McKinsey Report Gets It Wrong on Independent Agents

By Brian S. Cohen | January 27, 2014

For decades the experts have been betting against independent insurance agents, yet they keep winning. Why? The consultants, finance guys, and others who populate the skyscrapers on Wall Street discount the power of the local trusted insurance agent who does business on Main Street.

That’s not to say that the recent report from McKinsey & Co. on the future of property/casualty insurance agents should be discounted. It raises some very good points about how insurance agents need to evolve to continue to be the distribution channel of choice in the insurance industry.

McKinsey got some things right, some wrong. Let’s start with the latter.

The agent’s role hasn’t changed. Independent agents used to do more underwriting and policy processing. Automated underwriting and straight-through processing has reduced that role, so insurance companies perceive agents are doing less and should get less commission.

One size no longer fits all.

But the agent’s role has not changed. A local, trusted advisor to explain and recommend the proper insurance coverage the client needs. Today, that role is valued even more with trust in big corporations and the government at all-time lows.

Cost cutting is the easy way to increase short-term profits, and the biggest cost for most insurers is commissions. The report gives a short-sighted insurance company executive a reason to lower commissions. However, companies that reduce commissions will be following a fool’s gold strategy producing short-term gains, at the expense of the long-term viability of their agent-based distribution.

Brand awareness doesn’t translate into customer loyalty. A talking gecko, the discount, double-click Flo, or Farmers University don’t build customer loyalty but they do build customer awareness. The big insurance companies spend hundreds of millions of dollars to get consumers to think of them.

But being top of mind doesn’t mean the customer will have any loyalty to the company. You can’t create a relationship with a person through advertising. People can.

The opportunity to establish a relationship is unique to the agency distribution channel. It takes time and effort, but once established it creates strong customer loyalty. It’s why you never see any studies from big consulting firms that ask people whom they trust more – their local agent or the insurance company. We all know the answer.

Independent agents will gain market share as auto insurance becomes commoditized. I agree with McKinsey that some parts of the auto insurance market are becoming commoditized, but disagree with their conclusion that this will hurt independent agents.

Since they can offer multiple carriers, independents will still get the sale. They will just place the business with the best-priced carrier. The big losers will be the captive distribution companies, which will be unable to offer their clients choice.

Where McKenzie Got it Right

Agents must evolve in the way they attract and retain their customers. Absolutely! The cost of technology is dropping so fast that small and mid-sized agencies can now use tools like social media and data analytics that only large companies could afford a few years ago. Local agents need to be able to engage with their customers in real time. That requires they have a digital media and mobile-compatible platform as well as a social media capability to engage with clients and prospects.

One size no longer fits all in today’s insurance market. Independent agents need to understand their target market, the attributes of profitable customers, and how to reach and serve them.

About Brian S. Cohen

Cohen is president and CEO of Pacific Specialty Insurance Co., based in Menlo Park, Calif. Email:

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