Market Report: Independent Agency System Shows Growth, Opportunity

Both the commercial and personal lines property/casualty markets grew significantly in 2002 creating opportunities for each of the three major distribution systems: independent agents and brokers, captive agents, and the direct response companies. The larger the market share in a particular line of business, the more growth the particular distribution system experienced.

The market share percentages for each distribution systems did not change appreciably. However, within the independent agent and broker segment, there was a continued shift of market share from national companies to regional companies in both personal and commercial lines. Our research also showed again this year there are efficient companies using each type of distribution system and efficient independent agency writers are able to deliver insurance just as cost effectively as captive agent writers and many of direct companies, and in some cases, even more so.

This marks the eighth year in which the Independent Insurance Agents and Brokers of America (IIABA) contracted with A.M. Best Company to supply year-end 2002 industry market share and company expense data so IIABA could continue its annual assessment of the state of the Independent Agency System. All data reported comes from A.M. Best and is printed with its permission.

The data A.M. Best provides to IIABA gives the most accurate picture of what is occurring with property/casualty insurance distribution because it separates out the direct response companies from the captive agency companies. In addition, A.M. Best, for the IIABA study, separates out the affiliates of groups, which use different distribution systems and places these affiliates in the appropriate distribution category wherever the company group uses separate affiliates for this purpose. In the charts below, previous year market share numbers have been recalculated using these same divisions to provide as accurate comparisons as possible.

Key findings
The commercial lines market grew 19 percent to $203.28 billion in 2002. Because independent agents and brokers write almost 79 percent of this business, they experienced an increase in premium of $25.4 billion.

The personal lines market also experienced a healthy growth of 11 percent in 2002 to $188.35 billion. Independent agents and brokers added $6.7 billion in premium. This is very positive growth for the independent agency system but is nowhere near the growth that occurred in commercial lines, because independent agents and brokers write a much smaller percentage of the personal lines market—slightly more than 36 percent. When you consider the overall size of the $188 billion personal lines market; the overall premium growth in this segment of almost $19 billion in 2002 alone; and the fact that 64 percent of this market is not yet written by independent agents and brokers—you create a powerful business case for more independent agents and brokers to focus on personal lines as an additional profit center that merits a pro-active growth strategy.

Commercial lines
As the chart below indicates, each of the distribution systems largely held their own in commercial lines, but there was a continued shift of business within the independent agency segment from national carriers to regional carriers. The national agency carriers lost 1.07 points of commercial lines market share. The regional agency companies picked up 0.81 points of that loss, and the captive agency writers picked up 0.28 points of share.

In 14 states plus the District of Columbia, independent agents and brokers write more than 80 percent of the commercial lines market. The top five states in terms of independent agent and broker commercial lines market share are Hawaii, Rhode Island, Massachusetts, District of Columbia, and Maryland. Independent agents and brokers write 75 percent to 80 percent of the commercial lines market in 24 states, and 70 percent to 75 percent in five states. Commercial lines market share in the remaining states ranges from 65.62 percent to 57.41 percent.

Personal lines
Looking first at personal lines overall, there was very little change in market share among the distribution systems. Once again, however, within the independent agency segment, the national agency companies lost 0.93 points of market share, while the regional agency carriers picked up 0.87 points of share. You will note that the captive agency writers had a very slight loss in share, while the direct response companies had a very slight gain.

Independent agency personal lines market share can vary greatly by state. The Massachusetts agents have the highest percentage share with 78.87 percent. Maine, Vermont, Connecticut, and Ohio are the four next highest, having 50 percent to 61 percent market share. An additional 11 states have more than 40 percent share. In 17 states, however, independent agents have only 20 percent to 30 percent of the personal lines market, creating a big market to go after for growth.

Personal auto market
The personal auto market grew 10 percent in 2002 to $143.75 billion, of which independent agents and brokers wrote just under $51 billion. The independent agency segment grew its share of the personal auto market by $4.7 billion.

In the chart below, we see that national independent agency carriers lost 0.89 points of personal auto market share, and regional independent agency writers picked up exactly that amount. Similarly, the captive agency writers lost 0.21 points of market share, and the direct response writers picked up exactly that amount. In short, the share held by each of the three major distribution methods for personal auto remained virtually the same.

In all charts, A.M. Best has re-allocated premium volume to the proper distribution category wherever the carrier uses separate affiliates for its different distribution methods. In personal lines, personal auto, and homeowners charts, however, the market share for direct response companies are somewhat understated because direct business written by The Hartford and Progressive cannot be separated from the independent agency business written by these companies, and therefore is lumped in with their agency business. If and when these carriers begin to write this business in separately identified affiliates, A.M. Best will be able to re-classify into the direct response category.

For similar reasons, Allstate’s rural independent agency program is still classified as part of its captive agency business, rather than with the rest of its independent agency business, which is written in separate affiliates and has been placed in the proper distribution system category.

Homeowners market
The homeowners market grew 14 percent in 2002 to $42.65 billion. Independent agents and brokers wrote $16.4 billion of this market, increasing their homeowners premium by just under $2 billion in 2002.

The national independent agency companies lost 1.22 points of market share, while regional agency carriers and captive agency writers had market share gains, 0.92 and 0.41 points respectively.

Company expense comparisons
Each year, in addition to reviewing market share trends, we review the expenses of the most efficient companies from each distribution system. We have consistently found over the eight years in which we have conducted this study that there are efficient companies within each distribution system and that the overall expenses to provide insurance (operating ratios) for these companies are very close to one another. The operating ratio is a combination of the company’s underwriting expense ratio and loss adjustment expense ratio. The underwriting expense ratio includes the commissions/broker fees ratio, other acquisition expense ratio, general expense ratio, and the taxes, licenses and fees ratio.

Listed below are the operating ratios of the most efficient companies in 2002 for personal auto because this is the primary market in which all three of the distribution systems compete heavily.

National agency companies. Travelers (31.77); Great American (34.83); The Hartford (35.20); and Allmerica P/C (35.24)

Regional agency companies. Liberty Mutual Agency Companies (27.61); Auto-Owners (29.57); Cincinnati (30.13); GMAC Insurance (30.71); Safety Insurance (31.65); Commerce Group (32.58); State Auto (35.77); Progressive (35.93); Westfield (36.32); Nationwide agency affiliates (36.80); and Mercury General (36.84).

Direct companies. USAA (24.67); GEICO (24.89); GE Financial (31.56); 21st Century Ins. Group (37.59); and Amica (40.13).

Captive agent companies. Southern Farm Bureau Group (29.68); American Family (31.96); Auto Club of Southern California (32.27); Liberty Mutual direct writer cos. (36.62); Allstate direct writer cos. (36.72); Nationwide direct writer cos. (36.84); State Farm Group (37.94); MetLife direct writer cos. (38.29); Farmers Group direct writer cos. (45.12).

Both USAA and GEICO, have been able to achieve a three point operating ratio advantage over the rest of the companies. In 2002, USAA shaved about four points off its operating ratio. In addition, independent agency and captive agency writers should be able to gain further efficiencies as they implement real-time electronic interfaces with their agents and insureds. These expense differences reinforce the importance of continued investments in technology to maintain and enhance the long-term competitive position of both carriers, agents and brokers.

Conclusion
The independent agency system continues to have a very strong position in commercial lines. Independent agents, brokers and their carriers also have the opportunity to leverage their significant position in personal lines to go after the 64 percent of the current market that they do not write. Many of the major captive agency carriers have been following a similar strategy as they have moved into the independent agency segment of the market by acquiring independent agency companies or appointing independent agents and brokers.

The 2002 study also has demonstrated that the larger the market share, the more growth that segment will experience in a growing market. Independent agents and brokers added $25.4 billion in commercial lines premium in 2002 alone because of their dominant market share. In personal lines, they added $6.7 billion in premium in 2002.

Finally, the 2002 study reinforced that the three major distribution systems are each significant competitors and are locked in a competitive struggle where significant changes in market share are hard to come by.

Madelyn Flannagan is vice president of education and research for the Independent Agents and Brokers of America, and Jeff Yates is executive director for the Agents Council for Technology.