Finding and financing bright ideas for insurance e-commerce

Rough Notes, Aug 2000 by Dinnen, Steve

Tobat Capital will invest in entrepreneurs with

business plans in the early stages of development

By the time you read this, Tobat Capital, LLC, will be up and running. Running what? Running an innovative investment firm, with $100 million in venture capital, aimed at combining the power of the Internet with the power of insurance.

Tobat, based in Dallas, is the creation of entrepreneurs and venture capitalists. Specifically, it's the brainchild of three executives from E.W Blanch Holdings. The General Partners of the company are men who left Blanch specifically to form Tobat: Scott Brock, who's been active in strategic insurance investments and acquisitions; Cory Moulton, who headed international reinsurance at Blanch; and Ian Packer, former chief financial officer at Blanch and a man with working experience in both merchant banking and insurance.

When Rough Notes talked to Packer, he explained how the company intends to make strategic investments in companies that can make Tobat investors wealthy-and the insurance industry efficient.

Packer and his partners formed Tobat after sizing up the $1.2 trillion marketplace that the insurance industry represents. They believe that the financial services industry has been slow to adapt to technological and distribution advancements, estimating that distribution costs in insurance alone exceed $100 billion annually From a business-to-business perspective, they believe a lot of those costs can be pulled out of the industry, once insurance companies understand and adopt several new solutions.

Tobat will focus its investments on business plans that are targeting three of the industry's most significant challenges:

Flat growth

Antiquated legacy systems

High distribution costs

Some of the problems facing the insurance industry are a combination of challenges. For example, what about term life insurance? Packer believes that before long, low-level policies of, say, $250,000 or less will be underwritten and "Jet Issued" directly over the Internet without going through a lengthy application process.

"You can issue the policy right now," said Packer. "That's important because people want fulfillment when they decide to buy."

Packer is quick to note that Tobat won't be selling these policies; rather it will merely be investing in companies that possess the technology or distribution solution to accomplish such a task.

"We're the financier of the enabler," Brock said of Tobat. How about another example?

Packer doesn't have to look any further than the claims process, which he believes is cumbersome in its present form. But that doesn't have to be the case. There are ways to link repair part manufacturers, and repair shops and insurance agents or companies that should speed the flow of information, simplify it and enhance the ability to close a claim.

In their quest to move to just-intime (JIT) inventory systems, the auto and aircraft manufacturing industries already have adopted business procedures that could be reshaped to fit the claims processing system, rather than try to build new technology from the ground up, said Packer. One of Tobat's potential investments is developing a plan to target this exact opportunity.

"We think of ourselves more as applied technology experts as well as inventors," said Packer. Tobat will be making equity investments in companies that have begun operations. They may not be household names, but they've gone beyond the blueprint stage and are beginning to sell their goods or services in the marketplace. In order to qualify for review by Tobat, they'll be expected to show that within 18 months they can generate $20 million in annual revenues, and $250 million in within five years.

In general, Tobat will focus on companies and business plans that are utilizing technology to streamline distribution costs and enhance operations. This is broken down further to companies that offer either B2C (business-to-consumer) products, or B2B (business-to-business).

B2C through B2B affinity group distribution

B2B e-commerce "enablers"

Business process outsourcers

Virtual insurance company applications

Moulton makes it clear that Tobat will tread carefully as it moves into B2C enterprises. Investing in companies that plan to maintain an expensive Web presence to try to sell high-value insurance policies, for instance, is a flawed strategy, in his opinion.

"Consumers may go there once a year," he said. "Insurance is not a sell, like books:'

Packer also is aware that many B2C e-commerce sites have crumbled within the past few months. There have been some spectacular downfalls, with health care, retailing and even some insurance Web sites drastically retrenching or simply folding their doors.

While B2C business opportunities may require especially tough inspection, Tobat is very comfortable with developments in B2B. Research indicates that literally trillions of dollars worth of goods and services will be traded via the Internet. So, while Tobat may not want to sponsor companies that operate portals, it wants to invest in companies to develop software and other computer applications that enable insurance companies to post their own. Further, it wants to introduce to the market products that will allow insurers to rate, quote and issue policies more efficiently.