In the few years since the advent of Web insurance marketplaces, much industry debate has centered on which online mall model would prevail.In some cases, online malls acting as agents receive compensation based on policies actually sold to consumers. In others, revenue is based on customer referrals made to insurers, whether or not a sale is actually consummated.

The recent turmoil that InsWeb Corp. has experienced suggests that its business model may be outdated for today's online insurance market, analysts say. In June, the company announced a corporate restructuring and a series of cost-cutting measures due in part to declines in compensation based on customer referrals.

The Redwood City, Calif.-based company said that it would be laying off 40% of its 240-member staff during the next six months, consolidating its headquarter and agency operations in Sacramento, Calif., and shifting the focus of how it will be compensated by its insurance company clients.

The company also stated that revenues for the remainder of 2000 will be significantly lower than originally projected.

InsWeb's moves came less than two months after it laid off 10% of its employees and lost its biggest client, State Farm Mutual Automobile Insurance Co., Bloomington, Ill., which was the source of nearly 30% of InsWeb's revenue.

InsWeb's woes stem from what company executives admit was an "overdependence" on revenues it receives from insurers that are based on customer referrals generated by InsWeb.

Relying on referrals

Insurers pay InsWeb transaction fees whether or not the consumer actually purchases an insurance policy. These fees amounted to $7.1 million, or 82.3% of InsWeb's total revenues, for the three months ended March 31, 2000.

InsWeb's problems with State Farm arose because the insurer made up such a disproportionately large share of InsWeb's business but also because of how the relationship with the insurer was structured, says Hussein Enan, InsWeb's CEO.

He claims that some of State Farm's agents did not want to service customer referrals from InsWeb, and that State Farm was unwilling to address the problem.

However, some industry analysts say InsWeb's financial woes are the direct result of the fact that its business model does not allow InsWeb to retain and service the customer after a referral or sale is made.

"InsWeb lost control of the customer. The customer relationship is critical to making the model work," says Bryan Keane, a senior e-financial analyst with Prudential Volpe Technology Group, San Francisco.

Expanding agency activities

To modify its primary reliance on the customer referral model, InsWeb has begun expanding its insurance agency activities to include the sale of automobile insurance. The company currently sells policies in California, Washington and Arizona through its InsWeb Insurance Services Inc. subsidiary.

Unlike with referrals, InsWeb receives a commission based on a percentage of the insurance policy premium related to each insurance policy sale. "We're trying to achieve a balance of the two revenue sources," Enan says.

Apart from the significant financial hit that InsWeb took with State Farm leaving, the company has also suffered some serious financial setbacks in recent months

InsWeb reported that it lost $13.1 million during the first quarter that ended March 31, a 52% drop from the same period a year earlier.

In its most recent 10-Q filing with the Securities and Exchange Commission, InsWeb said that it would reduce consumer marketing expenses beginning in June.

Despite its mounting financial problems, Enan estimates that that InsWeb has more than $75 million in cash and short-term investments that will enable the company to operate comfortably through 2002.

"We can continue to do adequate marketing and take care of our other expenses and turn the corner at the end of 2002," Enan says.

InsWeb's current problems does not mean that the company will fade away, some analysts believe.

The fact that InsWeb has existing relationships with numerous insurance carriers and approximately 150 partnerships with major online entities are other reasons why it can succeed despite its recent setbacks, says Todd Eyler, a senior analyst with research and consulting firm Forrester Research Inc., Cambridge, Mass. "It's a valuable property."

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