The Double-Edged Sword Of E-Commerce

For decades, Allstate Corp. has reminded its policyholders that they are in good hands with their Allstate agents.

It seems now that a few of those hands are getting tied.

Over the next two years, the insurance giant plans to spend 1 billion (US$) on a wide e-commerce initiative that will be bankrolled in part by cutting costs. Allstate will eliminate 10 percent of its non-agent work force — 4,000 jobs — for a savings of $600 million.

While Allstate is claiming that it will not cut its mammoth brick-and-mortar agent force, it is planning to slash agent commissions by more than 50 percent and also convert 6,500 employee agents into independent contractors.

The New E-Commerce Economy

I have been saying for months in this column that while it is true that the new e-commerce economy will be a tremendous boon for many, it will ring the economic death knell for others.

What is about to happen to Allstate’s sales force is already happening to thousands of stockbrokers throughout the U.S., thanks to online brokerage houses such as E*TRADE and Ameritrade.

No Choice

With insurance companies like Progressive Corp. and Geico claiming to save consumers big bucks on auto and life insurance by eliminating the middleman, some industry observers feel that Allstate had little choice but to revolutionize its distribution system.

Still, to think that there won’t be some kind of serious fallout is to simply deny reality.

In the first place, agents who were accustomed to receiving commission rates of 10 percent will now be forced to service their clients for commission rates of 2 to 3.5 percent.

How will agents react to late-night phone calls about a fire or auto accident when they can’t pay their own rent?

Secondly, I wonder how many agents will be able to stay on as independent contractors when faced with paying their own Social Security, pension and health insurance contributions.

Only The Strong Survive

Obviously, many of these agents will be forced into another line of work. However, I think that the stronger, Internet savvy Allstate agents will take the next logical step.

These agents can overcome the e-commerce downsizing by setting up their own Web sites and negotiating better commission rates with smaller insurance companies. This process will allow them to truly become “private contractors” and be able to sell their services to the highest bidder and offer clients a variety of options.

Additionally, as service to policyholders suffers because of low morale, industrious agents and downsized employees could start their own back-end service companies via the Internet.

Three Cents A Share

Meanwhile, Allstate estimates that savings from the restructuring could add about three cents a share to its earnings next year and 36 cents a share by 2001.

I have just two questions about Allstate’s e-commerce game plan. How many policyholders will it lose to its former agents? And how will it combat online insurance auctions, which are the next logical step for buying insurance?

After all, in an e-commerce economy, insurance — just like an insurance agent — is simply a commodity up for bid.

What do you think? Let’s talk about it.