I believe the future of independent insurance agencies is at a tipping point. A number of forces are pushing agencies toward the precipice of major change. A few of those forces include: legislation, case law, the Web, generational differences, the economy, the soft market, and the vast fortune carriers have made the last five years. With so many forces driving the industry, isn’t it better to pro-actively manage your future rather than letting the winds of destiny set you down somewhere you don’t want to be?
Some of the forces are clearly beyond an agent’s control, but agents can take action to mitigate their effects.
Loss Ratios and the Hard Market
Carriers have never made as much money as they have made the last five years, especially if the mortgage guaranty insurers’ dismal results are excluded. And what happens when people have too much of anything? They take it for granted. That’s just human nature. So with the carriers making so much money, they are on the verge of taking loss ratios for granted. In fact, more than one company has explicitly stated (albeit privately) they no longer care about loss ratios. Many others have implicitly stated the same through their actions.
These factors mean change, but agents can be prepared. What are you doing to prepare for your carriers that don’t care about loss ratios? What are you doing to prepare for your competitors’ carriers that don’t care about loss ratios? What are you doing to prepare your agency for the eventual hard market?
Having too much business spread too thin is not going to help. Doing business with weak carriers is not going to help. Selling price rather than your agency is not going to help.
Professional agencies are helping their clients understand, expect, and manage their risk expenses and exposures for this market and the hard market when it arrives. That market may not arrive for a year or more, but they will be prepared. Being prepared gets more difficult with each passing day of this record setting soft market. When the market tips, will you be ready? Will your clients be ready?
Disintermediation and Web Sales
I see many agents worry about being driven out of business if they don’t appeal to consumers buying insurance over the Internet. If a customer is going to buy over the Internet, do they need an agency? Does the carrier need a middle man? This very well may be a situation of being careful what you wish for.
Carriers also understand that as the agent becomes more expendable the more the sale becomes commoditized, the more agents depend on company service centers, and the more agents don’t use coverage checklists. Carriers completely understand that the more agents are peddlers rather than professionals, the more agents are expendable.
But Internet-based writers have a completely different business model than independent insurance agents. They don’t have agents, so they have to advertise. There’s no doubt the annual expenditure of tens of billions of dollars on advertising insurance, mostly by direct writers, has changed the insurance market forever. Many agents and agent associations feel pressured to compete with this advertising, but independent agents and brokers are, by definition, supposed to get out and sell. This seems to be an often forgotten key characteristic.
We employ live people, not cartoons. We employ people that actually know coverages, not stand up comedians with red hair. We employ people, not cavemen. The advantage agents and brokers should have is they employ real people that can go out and find clients, provide professional advice, and develop long-term relationships in person.
It appears too many agents and brokers want to build marketing models based on clients calling them. Agents become the order takers. This model tries to compete using a much larger competitor’s rules, which is always a recipe for failure.
Another failure of this strategy — agencies invest heavily in advertising and continue to pay producers as if they were producing accounts from scratch. These agencies will go broke. I am already seeing this. Agencies cannot afford to advertise heavily and pay producers standard commissions.
Additionally, getting people to call is only part of the issue. The remaining part is knowing what to do when prospects do call. Consider yellow page ads. In the past, some yellow page ads generated so many calls that agencies continually spent more than they made just answering the phone and offering quotes. Generating call volume is not the solution. In fact, an advantage of selling rather than marketing is you get to choose your customers.
I am not suggesting marketing is not important, because marketing is critical. But marketing for marketing’s sake is a waste of time, money, effort, and hope. Agents who remember that someone has to always ask for the sale and the money will always come out ahead. No amount of marketing can ever substitute for that.
Professional vs. Peddler
As an approved errors and omissions (E&O) auditor for two of the three major agency E&O carriers, I’ve had agents all over the country tell me that attorneys and other experts have advised them they did not have to offer the right coverages to clients. The idea that a professional agent does not have to offer clients the right coverages just seems totally ridiculous to me.
What do you expect from other professionals? Do you want your doctor to offer all the treatments available or only the one he or she thinks you’ll buy? A professional advises.
Court after court is ruling agencies must offer applicable coverages if the agency holds themselves out to be a professional. A map recently published by Westport in their E&O magazine shows the vast majority of states are moving to this direction and a large proportion of the case law in those states has made it fairly easy for courts to rule that agents have this responsibility. Moreover, I suggest the goal should not be to have policies and procedures that will eventually be upheld in a lawsuit. The better goal is to have policies and procedures that prevent you from being sued in the first place. An E&O suit, even one an agency wins, will likely last at least a year, costing a tremendous amount of money and time.
Many benefits agencies have already blazed the trail for showing the value of being a professional versus a peddler. With the changes in health care, I firmly believe the sophisticated benefits agencies will prosper because they stopped selling only health insurance a long time ago. When every benefits agency has access to the same four carriers and exactly the same rates and coverages, the winner has to bring something to the table other than a commoditized health insurance policy. It does not really matter if the government provides insurance because the services these firms offer will still be necessary.
The P/C industry is approaching the same tipping point. Agents have sat on the fence of whether they are a professional or a peddler for long enough. If you continue to sit on that fence, the odds of being sued and the odds of losing the suit increase every day. You will be tipped off the fence whether you’re ready or not.
The professional agent will always have a place in this industry. Within the independent agent system, I’m not sure that peddlers have a future. I encourage you to be proactive and become a true professional in practice, and the first step toward being a professional is to use coverage checklists religiously.
I firmly believe many forces are independently pushing the industry towards a major tipping point. The only question is: Which direction you will tip?
Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.
To register for upcoming classes taught by Chris Burand at Insurance Journal’s Academy of Insurance visit: http://www.ijacademy.com/instructors/chris-burand
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