An interesting press release from a major web retailer, Overstock.com, heralded that the company would now offer personal lines and small business insurance through a wholly-owned subsidiary, the “Overstock.com Insurance Agency.”
A web powerhouse looking for elusive profits in the insurance market
Overstock.com is an online shopping retailer that competes with the likes of Amazon and E-Bay. It focuses its website offerings on broad range of products including furniture, rugs, bedding, electronics, clothing, jewelry and even cars.
Overstock.com ranks 187th in the United States in web traffic, according to Alexa.com, a website ranking service. Notwithstanding that traffic ranking, Overstock.com has had trouble generating consistent business profits sufficient to maintain a high stock price. Like similar web retailers, Overstock.com has attempted to develop ancillary businesses that may enhance the value of its web franchise.
In 2011, Overstock.com tried and failed to successfully co-brand insurance sales with a nationwide insurance agency. But, in late 2013, Overstock.com decided to take a new tack by selling, rather than advertising insurance and bought a turnkey insurance agency package to again try its luck at boosting profits.
Overstock.com sets up a nationwide insurance agency in a little less than 120 days
Overstock.com’s 2013 10K report stated that, “We … intend to begin to broker insurance products …to our customers in 2014.”
When filed this 10k statement was filed with the S.E.C. in February of 2014, the proposed insurance agency had already been formed and received license approval on January 7, 2014, in its home state of Utah. On January 30, 2014, the Massachusetts Division of Insurance approved Overstock.com Insurance Agency’s name and on February 12th, the company became registered with the Secretary of State to do business as a foreign corporation. By April 28, 2014, when Overstock.com announced that its customers could purchase insurance through its website, the insurance agency had effectively secured nationwide licensing.
In the same time period Overstock.com’s Utah agency obtained property and casualty contracts with carriers in the American Modern Group, Foremost, Progressive, and Safeco. In Massachusetts, however, when called the Division of Insurance found Overstock.com’s insurance agency licensed with Commerce Insurance and Citation Insurance, both members of the Mapfre-Commerce Group.
Beside the licensing and contracting activities, by its April 28th launch date, Overstock.com’s insurance agency also had in place an on-line quoting system, toll-free numbers connecting to a Connecticut call center, as well a policy management and binding system.
Overstock.com had moved fast, but it had help.
Overstock.com’s insurance agency came as a Turnkey program from Insuritas
Insuritas is a Connecticut-based company that has for a number of years focused on developing turnkey insurance agencies for credit unions as well as other banking institutions.
Insuritas provides companies seeking to enter the insurance agency business, and provides all of the services and contracts that they need to have their agency set up and operational in a short time. Insuritas claims that a company contracting with it will have an operating insurance agency within 90 days.
The Insuritas’ service package includes:
- A subsidiary or affiliated insurance agency, licensed in designated states or up to all 50 states, if needed.
- Licensed individuals through whom the agency will place insurance, as well as a Connecticut call center with individual toll-free numbers for the agency.
- Underwriting access to place insurance sold with insurance carriers with which Insuritas has an affiliation or agreement.
- A web-based quoting system for the subsidiary insurance agency to operate through the parent company’s website.
- Policy management and accounting systems for reporting operating and financial results
Once operational, the agency’s customers only deal with Insuritas’ call center in East Windsor, Connecticut. The insurance carriers direct bill all of the agency’s policies. The agency’ profit (or loss) comes from the net between the commissions less the costs of Insuritas’ ongoing backroom services.
Additionally, Insuritas charges initial fee for the development of an agency. The website of the National Association of Federal Credit Unions offers a 5% discount to its members to purchase Insuritas’ agency program. Since the Association values this discount at $25,000, the list price of the program would seem to be $500,000.
In the case of Overstock.com’s insurance agency, however, the cost to date seems substantially higher. Based on a comparison between Overstock.com’s 2013 10K and its first-quarter 10Q, the cost to develop the insurance agency appears to be an ongoing expense that has already reached $1.3 million as of March 30, 2014.
Overstock.com’ prior unsuccessful foray into insurance
On paper, the new Overstock.com insurance agency would seem to work. However, three years ago Overstock.com had a similar idea that also looked good on paper but that ultimately did not pan out.
In July, 2011, Overstock.com announced that it had partnered with Answer Financial, a 50 state insurance agency owned by White Mountain Insurance Group to offer automobile and home insurance. Similar to the announcement of the new Overstock.com agency, the theme then was that “More and more consumers are using the Web to save money on auto and home insurance,” and that Answer Financial’s insurance platform would allow Overstock.com’s “savvy online customers” to shop the market and compare prices to find the best deals.
After only a year and a half, the company’s 2012 10K commented, “The online insurance business site is a relatively new business for us. We cannot ensure that our expansion into this business will succeed.” After that statement, the online insurance business stopped being mentioned in the company’s security filings.
Will turnkey insurance agencies for retail entities work?
Whether the new insurance agency partnership with Insuritas will fare better than the defunct partnership with Answer Financial remains to be seen. But, there is a precedent for such success. Costco, the second largest retailer in the United States, has successfully sold property casualty insurance through a wholly-owned subsidiary insurance agency since 2002.
In 2002, Costco Insurance Agency, Inc. entered into a multi-year distribution agreement with Ameriprise Financial for marketing personal lines insurance to Costco’s customers in the 43 states where Ameriprise sold insurance.
The financials of the arrangement are not available, but for a number of years, the annual 10K report of Ameriprise has stated that Costco members represented 51% of all new policy sales to its property casualty subsidiaries.
Overstock.com certainly does not have the marketing heft of Costco with its estimated 45 million members in the United States. However, Overstock.com does claim that the profile of its typical product purchasers, women between 35 and 55, offers a compelling demographic for both marketing and underwriting insurance.
Overstock.com’s President has stated that firm does not have any set goals for the first year and expects it could take a few years for the agency to take off. If it does work, however, Insuritas and similar companies will trade on any such success to induce other web retailers to buy turnkey insurance agency packages. As the president of Insuritas put it, “We will learn how to do adopt the best practices of e-commerce and retailing from Overstock.com and apply that to other partnerships.”
AgencyChecklists will be watching and reporting on this business model as it develops over the next several years.