The traditional role of an insurance agent in the sale of insurance products to potential policyholders has changed dramatically over the years. Historically, the agent was the customer’s first and only point of contact. However, due to a maturing market’s slower growth in certain insurance areas, as well as the impact of increasing costs in doing business through agents, insurance companies sought new ways to increase profitability.
Insurance companies began providing consumers with additional access points for insurance sales, including the Internet and direct insurance sales through toll-free telephone numbers. Today, the Internet and other new technologies, as well as the modern “direct writer” business model, have gained popularity.
Large insurers selling fungible coverages (auto, homeowners) have increasingly used many channels to sell insurance. In the mid- to late-1990s, businesses began offering products on the Internet, and consumers were soon clamoring for online functionality for their insurance needs. A survey conducted around the year 2000 indicated that “45 percent of computer-owning households reported they rarely or never visited an agent or broker in person.” See Practicing Law Institute, “Fourth Annual Internet Law Institute: Remote Banking and Financial Services,” 610 PLI/Pat 809, 839-41 (June 2000) (hereinafter “Internet Law Institute”).
In 1999, Congress passed the Gramm-Leach-Bliley Act, which eliminated barriers that had previously prevented banks from engaging in insurance activities. The Gramm-Leach-Bliley Act brought the insurance industry “under assault” from banks and other segments of the financial services industry. This competitive pressure, along with the growth of the Internet, undermined a key role of independent agents in delivering many of the insurance products sold in America. Consequently, many insurers began shifting from an “agency” business model to a “direct writer” model.
One commentator explained the cost advantages that direct writers gained by “cutting out the middleman” and using mass media, including telephones, to issue policies:
“Agency system insurers” have traditionally solicited business through intermediaries, such as company agency forces, independent agents, managing general agents, and brokers. Intermediaries typically earn commissions that are charged to the insurer at policy inception as “acquisition costs.” These costs typically constitute a significant portion of an agency system insurer’s policy expenses. “Direct writers,” in contrast to agency system insurers, mass-market and issue policies directly to insureds (through mass media such as television, telephone, and the mail) without the use of intermediaries. Internet Law Institute, 610 PLI/Pat at 836.
In addition to cost factors, niche insurance companies such as USAA and GEICO were able to access specific populations, and did not use independent or exclusive insurance agents to obtain their customers. This was yet another competitive force that gave rise to the trend toward direct writers.
Furthermore, the direct writer system gained a foothold because it was a speedier way of doing business. For example, underwriting and policy issuance can occur almost instantaneously online in personal lines transactions. Obviously, telephone transactions provide many of the same speed advantages. As the direct writer system became pervasive, independent insurance agents expressed concern that they “may be headed the way of the milkman.” See John R. Wilke & Leslie Scism, “Under the Gun: Insurance Agents Fight an Intrusion by Banks, But Other Perils Loom,” Wall St. J., Aug. 8, 1995, at A1.
When a consumer buys an insurance product over the phone, a recorded acceptance is typically used instead of a written application. The American Law Institute noted that “written applications or consent requirements could be problematic under many states’ insurance laws,” in light of the new industry practice of selling insurance products over the telephone, the Internet or by some fashion whereby a policy is bound and premium dollars are immediately and automatically transferred from a policyholder’s bank or securities account, as they were in this case.” Cynthia J. Borrelli & Douglas C. Furlong, “Regulation of and Litigation Involving Insurance Agents and Brokers and Their Activities in the Year 2001,” SF81 ALI-ABA 359, 361 (May 10, 2001).
One of the impediments to the direct writer business model has been state specific “written notice” statutory requirements that, until recently, required agent involvement. Almost uniformly each state has a “written notice” requirement for the acceptance or rejection of uninsured motorist and underinsured motorist coverages, as well as with respect to policy cancellations.
This impediment, which implicitly favored the independent agency model, was eliminated by Congress in 2000 when Congress passed the passed the Electronic Signatures in Global and National Commerce Act (E-SIGN). Under that legislation, the legal effectiveness, validity or enforceability of any contract executed by a consumer cannot be denied solely because of the failure to obtain confirmation of consent by that consumer. This federal legislation applies to the states.
Regarding state statutory requirements affecting uninsured motorist and underinsured motorist coverage offerings/rejection, the enactment of E-SIGN likely permits these state statutory requirements to be fulfilled through digital recording of the telephonic purchase transaction where UM/UIM coverage was offered and/or rejected. Thus, the need for direct agent involvement in the transaction has been eliminated.
Although the E-SIGN legislation is silent regarding those state statutes that require cancellation notices to be sent not only to the named insured but also to the named insured’s insurance agent, recent case authority suggests that E-SIGN also will eliminate the agent’s participation in the cancellation process. For example, in Wellman v. GEICO General Ins. Co., 931 So. 2d 1046 (Fla. App. 2006), GEICO was a “direct” issuer of automobile insurance, selling over the telephone or the Internet. Wellman called GEICO and purchased automobile insurance directly, with no agent involved. Wellman was subsequently involved in an automobile collision and made a GEICO claim. GEICO immediately sent a written reservation of rights explaining that the policy had been cancelled for nonpayment of premium prior to the accident.
A Florida statute provided that an insurer’s notice of cancellation is not effective “unless mailed or delivered by the insurer to the named insured and to the named insured’s insurance agent.” F.S.A. §627.728 (emphasis added). The statute, however, was silent regarding cancellation notice to agents where the policy was issued by a direct writer. In Wellman, GEICO did not send notice to an agent, because there was no agent involved.
Despite failing to adhere to the letter of the statute, the court held that GEICO’s cancellation was valid. The court reasoned that “[a] direct insured gains no benefit by our imposing additional notice obligations on the insurer beyond those exercised here.” Id. at 1048.
The direct writer model has worked well for large insurance companies that have made major investments in television and Internet advertising. With respect to smaller insurance companies, it is probable that they will continue to use the independent agency market as a principal marketing mechanism. However, consolidations that are taking place in the personal lines marketplace will create additional market pressures to adopt a direct writer marketing approach, which will shrink the independent agency market. Independent agencies whose book of business is primarily personal lines may experience the most significant impact of this shift in the marketplace.
To protect against this agency market shrinkage, the modern agency needs to diversify its portfolio of insurance companies with a focus on smaller regional insurance companies writing personal lines coverages and in those type of insurance products that are not conducive to direct writing, i.e., general liability, specialty lines, which are governed by more complex and nuanced underwriting for which the direct writer model is ill equipped to handle on a large volume basis.
Diversification of the agency’s portfolio should be a principal focus as a buffer to the technological change that has caused shrinkage in the personal lines marketplace. Smaller insurance companies are unlikely to make the significant commercial investment necessary to set up a direct marketing business plan that requires Madison Avenue type advertising with its attendant expenses in the formulation of branding that is necessary to the success of the direct writer market.
The independent agent should also focus increasingly upon the generation of commercial business including specialty and surplus lines, which cannot effectively be underwritten through a direct writer model. In these modern times, the independent agent does not want to go down the path of the most successful and last buggy whip manufacturer, who continued to receive an increasing share of a diminishing market in an age of technological advancement.
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