Industry News

It happens every decade or so and now, in 2013, it is happening again.

There have been several consulting reports issued in recent months which, to varying degrees, predict the demise of the independent agent and the unraveling of the independent agent distribution system.

The National Association of Professional Insurance Agents (PIA) disagrees, vehemently.

The report that has garnered the most attention is one by McKinsey & Co.’s Financial Services Practice, a consulting firm. It contained the headline, “The End of an Era for the Local Insurance Agent.” McKinsey contends that “the economics of the traditional agent model are beginning to unravel.”

The McKinsey report, after it makes a case for agents being under increased pressure from competition by direct writers and commoditization, then goes on to observe – somewhat incongruously with the rest of its argument – that “Local agents are not in danger of extinction, but the role they play will continue to evolve.”

Having put forth its view of how it thinks the market is evolving, McKinsey then paints a picture of the role it sees local agents playing in the future: highly specialized, greatly diminished and paid much less. Indeed, McKinsey laments the fact that the flawed argument it puts forth “Surprisingly [emphasis added] [this] has not yet led to a change in the local insurance agent landscape. There are signs now, however, that the economics of the traditional agent model are beginning to unravel.”

It’s Just Not True

“The McKinsey report is just somebody’s opinion. In reality, I just don’t think it’s true,” said PIA National President John G. Lee of Fredericksburg, Virginia. “Direct writers are tough competition but we can compete. Wacte have just as competitive rates as they do. There is a percentage of the market that’s going to go direct and overall, across all lines, it’s been stuck under 30% for many years, despite billions in advertising. I don’t see that market share increasing.”

“Far from being the ‘End of an Era,’ this is the dawning of a bright, new age for the independent insurance agent,” Lee said.

PIA National Senior Vice President Patricia A. Borowski has seen this all before. Every decade or so, consulting firms will predict the demise of the independent agency distribution system, for their own competitive priorities. Often, she says, this leads to massive losses by those who buy into the narrative.

“The report by McKinsey is not a research report, as no true unbiased research seems to have been conducted for it,” said Borowski, during a break at a conference held by the Society of Insurance Research (SIR) in San Antonio, where she was representing PIA. “There are charts and graph references, but they are used to support a predetermined outcome. It is nothing more than an opinion article by a couple of analysts that – at best – relies on the authors’ opinions, along with selective statements from like-minded others.”

Borowski said the McKinsey report was on the agenda of the Commercial Lines Insurance Agents Panel at the SIR conference. The consensus among the panelists and a number of the conference participants was that the report is little more than a dressed-up op-ed article.

“These ‘reports’ are efforts to convince everyone that they – these consultants – have a plan by which carriers and/or banks (for whom the consultants would no doubt like to consult) can eliminate independent agents and pocket that savings,” Borowski said. “What is never discussed are the conversion requirements, ongoing costs and potential consequences carriers may face by following such a strategy.”

Borowski added that a similar attempt to displace independent agents was tried in the 1980’s. The accounting firm Arthur Andersen did a similar report for how banks would be able to take over the business of insurance; and another report for national P&C carriers about breaking up each line and running them as separate independent companies. Both plans failed. “The Arthur Andersen plan was horribly flawed; it led to escalating internal costs, less production and drove combined ratios through the roof,” she said.

A Flawed Premise

The McKinsey report is a flawed premise wrapped in a faulty analysis. It contends that the marketplace is inevitably marching away from independent agents and toward commoditization of more lines. It is this premise that is flawed. It owes more to the wishful thinking of those promoting it than to any truly objective analysis.

This report either ignores, or perhaps its authors are ignorant of, a more complete picture of what is actually underway in the broad insurance marketplace. They seem to advance an assumption that carriers generally are taking steps to prepare themselves to move toward commoditization. This is not supported by the facts, among them:

• GEICO has embarked on a very aggressive campaign to train and grow its own local independent agency network in order to stop the high rate of churn in its book, better hold the business they get and attempt to get a solid hold from which to grow further.

• State Farm continues to make their local agents the center of their system.

• Allstate’s growth over the last 20 years has been largely the result of their independent agency (IA) system, not their captive or direct channels.

• Farmers converted to the IA system east of the Mississippi some years ago and is growing the independent approach in the West as well.

• Progressive is primarily an independent agency carrier, as is Liberty, with both still writing the most business under their respective IA systems.

If the McKinsey report painted an accurate picture, it would reveal the real message: Insurers with independent insurance agency systems supported by high quality branding and marketing campaigns win.

In conversations with several of the most successful PIA agency owners in the nation, two themes emerge: First, agents must change and adapt in order to continue to succeed. Second, the independent agency distribution model is superior to the direct model, because agents provide the value that most customers are looking for.

Lee said the value that agents provide is significant. “Insurance is complicated and people need advice,” he said. “That’s what we give, good advice. At the time of a claim, they want somebody who can help navigate through the claim and help them with that. We represent many companies, so we can place clients with companies that best suit them. We can shop them at renewal if that’s necessary, whereas if you’re with a direct writer or one of those online-direct people, you’re locked into that company only.”

In order to get the chance to provide that value, however, one must attract new customers as well as retain existing ones. Agents noted that agencies need to be responsive to their customers’ desire to communicate with them when and how they want; but that online and social media communications must provide an introduction to the personal interaction that follows, not replace it.

‘Becoming More Like Us’

Stan Logan, a principal of Logan, Lavalle, Hunt Insurance Agency in Louisville, Kentucky, says his agency’s strategic investment in online technology is already paying off handsomely.

“My website for example, we’ve beefed it up, we’re doing more social media, we’re doing more outreach through technology,” said Logan. “In the last six months, I’ve gotten more insurance quote requests than I have in the last six years.” He said that all have come from new customers. “That proves to me that my strategy is right.”

Asked what he thinks of the argument that because people are doing more online, agents will get pushed out, Logan was emphatic. “Number one, I’d say consultants are on the way out,” he said. “People still want to be counseled by trained professionals. They are reaching out to get the conversation started – but it’s just the start of a conversation. We still have to bring value to the table. You’ve got to talk – I sometimes have to remind my producers, ‘pick up the phone.’ But the instantaneous online communication is what starts the conversation.”

Logan took issue with comparing insurance agents to travel agents facing disintermediation. “The travel agents that didn’t make it treated everything like a commodity, while the ones that succeeded provide outstanding personal service.”

Tim Dean, President of Marshall & Sterling Insurance in Poughkeepsie, New York, said his agency is countering more internet shopping by stressing the consultative benefits of having an agent. “We don’t think that a decision to protect your personal wealth and assets should be done in 15 minutes or less,” he said.

At the same time, Dean said that direct writers like Geico are having to change, opening up physical brick-and-mortar locations in communities, staffed by their own agents.

“They are writing people who are price-focused – but then, those people start to grow up and get married, and have children and assets that they need to protect,” Dean said. “At that point, they want to talk to somebody. So, Geico has to open up offices or else what happens? They notice that when it’s time to really get serious about insurance customers leave and go to the independent agent.”

“What I like about that is their cost structure changes,” he added. “Now, they have to rent offices just like we do and they have to staff them with people who are professional and knowledgeable, so that means they’re becoming more like us.”

Dean also takes issue with some assertions in the McKinsey report. Of the contention that the traditional agent model is “beginning to unravel,” he disagrees. “We’re not seeing that at all. We hired three additional producers focused exclusively on personal lines in the past two years and they are doing well.”

And about the idea that carriers can open “central contact centers” that “replicate the feel of an agent’s office,” Dean is dismissive. “We tried to utilize call centers offered by several of our carriers and have found the retention rate to be much lower than when we service the clients ourselves.”

Cutting-Edge Agents

For more than five years, independent insurance agents have been at the cutting-edge of social media and technology. That should not come as a surprise, because agents are among the most nimble, adaptable — and competitive — participants in the marketplace. This has always been the case.

“Business entities that ignore, or fail to recognize, developing market realities do so at their own peril,” said Borowski. “PIA agencies have an extraordinary ability to evolve, transform and adapt their operations, people, technologies and insurance company business practices faster and more successfully than most.”

Logan put it succinctly: “If you keep doing the same thing that you’ve always done, you will be out of business.” Dean added, “Our model is a lot better. Protecting your assets is important. I tell prospects: ‘When it’s time to get serious about insurance, call us.’”

Lee said as far as he is concerned, independent agents have a bright future.

“They’ve been predicting the demise of the independent agent for many years and it’s not happened,” said Lee. “And it is not going to happen. Because agents provide something that people are looking for. We provide value.”

PIA National Executive Vice President & CEO Ron Von Haden can take the long view. “I’ve been around in this business for over 40 years, and I laugh every time that I hear that the independent agent is dead,” he said. “If you look back through history that’s been said over and over and over, but agents have been able to adapt, evolve and change to keep up with customer expectations and market changes.”

Von Haden said, “Agents started in a time when they were using handwritten letters sent with 2-cent stamps. Then, they started using manual typewriters, then electric typewriters. They migrated through microfiche, through fax machines, websites, mobile devices and now, social media. This evolution shows absolutely how adaptable independent agents are. Their goal is always to become more efficient business operators and improve their level of customer service.”

“Marketing methods will change, service methods will change, but independent agents – as they always have done – will rise to the demands of their clients and outperform their competitors,” said Von Haden.