Nearly one year after Allstate Insurance launched its $1 billion "Good Hands Network" Internet initiative, State Farm Insurance Co. has joined the growing number of carriers that are selling policies directly to consumers online.Next spring, the Bloomington, Ill.-based carrier will begin selling auto coverage to consumers in California and renters insurance in Illinois via its Web site. Customers will be able to apply for coverage and bind the policy online using a credit card. State Farm's Web site currently provides auto quotes and the ability to file a claim.

State Farm executives call the company's direct initiative a logical extension of the company's Internet strategy, not a reaction to market competition.

"We selected California for auto insurance primarily because we want to maintain our competitiveness in the state," says Robert Reiner, State Farm's manager of enterprise Internet services. "California is one of the most wired states and it has an Internet culture where it is very common to navigate and do business online."

The company selected Illinois to pilot online renters insurance primarily because it can tap into two large metropolitan areas, Chicago and St. Louis.

The bigger picture

Although State Farm executives will not comment on how or when they intend to expand the initial program, it's clear that the pilot is just the first phase of a plan to expand the company's use of the Internet.

"We're hoping to gather quantifiable data on cost expenditures and customer care efforts, as well as the user interface and the whole process of binding online, to better understand the implications of rolling it out in other states," Reiner says.

The company is getting a handle on the technical and cost implications of the initiative. "We are in the process of developing the user interface and the back-end processing piece," he adds. "We're running into a lot of issues about how we will migrate traditional business processes out to the Internet smoothly and effectively."

Reiner declined to name which companies are providing technical support and how much the effort will cost.

State Farm's direct initiative is not intended to replace the relationships it has established with Web aggregators such as QuickenInsurance and NetQuote, where consumers purchase polices online. However, Reiner acknowledges that company executives fear that State Farm's brand is diminished on Web aggregation sites.

"Given the fact that resources are limited, we believed that it was best for us to have the application binding process through our own brand," Reiner says. "That being said, there are no plans to pull the plug on these relationships."

Avoiding agent angst

State Farm's decision to slowly roll out its direct program is typical of how the company has launched other initiatives, such as its all-Internet bank, State Farm Bank. But it may also signal the company's awareness that the online initiative may be disconcerting to some of its 16,000 agents.

Mike Lanham, a State Farm agent based in Carol Stream, Ill., says he supports the company's decision and believes that State Farm has no intentions of abolishing its agents. "Any sales activity that occurs online will be assigned to an agent, and we will get servicing compensation for that policy," he says. "It's a reduced commission, but not significantly reduced from a typical commission."

He declined to elaborate.

Lanham believes that customer demand and competitive forces are behind the decision. "We have to position ourselves to cater to the generation of new customers who have never sat down in an agent's office and prefers to do business on the Internet."

Customers who purchase policies online will be able to select an agent through the Web site, or an agent will be assigned to the account based on geography and other criteria.

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