Distribution of insurance today has become a de facto discussion of marketing. Smart agents and smart company people will benefit if they understand the history of insurance distribution. Insurance distribution was initially split between independent agents and captive agents/direct writers. The latter would depend on their company’s marketing prowess and their own ability to build on those marketing efforts to write insurance. Independent agencies on the other hand received almost no marketing support. Their model required they get off their butts and sell insurance. A major difference exists between marketing and selling. Selling is a proactive action requiring a person to ask for a sale. Marketing on the other hand is designed to cause an insurance consumer to ask for a quote. The material differences between these two sentences are as wide as the Pacific Ocean.
Another historical fact is that consumers used to not have a choice about how to buy insurance. They had to buy from an agent, whether an independent agent or a captive. A large portion of consumers never wanted to buy through an agent but they had no choice. Today, they have a choice. Many consumers’ abandonment of the agent then has nothing to do with anything except they finally get to buy insurance the way they always wanted to buy insurance. Agents and their companies were getting a bonus previously.
The market for consumers that do not want to involve agents is large, as proven by the success of personal auto writers that do not use agents. A serious mistake independent agency companies and independent agencies are making then is thinking their lack of marketing is why they’ve lost these consumers and therefore, marketing is the solution to getting them back. Agency marketing or the lack thereof has nothing to do with it and therefore, chasing these insureds with a lot of agency marketing money is a complete waste. Some agencies are going to waste a lot of emotional energy and money simply because they cannot accept this reality. The smart ones are already long past this inflection point.
For the companies though, they have to make a decision. Do they just let those consumers go or do they create a dual distribution structure? Most, if not all, of the largest independent agency carriers have decided to create a dual distribution strategy.
Companies have another decision to make going forward even within the independent insurance agency model. This decision point is precipitated by company automated underwriting systems, otherwise known as predictive modeling. Clearly predictive modeling is working in personal auto. While the results are not quite as good in commercial auto, the results are beginning to show there too and in other lines as well. If these systems work to their touted potential, for what will companies need agencies in these lines?
Historically one of the key differences between independent agents and other distribution models was the quality upfront underwriting independent agencies were capable of providing. Companies recognized this value and built contingency programs to reward the agencies best at upfront underwriting. Upfront underwriting then was a competitive advantage for these companies and their agents. Now, if predictive modeling really works, companies will not need agents to upfront underwrite, at least not in some lines and at least not to the degree they’ve historically needed upfront underwriting.
This is the death knell for some agencies that work hard and take pride in their fantastic loss ratios. They may not grow or have much volume, but they know how to underwrite. I do not know if extinction is their future but evolution is their best strategy. Otherwise they may be like Kodak the day before Apple introduced the iPhone.
Agencies in general depend on contingencies for their profit. If contingencies decline due to predictive modeling (which by definition attempts to balance market share and profit), a likely result, agencies must become more efficient to generate profit. This means better management and reinvesting more money in methodical producer development.
Companies also have to decide whether they will emphasize growth or volume. (As an aside, agencies and companies both need to understand growth is distinct from volume.) Currently because many company reporting systems are flawed, some companies are asking for volume for volume’s sake, thinking they are growing.
For example, two agencies form a cluster each with $250,000. The reporting system now shows $500,000 for the agency and the company thinks this book is growing. That is ridiculous but a true example. Other companies simply want volume because they think they can control the volume once they have the business.
Another facet is the short-term thinking some companies have about volume. They do not care if growth is sustainable. Just give me another book roll. With predictive modeling the company believes it can underwrite anything and the more volume the better; and even though it is a one-time growth event, the company will worry about next year’s growth next year. One of the many risks these companies truly face is agent consolidation. This will happen either through clustering/aggregation or M&A.
In fact, some distributors are already larger than almost all their carriers. It is just a matter of time before one of these entities turns the tables on their carriers. This fact already is affecting the distribution strategy of many companies.
The other strategy within independent agency distribution is focusing on agencies that can generate true organic growth. Some companies have moved some contingency emphasis from loss ratios to growth for this reason.
Independent agency companies that do not have the direct ability to sell to consumers who want an agent involved (commercial and personal) must then appoint agencies who can sell and bring additional value to the client. The companies, for enough money, can market to all other consumers.
Agencies who can sell are the future of insurance distribution. For those agencies that can sell or will develop the ability to sell, and simultaneously manage operations with more efficiency, the future has never been brighter.
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