

Answer Financial, founded three years ago, has created a database--a “technology infrastructure,” the company calls it--to offer auto, homeowner and health insurance along with annuity policies and other personal financial services online.

Institutional investors backed the idea with $88 million of investment and remain confident today even though Answer Financial is still in the developing stage and is seeking $60 million more to keep building the business. “This is a serious company, not a dot-com, rub-it-all-over-your-body kind of company,” says Alan Snyder, founder and chief executive. Money should be flowing in instead of out--a condition called positive cash flow--in 2002, he adds.

E-insurance Systems is offering commercial insurance online, using a software program developed by Genex Co. of Culver City. E-insurance started in March 1999 with more than $3 million of equity from investors led by its founder, David Thorson, a policy-writing commercial insurance agent. The company added $2 million in investment raised by Digital Coast Partners of Santa Monica and will shortly receive $15 million more, Thorson says.

The idea behind both Answer and E-insurance and other companies experimenting with insurance on the Internet is that 15% to 20% of the average policy’s cost, whether personal or commercial insurance, is for paper forms and other overhead. “We can get those costs down to 6% to 7% immediately and 1.5% ultimately,” says Thorson, chief executive of E-insurance and the head of Thorson Associates, a third-generation family insurance brokering firm.

Many people who buy insurance will be surprised to learn that most insurance firms lose money on the premiums collected--claims ultimately outrun the amounts of premium income. The firms make up the losses, to be sure, on investments made while waiting to see whether claims arise.

Lately, competitive pricing on auto, homeowner and commercial policies, and claim expenses on health insurance, have worsened the losses and pushed companies to seek solutions online. Allstate, State Farm and other auto insurers sell online; all insurers are trying to use the Internet to save money.

But most insurance Web sites only serve to refer customers, not to service their policies and retain customers for three years, the time it takes to make a profit on an individual policy, explains John Casey of Aon Corp., a Chicago-based commercial insurance giant with $8 billion in revenues. Casey is devising interactive ventures for Aon, which recently bought Auto Insurance Specialists, of Los Angeles, as an initial foray into personal insurance lines.

Another trend in insurance is the shift by employers away from buying uniform health coverage for employees to offering a variety of health plans from which employees can compile individual coverage preferences.

Answer Financial’s elaborate computer programs, into which the young company has invested $70 million since July 1997, responds to both trends. The company is licensed to issue policies online in all 50 states; its site covers regulations in all.

To market the service, Answer tries to work through corporations, offering supplementary insurance to employees. “We will offer dental, vision and long-term care insurance in addition to the standard health coverage offered by a major carrier,” Snyder explains. Answer Financial has formed a marketing partnership with Cigna and contemplates similar arrangements with other major insurers, who are attracted by the breadth of Answer’s online platform.

Ultimately, “we could be electronically linked to insurance carriers such as Cigna to deliver seamless online services to their clients,” says Snyder, 54, a 30-year veteran of the business who came to Southern California in 1990 to take over management of failing First Executive Corp., which he reorganized in bankruptcy.

He sees Answer Financial attaining revenues of more than $300 million this decade and perhaps more. “Whether we can become known for a true innovation in this industry depends on how we execute the plan,” Snyder says.

The investment managers who have backed his firm with $88 million include Conning & Co., a Hartford-based insurance research firm owned by MetLife Inc. Conning Capital has $600 million invested in small companies working on technological solutions for financial services--including $35 million in Answer Financial, explains Stephen Piaker, an investment manager. “Unlike buying cars or books, finance is all information. It should be suited to the Internet,” Piaker says.

The Internet is needed to bring down costs here and in the global insurance business, says Thorson. He recently lectured at Lloyds of London, and the famed insurance underwriting firm licensed E-insurance Systems’ program to help in Lloyds’ own modernization.

What makes Southern California a good location for firms innovating in insurance? Prime assets: “Talented people,” says Snyder. “Lots of talent to hire,” says Thorson.

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James Flanigan can be reached at jim.flanigan@latimes.com.

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Online Insurance

Sales of policies on the Internet are growing, but still make up only a small portion of the $800-billion-a-year U.S. market:

Sales on the Web (in billions)

2003 (estimated): $4.13 billion

*Estimated

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What people would buy

What types of policies people are most likely to purchase online:

Auto: 42%

Life: 23%

Home: 21%

Health: 13%

(Numbers do not total 100% due to rounding.)

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Sources: Forrester Research, IVANS Inc., Insurance Information Institute

Researched by NONA YATES/Los Angeles Times