Wal-Mart Stores (NYSE:WMT)is looking for additional profits in some very weird places these days. The retail giant has teamed up with insurance broker Tranzutary Insurance Solutions' AutoInsurance.com to sell car insurance policies through its website.
The idea here is to offer customers something that Amazon.com(NASDAQ:AMZN)does not: car insurance. Insurance is one of the few industries that Amazon has not tried to enter yet. For once, Wal-Mart has beaten Amazon to the punch in offering a service.
The insurance strategy is a low-risk and low-cost one for Wal-Mart because Tranzutary will do all the work. AutoInsurance.com will sell the policies and act as the agent. Six insurers, including Progressive, Travelers, and Allstate's Esurance, will underwriter the policies, The New York Times reported.
What Wal-Mart is really hoping to do here is drive traffic to its website in order to grow its online retail business. The real hope is that customers searching for insurance might also order some toothpaste or a new toaster while at Walmart.com. Wal-Mart may also be hoping to expose insurance shoppers to some of its other services, such as its Walmart to Go online delivery service. Wal-Mart will also advertise the insurance in its stores, which is another effort to attract customers to its website.
How will Wal-Mart affect the insurance business?
The impact of Wal-Mart's move on the insurance business will be difficult to ascertain. The car insurance policies will only be available in eight states -- Louisiana, Arkansas, Mississippi, Missouri, Oklahoma, Pennsylvania, Tennessee, and Texas -- to begin with. Wal-Mart plans a nationwide rollout, but didn't set a date.
It will take time to roll this out because auto insurance is a very complex business, largely because of state laws. There are nine states that mandate no-fault auto insurance, which makes it very hard to file claims or sue in a car accident. There are also three states that give customers a choice between no-fault and traditional auto insurance.
That's why auto insurance premiums can vary widely from state to state. Insurance is not like money transfers for which Wal-Mart can charge a uniform rate all over the nation.
Yet Wal-Mart hopes to be able to offer much cheaper auto insurance premiums. Daniel Eckert, Wal-Mart's vice president of services, told CNN that a test of the insurance sales effort in Pennsylvania saved the average customer $1,168 a year.
It is also no coincidence that some of the states where Wal-Mart is rolling out its policies regularly appear on the lists of states with the highest auto insurance premiums. Some media outlets reported that Louisiana had the highest average car insurance premiums in the nation last year largely because it is very easy to sue insurers in that state.
Pennsylvania, where the insurance service was tested, is one of the three states to allow drivers to choose between no-fault and regular auto insurance. Traditional auto insurance is usually cheaper than no-fault options because it gives insurers more freedom to tailor policies to individual drivers.
Wal-Mart might also have some trouble offering a wide variety of insurance products. The New York Times noted that policies from the two largest players in the auto insurance game -- Berkshire Hathaway's GEICO and State Farm -- are not available through Wal-Mart's insurance marketplace.
Offering auto insurance through its website is a wise move for Wal-Mart, a retailer that needs to attract more affluent and web-savvy customers. Insurance will never be a big profit center for Wal-Mart, but it can serve as a loss leader to drive traffic to Walmart.com.
Daniel Jennings has a position in Berkshire Hathaway. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.