During the early 1990s, many observers of the personal-lines property-casualty insurance industry1 believed that "direct response"—the sale of policies via toll-free telephone numbers and without the help of intermediaries—would storm the industry and topple its leaders. It didn’t happen. Instead, traditional insurers beefed up their technology, slimmed down their operations, and made their traditional channels sufficiently competitive to hold on to the greater part of their business.
Today, most insurance companies, or carriers, continue to distribute policies through agents: either captive agents, who sell the policies of a single company, or independent agents, who distribute policies on behalf of many. A smaller group of carriers sells policies through other channels, including banks and work-site marketing programs, or direct to the customer.
So far, few of the industry’s incumbents make much use of the Internet. Judging from their limited response to it, many large incumbents, whether they sell directly or through agencies, think they can hold back the tide of electronic commerce by using the same incremental defenses that defeated the direct-response threat. No doubt, these incumbents are encouraged by industry data showing that retention levels remain high and that most consumers are "very satisfied" with their carriers. Research...