Yogi Berra once said: “It’s tough to make predictions, especially about the future.”
Ignoring that wisdom, what will the insurance agency business model look like in 10 years or 20 years? Right now there are several major trends that are impacting the insurance industry.
These include: 1) agency consolidation, 2) ease of starting a new business, 3) the age gap, and 4) insurtech and artificial intelligence.
The first three trends will re-shape the existing industry and the agency business model and gently morph it into a revised structure. However, insurtech and artificial intelligence are disruptors that could totally change the way business is done.
The first trend is the result of small to medium size agencies currently being bought up by large publicly traded firms and private equity backed operations. Private equity has jumped into the insurance industry with both feet. It now accounts for one-third of transactions and is quickly headed to be responsible for half of the agency acquisitions.
This consolidation trend has been occurring for some time. One noticeable fallout is that more and more insurance accounts are controlled by agencies that are professionally managed and have a national presence. This might track consumer expectations to have access to an organization that has broad support. Small independent agencies need to focus on personal relations and create ways to service accounts that makes them competitive against larger firms. The days of towns having multiple small independent agencies are waning.
The second trend is a counter to the first trend. Today, the ability to start an agency is as easy as it has ever been due to various options that did not exist 50 years ago. The major change is due to market access.
An entrepreneur today can start a new agency and access a wide variety of markets through aggregators or similar venues. This makes the firm viable right away. In the past, a new agency would have to broker business through another agency until they could get enough volume to have their own contract. It would take a long time before the agency would be large enough to support contracts with multiple standard markets.
There are still more options for new and small agencies to gain support and secure market access. The traditional route would be to join a cluster or network. Clusters are two or more agencies that share access to markets and perhaps other things like facilities, computer systems, accounting, service staff, etc. This option usually is available after the agency is already established.
Another system is a new franchise agency system, like Brightway and Goosehead. This agency franchise not only provides market access, but also includes back office support, such as accounting and customer service staff. The branding, agency automation system, procedures, etc., are all consistent. Typically, the new franchisee will pay an initial franchise fee (often $25,000 or more) and then the commissions are paid to the franchisee at a lower rate to offset the cost of support.
The advantage is that like all other franchises, a new entrepreneur can be up and running right away. Most of these franchises are structured so that the franchisee is a sales person that can own their own business (and book of business) without having the hassle of being in charge of employees or handling market relationships. The downside is that the franchisee needs to conform to the rules and the compensation might be less than if they owned a truly independent agency.
Partnerships such as clusters, networks, aggregators and franchises are becoming an incubator for new agencies. A 2015 survey sponsored by Insurance Journal indicated that more than 25 percent of agents work for an agency that is a member of an aggregator or belongs to a cluster. These options also have the benefit of operating a small agency while being part of a larger organization. The Insurance Journal’s list of the Top 20 Partnerships for 2016 show impressive numbers for the combined revenues of the members.
The third trend is an issue faced by all businesses, it is a demographic population gap. Baby boomers are retiring. The first boomers turned 65 in 2011; 10,000 turn 65 every day; the youngest are now 52. Meanwhile, millennials are entering the workforce. The issue is that there is a growing population gap since the generation in-between, generation X, is smaller than both the baby boomers and millennials groups. So, people in their 60s will be replaced by people in their 20s, because there is a lack of people in their 40s.
Also, agency ownership issues arise. Baby boomers own 63 percent of the private businesses in the U.S. and 80 to 90 percent of their wealth is tied up in their businesses. It is estimated that 75 percent of baby boomer agency owners plan to transition over the next 10 years; 48 percent in the next five years. At least for a few years, these retiring owners will help fill the seemingly insatiable desire of private equity firms to acquire more agencies.
This age gap also means an experience gap. The 20-plus-year seasoned producer or manager will be replaced by a person with less than 10 years of experience. The efficiencies built by experience will be lost while the younger generation comes up to speed.
Finally, there is insurtech, which is the 800-pound guerilla of these trends. Insurtech is the umbrella term now used to cover the usage of technology in the insurance industry. It can be used to describe the overall impact that technology has on the insurance marketplace. Insurtech can include things like smartphone apps, wearable devices, sensors in appliances, access to online consumer data, improved claim tools, individual consumer risk development algorithms, online policy handling, automated compliance processing, etc.
This trend is a wild card since all the possibilities are truly unknown at this point. However, the future looks like it will have a huge impact. For example, the wide use of self-driving cars is just a few years away. Since these cars are expected to be much safer due to technology, the liability related to driving with be reduced and perhaps shift from the owner to the car manufacturer. So, personal lines auto policies could be a thing of the past in just a few years.
Most “things” that we have will have some sort of technology built in that can monitor performance, how it is used, problems, surroundings, etc. Again, this will also re-shape and shift liability.
Insurtech and artificial intelligence is expected to change how information is collected, analyzed, distributed and used. Consumers today getting an auto policy quote can enter their name and address and the system will have access to the car that the consumer owns. There is a ton of information out there waiting to be accessed, analyzed and utilized, and with artificial intelligence it will be done with a computer rather than a person.
For insurance agencies, most likely the next 10 years will be a gentle evolution into a new form. In the long run, perhaps 20 years from now, the role and even the existence of insurance agencies are unknown and very difficult to predict due to the role of technology. At that point we might quote The Grateful Dead and say, “What a long strange trip it’s been.” Share this article with a colleague.