Elephant Insurance has strategy to tap online market for auto insurance [Richmond Times-Dispatch, Va.]

April 07--Step inside the Elephant Insurance Services LLC headquarters in western Henrico County, and you'll see a 7-foot-tall balloon elephant named Ellie.

Staff members run around in wacky hats and costumes, playing in pingpong tournaments and posting funny pictures all over the walls.

The company believes in having fun but also working hard, said Chief Executive Officer Kevin Chidwick, who joins in the office antics whenever possible.

Behind all the joviality, though, Elephant Insurance Services, a division of United Kingdom-based insurance giant Admiral Group plc., has some serious ambitions in the U.S. auto insurance market, which it entered barely four years ago.

Elephant is a direct-to-consumer seller of auto insurance, selling its products to customers online and by phone rather than through a network of agents.

Chidwick, who moved to the United States from the U.K. early in 2012 to lead Elephant, foresees the U.S. market moving more toward that online, direct-sales model, just as the market has changed in the U.K.

"It is inevitable," he said. "If you don't believe that, then you are like King Canute standing on the beach trying to stop the tide."

Chidwick points to the transformation of the U.K. market since Admiral Group was formed in 1993.

Twenty years ago, most top car insurance companies in the U.K. sold their products through an independent agent system, and less than a quarter of insurance was sold direct by phone.

Today, the top five insurance providers are mostly direct-sales organizations, including Admiral, and 75 percent of customers buy car insurance direct on the Internet or by phone.

"So in 20 years, the industry has changed from being an agent-based industry to a direct industry," Chidwick said.

Also, about two-thirds of customers in the U.K. will re-shop their car insurance each year, he said, "because they are shopping for a better price."

About one-third of those people will change their insurance provider yearly.

"The market has gone commoditized now," Chidwick said. "Brands and personal relationships that were very important 20 years ago are not as important now."

In the United States, only about 25 percent of customers buy their car insurance online now, Chidwick said.

"The U.S. does not yet have the phenomenon of most people buying direct, and it does not have the phenomenon of more people shopping through price-comparison websites," Chidwick said.

In the U.K., about 60 percent of customers who buy car insurance online do so through a price-comparison website. Admiral Group has its own such site, confused.com, which Chidwick used to lead as CEO.

The site allows online shoppers to compare prices for about 120 car insurance brands in the U.K.

"That kind of service doesn't really exist in the U.S. at this time," Chidwick said. "I think those two things are going to come in the next 10 years, and I think they are going to come in a big way."

Bob Hartwig, president and chief economist for the Insurance Information Institute, an industry public information advocacy group, said an increasing number of small direct-only auto insurers are operating in the United States.

"But we have a long way to go before at least a majority of insurance is sold the direct way," he said. "The market will be changing. Some (insurers) will be direct-sale only, some will stick with the agents only, and the rest will be a fusion or a blending of systems, and that will continue for years to come."

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A trend toward more online sales of auto insurance could be viewed as a threat to independent insurance agents and brokers, who are keenly aware of how the online, direct-sales model is changing the industry.

"You would have to be asleep if you did not understand the impact" of the online market, said Jason Angus, chief marketing officer for the Hilb Group, a Henrico-based insurance brokerage with nine offices in seven states.

"The more simplified the product, the more it allows itself to be sold through that medium," Angus said. "If it is a complex product, then it becomes more difficult. There are too many variables associated with it."

Angus stressed that independent insurance agents can still provide consumers with advice on the totality of their insurance needs, not just automobile insurance.

"The consumer is empowered with the Internet, but we see it as just another tool that we use," Angus said. "The value of an independent agent working with their client to make sure they are appropriately covered is not something that is currently being challenged."

Bob Bradshaw, president and chief executive officer of the Independent Insurance Agents of Virginia, said the organization is stressing the value of trust.

The organization's national office emphasizes that in a campaign called "Trusted Choice" that encourages people to stick with an independent insurance agent when buying auto insurance. It includes a website, trustedchoice.com, that offers links to insurance agent offices all over the nation.

"We would say that using an independent agent is sort of like using the Internet anyway because most of our members represent as many as eight or 10 different companies," Bradshaw said. "They can find the company that provides the best insurance for the lowest cost."

Hartwig from the Insurance Information Institute said many insurers who have agents are reacting to direct-only companies by allowing consumers to buy auto insurance online or over the telephone.

But when that happens, those insurers also assign an agent once the transaction is completed.

"They believe that is one of the advantages that they offer," Hartwig said.

State Farm Insurance, the nation's largest auto insurer, which has about 1.18 million auto policies in Virginia, said it is adjusting its operating model to meet customer needs.

"State Farm's vision clearly states, 'Our customers' needs will determine our path.' As our customers rely more on online and mobile capabilities, we are building relationships that are most convenient to them," company spokeswoman Amy Preddy said.

But the company says its 463 agents across Virginia are still a very important part of that model.

"As a trusted adviser, your agent can help you customize an insurance plan that works for your family and financial situation," Preddy said.

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The U.S. private-passenger auto insurance market, measured by direct premiums written, was about $172 billion in 2012, according to Charlottesville-based SNL Financial.

The Virginia market was about $4.3 billion in 2012, SNL Financial said.

Chidwick wants Elephant to grab a bigger share of a growing market for direct sales.

But he's not looking for the company to overtake the titans of the industry, such as Geico, the Chevy Chase, Md.-based company that dominates the direct-sales market for auto insurance.

Geico earned about $16.7 billion in premiums in 2012, an increase of $1.38 billion over 2011, according to financial reports by its parent company, Berkshire Hathaway Inc., which says Geico is the third-largest private-passenger auto insurer in the U.S. in terms of premium volume. Another subsidiary of Berkshire Hathaway owns the Richmond Times-Dispatch.

The growth at Geico came from a 6.5 percent increase in policies-in-force and an increase in average premium per policy in 2012.

In 2011, Northbrook, Ill.-based insurer Allstate Corp. also made a move into the direct-sales business by acquiring online insurer Esurance for $1 billion.

The business is heavily driven by advertising.

Insurers spent nearly $6 billion in 2011 advertising their property and casualty insurance products, according to data compiled by SNL Financial. Geico alone spent nearly $1 billion.

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Chidwick agrees that trust remains a major factor in how U.S. customers buy insurance, and he is quick to say that the market changes he foresees don't entail the end of independent insurance agents.

But auto insurance, he believes, will increasingly go the route of an online-driven commodity.

When it comes to buying auto insurance, "people want to get it done with the least amount of fuss, and they want to compare prices," he said. "And that makes it a natural Internet product."

That type of market, he said, "plays into our strengths" as a company. Two things are important for success in the direct-to-consumer business besides providing good customer service, Chidwick said.

Elephant needs to be a good "risk selector," he said. That is, it must be good at calculating the probability that a customer the company is insuring will make a claim. "You also have to be very efficient and low cost at what you do," he said.

"Obviously, claims are much more expensive than premiums, and so predicting the probability of a claim is critical," he said.

"The reason that Internet and direct is better for that is because you get access to a lot more information when customers are filling out forms on the Internet than you do if you are filtering it through an agent in a shopfront somewhere," he said. "You get the opportunity to use that data more powerfully because you get all that data in a raw form, and you can look at the patterns of that data."

Elephant's U.K. parent company, Admiral Group, doesn't break its financial results down to individual markets. The company said its international car insurance businesses, which include operations in the United States and several other European countries, saw its customer numbers rise 42 percent to 435,900 in 2012.

Since starting out in 2009 selling insurance only in Virginia, Elephant has expanded its sales territory into Maryland, Texas and Illinois.

The fast-growing auto insurance company employs about 260 people at its offices in Henrico. The insurer has said it could have 300 to 500 employees here by the end of 2013.

Besides being markets with a lot of automobiles to insure, Elephant sees those markets as having the best potential for more online shopping and a regulatory environment that is easier for new entries, Chidwick said.

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