Challenges and Strategies for the 21st Century Independent Agency

The letter from the Palatine Insurance Co. to the independent insurance agency, written in the dawn of a new century began: “The insurance business is experiencing perilous and unprecedented challenges …” The date: 1921. As the saying goes, everything old is new again.

And so it is with the insurance business. Pundits have been predicting the demise of the independent agency system during my 25 years in the business. While it is true that the number of independent agencies has fallen 15 percent in the past 10 years, one wonders, given the many challenges agents face, how many other industries could boast a decline of only 15 percent in 10 years.

Some of those challenges include:

• A highly fragmented industry. Almost 75 percent of independent agencies have less than $2.5 million in revenues. It is difficult for the average agency to exercise power in the supply chain.
• Plentiful and well-branded direct channel competitors. In addition to the lizard, State Farm, Farmers and Allstate, other carriers are experimenting with direct channel distribution. Think Progressive, Safeco with Costco or The Hartford with AARP.
• Complicated, labor-intensive operational platform. Fifty percent to 60 percent of agency revenues are spent on compensation and benefits.
• Talent shortage. The average age of an agency principal is mid-50, and the agency workforce in general is aging. A great number will retire in the next 10 years. As the U.S. population ages, competition for capable people is going to get tougher.
• Slow organic growth. Increased competition, soft market conditions and a slowing economy have reduced average growth rates to 5 percent or less.

Considering the challenges, independent agents have proven to be among the most resilient of all small businesses. As director of agency management resources at the Independent Insurance Agents of Texas, I am privileged to engage with resourceful business people on a daily basis. The variety of working business models reflected in agencies amazes me — they range from rural, one-person shops with less than $100,000 in revenues to publicly held metropolitan shops with statewide footprints. The common denominator? Adaptability.

For every challenge, independent agencies are responding with new, best practice strategies, including:

• Consolidating books of business and markets. Agencies are merging, acquiring books of business or affiliating through clusters, alliances and aggregators to gain economies of scale and strengthen influence with carriers.
• Leveraging the Trusted Choice Brand. Agencies are using the Trusted Choice initiative to promote the competitive advantages of choice, advocacy, customization and physical proximity.
• Allocating production and service resources more effectively. Agencies are identifying their higher margin, relationship-oriented prospects and customers, and are allocating the highest and best use of staff for those segments. Low-margin clients are being consolidated into business units where service can be standardized.
• Extending relationships across the supply chain and beyond policy periods. Agencies are including the carrier in the relationship mix with clients, leveraging the carrier brand and focusing on the reduction of long-term cost of risk, which discourages costly annual shopping and internal carrier switching.
• Becoming employers of choice. Recognizing that employees are customers too, independent agencies are managing the employment experience and aligning agency strategy with employee aspirations. Because it is easier to train than convert, agencies are recruiting capable, sales or service-minded people from outside the industry and providing training.
• Exploiting technology. Agencies are digitizing their workflows and taking advantage of imaging, dual monitors, real-time transactions and 24/7 accessibility to increase productivity and counter direct channel convenience advantages.
• Finding new sources of organic growth. Agencies are investing in new producers, cross selling into non-property casualty lines and adding non-core services such as loss control and human resource consulting. They are also investing in more sophisticated marketing, sales training and sales management.

To paraphrase Mark Twain, reports of the demise of the independent insurance agency system are greatly exaggerated. It was so in the early 20th century, and it is so now.

Topics Agencies Training Development