CARRIER DELIVERY SYSTEMS
As 2005 comes to a close large agencies are consolidating smaller ones (that means that they’re paying whatever price needed to bring in books of business), bank agencies are growing and learning what (and why) their methods of growth (except acquisition) hasn’t really delivered to their expectations and carriers are still trying to figure out how best to “serve” the customers (“serve” definition – maximizing income from the end insureds with or without a traditional distribution system).
I have been asked why I would risk prognostication when it is much safer to react to the needs of agents and the insurance industry as events occur. My answer (and the reason for this article) is that, while I may be wrong, or while conditions may mature in different directions leading to revisions in my expectations, the future is becoming clearer every year. The industry that we learned about from its modest beginnings in London where a group of underwriters took “risk” on ships and their cargos to it current state is changing more radically at this moment than in it has previously in its entire three hundred year history. And those changes will impact the agency industry, as well.
The Risk Takers:
The Stock Companies:
During the past 25 years, the insurance companies who were formed and grew over the last 200 years have begun collapsing under their own weight. They have been sold off piece-meal or they have been absorbed by other companies to form new giants. Either way, this is actually a “good thing” in the long run. We have not lost the capacity of the carriers in their demise. Nor have we lost what expertise remained in the once robust companies. The capacity has moved to other carriers and (as reflected below) has actually increased due to the incursion of new money into the industry. The expertise has moved, as well. The old adage about -- never burning your bridges because you are likely to meet everyone you encounter in the industry at least once more – has never been truer. The executives who have made their fortunes and lost the heart for the battles have retired into consulting positions. Those who needed the jolt of change to re-invigorate them are now in position at new carriers.
Many carriers who are less than 100 years old began as local or regional or specialty companies and found a vacuum in the market as the giant stock companies turned their attention to the larger, more complex risks who pay ‘big bucks’ for insurance. They thrived, grew and profited. Small companies became larger. Larger companies became regional. Regional companies became national, but not necessarily universal (as their predecessors had done). While some companies continue to do what they know best, many more have been bitten by the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization – a primary driver of growth on behalf of stockholders) Bug and have grown into the very companies that they competed against so successfully in the past.
The Direct Writers:
These companies who were merely a ‘speck on the windshield’ of the stock companies a mere 50-60 years ago have now overwhelmed their competition. State Farm was started by a farmer in the early 1920’s as a Mutual Company. Today they have 71 Million customers and 79,000 employees. Allstate was a project of Sears’ chairman in 1931. They ended that year with 4,217 customers, 20 employees, $118,000 in premium and a 66% loss ratio. Now they have over 17 Million customers, over 39,000 employees and an asset base over $140 BILLION. These companies and others like them did what no one considered possible by leading the curve of change and providing products and services needed by the end users in ways more convenient to the customers. They are now juggernauts and, as such, bear the respect of the 5,000 pound elephant (as in “where does a 5000 lb elephant go? Wherever it wants”) but have also become as cumbersome. It was easy to sell insurance through Sears stores when no one else sold that way (and when Sears was the place everyone shopped). Automation, advertising, and television were the impact areas of the giant direct writers. They struggle to find the innovation that will keep them in their current status over the next 100 years.
The Non-Insurance Financial Institutions
Banks, brokerages and other financial-based businesses have finally realized that their customers are also insurance customers and that the name of their game is Asset Protection, regardless of form of asset. Banks no longer simply stockpile your money. Brokerages no longer simply invest your money for a fee. All have found fertile ground in the L&H and P&C marketplace and will easily interchange hard currency and stocks and bonds with life insurance (for its eventual returns of asset) and P&C insurance for its savings of asset in case of an insurable loss. While this has been going on for many decades, the trend has accelerated in the last ten years and we will soon see every financial institution with an insurance arm or relationship. Fortunately for the agency industry and unfortunately for the financial institutions, they have had a series of false starts as they attempt to buy their way into the insurance industry only to find that growth through acquisition without the solid insurance foundation is like building a high-rise on the sand. It can be done, but it will not be stable and slight changes can spell disaster. The insurance companies are finding out that just because the insurance business is related to a known financial institution, it does not mean that it can underwrite to a profit. But the banks will not stay ignorant of this fact and will reorganize to build a solid foundation over the next generation and will learn to properly penetrate their customer base for profitable growth sooner, rather than later. Even to this day, many financial institutions are so cumbersome that their insurance arms actually have to “battle” for the right to market to their customer base. Can you even imagine State Farm arguing over whether to market a product to clients who already have another product??
The Independent Insurance Agent
Once respected like the local banker and accountant, the insurance agent has moved next to the used car salesman in status in the eyes of many insurance buyers. Until the 1950’s or 1960’s the agent was an advisor who was hired to provide the right insurance plan with the right carrier. Cost was always an issue, but longevity with a carrier and the assurance that claims would be properly and promptly handled (with the agents’ active participation) was the key to getting and retaining customers. Even with all of the benefits of automation, one of its by-products, automated rating, permitted agents to quickly price products and to present PRICE as the major factor of insurance decision-making. This sounded good to the customer, but we now see the result. Price-driven sales has spelled disaster for stock companies and for the independent agents. The lower cost basis of direct writers permitted them to use Price-Driven Decision-Making to overwhelm the companies (and their agents) who could not (or would not for prudent underwriting reasons) react as fast as the direct writers. So trust in product and provider and agent has been replaced with the assumption of “sameness” of like insurance products. Once we convinced the public that insurance policies were a commodity, they had less reason to need insurance agents.
Then, in the last decade, the insurance companies moved one step closer to making insurance agents redundant. They removed the agent from the claims process, using as the reason that agent participation was redundant and slowed the claims process. Most agents now simply tell the client to call the insurance company for claims service and are not involved in the claim at all.
Now if all insurance policies are commodities and claims are to be handled by the carriers without agent intervention, WHY DOES THE CUSTOMER NEED AGENTS?
The answer is usually, “to make sure the policies and endorsements are processed properly and quickly – to “service” the clients.”
Well I have good news for you and I have bad news for you. The automation industry is ramping up to allow much easier access to a customer’s insurance account by that customer from the convenience of his own home (or at the car dealership) to permit him to make his own changes. Insurance portals are opening every week that allow customers to shop, price-compare and buy insurance products on-line the same way they do banking on line and pay their bills on line.
Now, tell me again, “Why do folks need insurance agents?”
THE FUTURE (as I see it through my slightly hazy crystal ball):
Internationalization and the World Economy – everyone in the world needs auto insurance and protection against normal insurable perils to their homes and businesses. If peace reigns and the third world evolves into vibrant economies (i.e. China) this provides an important source of new customers and the major companies will become international players in a bigger way than they have to date. This will stabilize them. If the religious zealots (of all persuasions) continue to implement world population control by murdering each other and millions of innocents in the name of “the one and only God”, the carriers will stay geographically centered where the problems are the least and participate in the insurance for the interim re-building efforts while the ‘crazies’ build a new generation of killers. In the long term peace is better for the insurance industry than war and the progress of existing and new participants in the industry will depend on the world’s economy.
The greatest challenge to the carriers (stock and existing direct writers) is the fact that their computer systems are, on average, 23 years old. How many of you have had a system for 23 years and find it still operational? These legacy systems have been upgraded, jury-rigged, added to and ‘scotch-taped’ until they are hardly recognizable. They remain cumbersome and expensive. Yet, the upgrade to the systems that would either help retain the insurance agency system (or destroy it) would cost BILLIONS of dollars. Of course the companies have the funds, but many do not have the long-term viewpoint and fortitude to take on this challenge. Company executives count their compensation futures in terms of two to five years. Company Boards of Directors look to their stock values and dividend paying capacity every quarter. Few want to acknowledge that without a major, expensive automation overhaul, they leave the ‘Window of Opportunity’ wide open for new ventures (who are not saddled with decades old legacy systems) to pave the way for the consumers to change their allegiance toward the companies with whom it will be easiest to do business in the future. And some of those new companies have already begun chipping through the eggshells in which they have been developing to face a new world of opportunities. They will be the smaller, faster predators competing with the dinosaurs of the industry. Be ready to deal with a new generation of companies with automation capabilities that we’ve only dreamed of in the past. Listen to them even though they may have limited insurance experience. They will eventually overcome the dinosaurs.
The Direct Writers:
Much as they try at the top levels to remain vibrant and flexible, the major direct writers have built “silos of power” involving thousands of mid-level employees, all of whom thrive on being busy but not doing anything. Less than a condemnation, it is a natural transition that results in companies like those major stock companies who have been around forever (but are no longer around). Businesses in this country seem to grow into behemoths that can no longer feed themselves and cannot react to changing environments. Smaller companies who are hungry will still absorb the creative players in the game and will grow into new “giants” in the future. Look to internet-based companies without the ‘brick and mortar’ currently associated with the insurance industry as the next “Up-And-Comers”. Look to companies making strategic alliances to provide all services and products needs through multiple companies and product and service levels. By the way, the new direct writers will only have high level, employee customer service staff.
The banks have their own problems. While they try to figure out how to absorb each other and how to build a branch every fifty feet (there are no fewer than 12 bank locations within a one mile radius of my office – figure out how many are near you) some bright guys are figuring out that all banking can be done through a central clearinghouse and every computer with internet capability. A few more security issues need to be addressed before you’ll be able to buy bank branches for a few hundred thousand dollars and turn them into something else (a local branch was recently sold and is now a Dunkin’ Donut shop, complete with drive-through). Once protection is more than a series of numbers that most people write on a ‘post-it’ stuck to their computer screen, the days of on-site banking are numbered. What do the banks need with insurance entities then?
In the meantime, the bank agencies that succeed in proper underwriting and cross-selling will build a good base of operations and will thrive. Many more will flounder as carriers realize that they are more loyal to the bank customers than to the carriers and that, aside from unlimited funds to buy other agencies, they cannot build more business – just consolidate the business already in the hands of the insurance companies.
The Independent Insurance Agencies:
The agency universe will continue to shrink. That’s not a bad thing, in itself. There is room for small agencies but many existing small agencies have perpetuation problems. The owner’s perpetuation plan is to sell and get lots of money. Start-up agencies continue to have serious problems getting carriers to appoint them. The solution is cluster groups and the Virtual Insurance Agency (ask Agency Consulting Group, Inc. for more details if you don’t know about them yet) that permits growth of books of business to the size needed to support independent contracts with carriers.
Meanwhile most agencies that are perpetuated will become larger from the consolidation of the industry. That will give them the required scale to do business in the future and still provide a sufficient return for the owners to make the business venture worthwhile. The most successful agencies will evolve professional managers (as opposed to insurance professionals who try to manage a business) and marketing efforts to increase natural (one-at-a-time) customer acquisition. Without natural customer acquisition a company will not have a solid enough foundation to manage their book of business in case of a business downturn (i.e. company pull-out, restrictive marketplace, decreased capacity, etc.).
The future of the industry will be yielded to those agencies that alter their marketing philosophies, that enhance their automation capabilities and that re-invent themselves as insurance consultants instead of salespeople and claims facilitators instead of simply a producer force.
Proactive sales agencies will remain viable while reactive agencies whose only source of business are referrals from existing clients will shrink. If you DO SOMETHING every year to promote the agency and to sell more insurance products to more clients, you will survive.
Most agency websites are simple billboards. Agencies that invest in websites that permit clients to interact with their agency account (request changes, report claims, inquire regarding payment status, do their own quotes) will survive. Within five years, every personal lines customer (and a growing number of BOP customers) will be able to access their accounts through the carriers and will be able to take care of their own common transactions (with 24/7 live service reps available if they have any questions). Auto dealers will be able to give the client access to the web to get into their policy, notate the change and print any ID cards at the dealership. Most renewal policies are already being sent directly to the client. When the client can input his information, get his quote, confirm it and pay for it with an e-account and get the policy printed on his home printer, why would he need an agent for transaction processing. It may take two or four decades to kill off the generation of people who need to touch a person in an office to get a transaction taken care of, but how many of us already pay our bills on line and do our banking on line? How different is it to do an insurance transaction on line?
Whether you use Agency Consulting Group, Inc.’s Asset Protection Model of product distribution (contact us for more information) or another relationship selling model, you must eliminate Price-Driven sales from your lexicon if you wish to remain viable into the future. Other distribution models permit much better price comparison strategies than the independent agency. These will soon be available to the consumer for personal lines on the web. If you consider price quoting your sales model, you will fail in the long run.
You don’t have to stop managing claims for your clients if you feel (like I do) that it is the primary reason that customers do business with agents rather than direct with carriers. Report the claim, but follow up (not waiting for the customer’s irate calls) and tell the customers that you are doing so on their behalf. They will love you for it and won’t leave you if they don’t have to.
“Easiest to do business with” – the new mantra for the insurance business in the future. Consumers will always move toward the ETDBW. If we can make ourselves that model, the agency industry will be around for a long time, albeit different than it appears today. If we can’t, we’ll disappear – slowly – as consumers find the ETDBW.