Selling unusual online
By Michael Korver
Lifenet Insurance Company was founded by Haruaki Deguchi, an industry veteran, and Daisuke Iwase, a recent graduate from Harvard Business School, on October 23, 2006, with 100 million yen in seed capital provided by Asuka DBJ Partners and the Monex Group.
The company aimed to become the first in Japan to sell term life insurance direct to customers solely over the Internet and, thereby, provide real value in a crowded marketplace by emphasizing convenience, low fees and product transparency.
Lifenet was also the first applicant for a life insurance business license in 74 years in Japan, as the founders and investors intended to build an independent life insurance company, rather than affiliate with an incumbent.
Life insurance in Japan
Life insurance has a relatively long history in Japan. One of the most famous educators in modern Japanese history and a key figure in the modernization of Japan following the Meiji Restoration, Yukichi Fukuzawa, is said to have introduced the life insurance system to Japan as early as 1868.
Japan’s defeat in World War II caused great disruption in the life insurance industry as it did to the entire economy. The war also left a large population of widows and single women who needed employment. Life insurance companies hired many of these women as door-to-door salespeople to peddle policies with affordable monthly premiums.
This tradition of an almost entire female direct sales force has continued until the present time. The post-war population boom and economic recovery brought about increased demand for life insurance to provide security for new families, causing the market to grow rapidly.
After the bursting of Japan’s so-called “bubble economy” in 1989 and the ensuing failure of many financial institutions, Japan embarked on a number of reforms in the financial services sector.
In 1998, the responsibility for supervising life insurance companies, as well as all private sector financial services institutions, was transferred to the newly formed Financial Services Agency (FSA), ushering in a period of market deregulation.
Non-life insurance companies were permitted to enter the life insurance market and vice versa. Commercial banks were allowed to sell life insurance products. The market entry of foreign life insurance companies, introducing novel “third sector” insurance products, also served to increase competition in the insurance industry.
According to a survey by the Japanese Institute of Life Insurance (JILI) published in September 2006, 87.5 percent of all Japanese households had life insurance policies (including individual annuities). Of these households, average annual premiums amounted to 526 thousand yen, making Japan not only the second largest life insurance market in terms of premiums in the world after the United States but also with one of the highest premiums paid per capita.
Although the market was clearly large, it was not growing. And the prospects for future growth domestically were nil as the number of Japanese over 65 years of age expanded at an unprecedented rate and the number of children born plunged dramatically. The number of life insurance policies in force and total face value had, in fact, peaked in the mid-1990’s and gradually declined thereafter.
Most policyholders did not initiate the purchase of a life insurance policy on their own. Rather, it was customary for potential policyholders to be directly solicited by insurance salespeople in the workplace, or through introductions by relatives, friends or acquaintances. In these cases, it was common for policyholders to either not read the written contracts, or not fully understand the terms of the written contracts, and, instead, simply trust the salesperson regarding the terms of the contract.
By far, the most important sales channel was each company’s captive sales force made up largely of women. Their relatively low status in the company and intensifying sales competition combined with performance-linked compensation schemes made it difficult to maintain high morale in the sales force. This led to high turnover and difficulty in providing adequate training. As a result, misunderstandings between policyholders and insurance companies often occurred and policy churn was a significant problem.
For consumers, the image of life insurance products had become increasingly negative because of the insistent sales tactics of salespeople, complicated contract terms, and lack of comparative price and feature information. Regulators like the FSA were not happy with incumbent insurance companies, as they seemed reluctant to undertake fundamental reforms to rectify these problems.
Developing value proposition
When Lifenet’s founders proposed selling life insurance via the Internet, the conventional wisdom was not encouraging. In fact, it was seen as an audacious challenge ― creating the first new independent life insurance company in 74 years.
Many industry professionals asserted that the traditional face-to-face method of sales could never be replaced, because the core value of life insurance was to provide financial security to customers and providing security in the context of Japanese culture required a hand-holding approach.
Furthermore, few consumers actually sought to purchase insurance on their own and only considered a purchase if they were solicited by a salesperson. As mentioned above, few people had the patience to read or the willingness to understand the complicated clauses of the typical insurance contract.
The Lifenet team did not accept these arguments. They felt that many forms of insurance would eventually be successfully sold online. The Lifenet team also believed their value proposition would have a strong competitive advantage against traditional players. Because major insurance companies could not afford to cannibalize their highly lucrative (but heavily sales commission loaded) existing products, they were forced to maintain their high cost and inefficient sales channels made up of armies of salespeople and sales agencies. Even those companies selling products directly to consumers via the Internet or mail, had to put enormous amounts of money into traditional television and newspaper advertising.
Through use of published data and customized surveys and focus group interviews, the Lifenet team identified as their target, middle-class married couples in their 20s and 30s with at least one child.
The initial products would be term life insurance and supplementary medical insurance. By doing away with an expensive sales force and establishing efficient operations, product prices could be set as low as one-half of existing products.
In a radical departure from common practice, the company intended to disclose its cost structure and finances to potential customers. The website would be the primary channel through which customers would not only gather product information but also make the purchase.
On the other hand, the Lifenet team did not discount the many challenges ahead of them. First, even in the United States, a country markedly more successful than Japan in popularizing e-commerce and with consumers more open to doing business remotely, the online life insurance business was not an unqualified success.
Second, there were many industry professionals that remained critical of Lifenet’s business model, believing that life insurance needs were only manifested when customers were approached by a salesperson.
Third, Lifenet needed to convince consumers to purchase from a start-up. Because life insurance is a long-term financial product, it would be natural for customers to prefer to purchase from a large, established company for the sense of security provided. To compound matters, by charging lower prices, the new business would have much less money to spend on marketing and building its brand. The Lifenet team needed to figure out how to overcome these challenges.
Despite the many challenges of a startup battling major industry incumbents, enough people were impressed by the founders and their business plan that Lifenet was able to raise an astonishing 13.2 billion yen in capital even before it started operations. Lifenet received its insurance business license on April 10, 2008 and opened for business one month later.
Although growth in business was initially slow to ramp up, the cumulative number of insurance contracts written has recently increased on a “hockey stick” like trajectory as the chart below shows.
Michael Korver is a professor of international business strategy at Hitotsubashi University Graduate School of International Corporate Strategy.