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Market Pressure Increases for Online Ventures

As venture capital vanishes, insurance dot-coms seek refuge with traditional insurance brick-and-mortars.

Blame it on bad timing, or the slowness of the insurance market, but one thing is for sure: Insurance specific dot-coms are in trouble.

And the casualty list continues to grow. Chicago-based Iwix.net, an Internet specialty insurance marketplace, shut its doors after it ran out of cash and couldn't find an investor or a buyer. Ebix.com (Schaumburg, IL), a provider of software and Internet-based solutions for the insurance industry, recently received an emergency cash infusion from long-time business partner Brit Insurance Holdings, a UK-based insurance holding company with assets of British Sterling 250 million. The $7 million in cash will help Ebix meet a Nasdaq funding requirement and should keep the company from being delisted. These events follow the closing of eCoverage.com, the online insurer that ran out of funding.

"The funds that have dried up are partially due to bad timing," says Eduard Cecere, research analyst, TowerGroup (Needham, MA). "The funding ran out when it did, and some of the business models that have failed are just because of bad timing."

Max Carter, chief executive officer at Iwix.net, agrees. "We have been trying to find a venture capital investment for some time," he told I&T in April. "But there is clearly a lack of investment capital for online businesses. Because of that...we closed the doors." Carter says Iwix was also looking for a buyer, but to no avail.

While Ebix was not bought outright, Brit Insurance Holdings did become the largest equity holder of the company. While the additional funding was gladly accepted, it was not "a get-funding-or-shut-down situation," says Robin Raina, president and chief executive officer, Ebix. "It was not a survival issue," he says. "We could have done some internal cost cutting." The extra cash, says Raina, will allow Ebix to continue current operations and expand its operations in the UK, besides helping with the immediate problem of Nasdaq delisting. "The Brit deal brought in the money necessary and gave us the net tangible value—in excess of $7.5 million—that will meet the requirement for the Nasdaq," adds Raina.

Similarly to Ebix, CyberComp, a Lawrenceville, NJ-based online workers' compensation quoting-and-binding service, found a savior in a traditional brick-and-mortar. Employers Reinsurance Corp. ($38.5 billion in assets, Overland Park, KS) purchased CyberComp from troubled Reliance Insurance (New York). "The real issue for CyberComp was the financial rating of their parent," says Bruce Coates, vice president of marketing research and development, Westport Insurance Corp., a division of ERC where CyberComp will operate. "The system worked, but CyberComp ran into problems with Reliance's rating."

Even more ominous for insurance dot-com plays may be the nature of the insurance market. "The insurance industry may not be ready now—and this may be controversial—but there are problems that are rising on the carrier side," says TowerGroup's Cecere. "These problems relate to strategies the carriers have picked that may not enable the online dot-coms to work with them," says Cecere. "It may be that the carriers' technology, such as legacy-based technology, doesn't work in the online, real-time environment, or it may be business strategies that work against dot-coms," such as carriers deciding not to use aggregators and operating their own Web offerings independently.

"That doesn't work with online quote aggregators," continues Cecere. "The result is the consumer is disappointed with quote disparity."

Iwix's Carter agrees. "We were ahead of our time," he says. "The market is slower than we anticipated." Carter contends it will probably take two to three years for a market to develop to support a dot-com insurance player.

TowerGroup's Cecere anticipates that a winning dot-com business model will emerge in the next two years-but probably not from a start-up. "Brand is very important, as eCoverage has shown," he says. "You can't buy a brand. The winning model is going to be from one of the players we know now." Most importantly, he adds, the model is going to an online insurance agency, rather than the aggregator concept.

"The days of the online quote aggregator are numbered," adds Cecere. "The online players will have to do more than find prospects," such as acting like an online agent that can take some cost out of the transaction.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio

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